Sustainable Investing

Climate change investing: How to find your opportunities

Jul 21, 2022

Here’s how we look at the new global economy that is being created—and why we think private markets are particularly interesting now.

Efforts to combat climate change are reshaping economies, companies and the investment landscape across the globe—creating the potential for returns.

Investors have noticed. It is estimated that investment to combat climate change surpassed $500B in 2020 and $750B in 2021.1  Governments have been setting net-zero targets in an effort to reduce carbon dioxide emissions and at least a fifth of the world’s largest public companies have now made some form of “net zero” pledge to cancel out their carbon emissions. 2

But how, in this tidal wave of potential opportunity, do you find the investments you want to make? We find it helpful to look at climate change investments through two approaches:

Stages—Recognizing that opportunities run the gamut from early-stage venture capital to public market leaders seeking to become more sustainable. We think some of the more interesting investments now are private companies with established solutions ready to be scaled.

Area of Impact— Identifying goal(s) that a company or technology are seeking to achieve that align with change you want to invest in. Is it to reduce carbon emissions? Remove carbon emissions? Retrofit existing facilities to new realities created by climate change?  This allows you the opportunity to pursue returns in a meaningful growth area.

Metamorphosis into a climate-aware economy

We see four significant factors accelerating this move towards a “climate-aware” economy: governmental regulations and pledges; plummeting costs of enabling technologies; consumer demand; and corporate pledges and initiatives. More specifically:

Governments are acting

Countries across the globe are rapidly increasing their pledges and regulations to reduce carbon emissions to net-zero.

Indeed, while carbon regulation started in the 1990s largely in Europe, net zero targets now total 78% of global GDP—with both China and the U.S. now notable as leaders.  In 2020 alone, regulations governing emissions grew from 5% to 22% of global emissions.3

Driving change through “net zero” regulations

Sources: J.P. Morgan Asset Management; World Bank Carbon Tracker, U.N. Intergovernmental Panel on Climate Change. Data as of April 1, 2021, and August 9, 2021.
Visual depicting net-zero targets as a share of global GDP by percentage for the United States, European Union, China, Japan, UK, Canada, others with targets and others with no target as of April 1, 2021 and August 9, 2021.

The price of enabling solutions is dropping

The cost of key technological innovations has been plummeting—improving the scalability of alternatives energy sources and making them competitive. This phenomenon is most clearly seen in, but not exclusive to renewable energy, with the competitive edge potentially tipping in favor of them.4

It is important to note that while renewables comprise just 17% of the energy consumption in the U.S. today, some say that is on track to comprise 64% of capacity in 2050. However, that future would require about $5 trillion to $10 trillion in investments.5

Consumers are increasingly interested in sustainability

Consumer demand has been growing so steadily that academics are predicting that sustainability-marketed products will generate $140 billion in annual sales by 2023.6

In fact, although sustainability-marketed products were only 16% of the market, they delivered more than half the market growth in the last five to six years. 6

Companies are making pledges and starting initiatives

From 2019 to 2020, companies vowing to pursue net-zero policies by the end of the century increased threefold. And many of the world’s largest corporations have pledged to be net zero sooner. 

Climate change investing—by stage

Opportunities abound. You could invest in early stage companies or, at the other end of the spectrum, in traditional companies as they adjust to new climate change technologies and imperatives.

Right now, we see some of the more interesting opportunities in private companies that are taking existing, proven solutions and making them more scalable, efficient and cost-effective for use by consumers and established companies.

What does this spectrum of opportunity look like?  Using electric vehicles as one example, you might:

• Invest in mid- to late-stage companies that are seeking to provide needed electric vehicle charging stations, and finding ways for these stations to fit into existing electricity grids

• Take the added risk to invest in early-stage, next generation technologies such as electric airplanes

While most of the examples we’ve mentioned so far are in energy and transportation, almost every sector is seeing the global shift to a climate-aware economy. Generally speaking, private capital may offer more growth because many technologies are just being developed, such as carbon capture, hydrogen and long-duration battery storage.  It is important to note that these technologies are often in early stages of development which indicates inherent risk and should be considered carefully.

Looking at impact

Beyond the financial potential, some investors are motivated to invest in climate solutions for the potential impact of those investments in addressing the threat of climate change.  And with many urgent solutions needed, there are a range options for investors to explore to have an impact.

We bucket these climate solutions into the “three R”s: reduce, remove and retrofit. Reducing energy emissions alone won’t be enough to combat climate change and its effects. Along with emissions reduction across all sectors, the world also needs carbon removal and the retrofitting of physical assets for some inevitable climate change.

Each of the three Rs offers investors a range of potential opportunities

Source: J.P. Morgan, data as of December 2021.
This chart details the three R's to climate investing approaches and how they work. Reduce, Remove and Retrofit. Reduce is made up of three categories: energy supply decarbonization, energy demand reduction and process transformation. Removal consists of natural carbon sequestration and mechanical carbon removal. And retrofit contains water efficiency/enhancement, food/agriculture reinvention and adapting the built environment..


For a full discussion of climate change investing along impact lines, click here

 

We can help

To learn more about climate change investing in general, private market opportunities in particular and which investments might work to support your personal goals, speak with your J.P. Morgan team.

 

1BloombergNEF

2Net Zero Tracker, https://zerotracker.net/#companies-table.

3JP Morgan Asset Management, World Bank Carbon Tracker, U.N. Intergovernmental Panel on Climate Change, date as of April 1, 2021 and August 9, 2021. 

4“International Renewable Energy Agency (IRENA).” IRENA: International Renewable Energy Agency, https://www.irena.org/.

5Iea. “Net Zero by 2050 – Analysis.” IEA, 1 June 2022, https://www.iea.org/reports/net-zero-by-2050.

6NYU Stern Center for Sustainable Business, “Research on IRI Purchasing Data (2013-2018), March 11, 2019. The total value of sustainable-marketed products is estimated based on the actual sales of 36 product categories, representing about 40% of the total market in measured channels, excluding alcohol and tobacco.  

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Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments involve greater risks than traditional investments and should not be deemed a complete investment program. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain. The value of the investment may fall as well as rise and investors may get back less than they invested. Diversification and asset allocation does not ensure a profit or protect against loss.

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