Climate change is the challenge of our times and tackling it will require greater alignment between a spectrum of stakeholders including governments, companies and consumers from around the world. The upcoming COP26 meeting has clear objectives, including accelerating the move away from fossil fuels to other sources of energy. Another key objective is the financing and commitment of over $100bn from developed markets to support climate finance in developing nations, as well as encouraging investment from the private sector. The journey to achieving this will ultimately be down to the provision of solutions from the above mentioned stakeholders. To combat such a broad issue, solutions will need to span across traditional sector classifications. We have identified five broad categories to address climate change: Renewables and electrification, sustainable construction, sustainable food and water, sustainable transport, and recycling and re-use, which we will explore in further detail in the following sections.
Renewables and electrification
Consumption of fossil fuels as a form of energy, drives nearly three quarters of annual greenhouse gas (GHG) emissions, so identifying and implementing alternative forms of energy is going to be key. Today there are cost competitive electrification technologies that reduce the need for fossil fuels. Renewable energy can, for example, replace power plants, electric vehicles can replace combustion engines and heat pumps can replace gas boilers. Electrification offers a myriad of investment alternatives and is an area where we currently find a number of opportunities.
One area of focus for us includes companies, like Schneider Electric, which offer power management to their underlying client base to achieve energy efficiency savings.
Through the use of their own proprietary digital solutions, they are offering their vast roster of customers solutions to improving energy efficiency at every stage of the supply chain process.
By doing so, this allows for companies to track their overall level of emissions and, in combination with Schneider Electric’s expertise, find ways to reduce their overall footprint.
Construction, both residential and commercial, is a major source of GHG emissions.Governments across the world are embracing the idea of net zero buildings and introducing laws to encourage companies and consumers to move in that direction.There is continual innovation in this area, and many investment opportunities that enable a reduction in GHG emissions from buildings. Ongoing innovation in the heating, ventilation and air conditioning space is viewed as crucial to driving a meaningful reduction in the carbon footprint of a commercial or residential building. Heating and ventilation forms around half of the energy consumption of a building, and demand for solutions in this space is forecast to double by 2050.
By modernising HVAC systems, through both hardware and software based solutions, companies can improve their overall energy efficiency as well as reduce GHGs.
For example, Trane Technologies provides energy-efficient air conditioning and refrigeration solutions to both commercial and residential buildings, including hardware and after-care support.
The company was able to save its customers almost 8 million metric tons in carbon emissions in 2020, and there is scope for this to continue growing in the future as the technology is increasingly adopted, and companies benefit from potential savings in infrastructure-related emissions.
Sustainable food and water
The global agriculture system contributes about 18% of global GHGs – via fertiliser use, soil erosion, deforestation, as well as methane produced by cattle – while also being a leading contributor to water stress. There are a number of interesting and innovative solutions and technologies being developed to address this sustainable challenge, including companies which invest in precision agriculture, so that farmers can produce more crops but via an efficient use of resources
Deere & Co, a US-based agricultural and forestry machinery company is a leading innovator in this space.
The company is currently heads and shoulders above industry peers, when it comes to integrating technology and data solutions alongside its traditional machinery.
The result of this embedded technology allows for reduced herbicide use, improves planting speed, spraying accuracy, and improving overall farm yields.
Transportation generates around 14% of annual GHG emissions around the globe, with automobiles being the biggest contributor. The move away from internal combustion engine cars towards electric vehicles has perhaps been the most well recognised shift in terms of the ongoing journey towards reducing carbon emissions. The technology behind electric cars has improved meaningfully. As battery life has improved, the cost of production has come down and charging stations are now more widely available. Similarly, the premium to purchase an electric car, relative to a traditional combustion engine, continues to narrow, with subsidy and regulatory support continuing to help.
A shift in social norms has also meant consumers in developed markets are increasingly using electric vehicles too.
We believe that Volkswagen presents a compelling investment case in this space.
The company may still not be the first name that springs to mind when one thinks of electric vehicles, but the substantial deployment of capital (over USD 37 billion) and commitment towards their electric vehicle range marks them out as a good example of a company adapting their business model.
Recycling and re-use
The final piece of the climate change solutions puzzle is a focus on recycling and re-use. Estimates suggest recycling saves 700 million metric tons in GHG emissions annually; an incredible number but with much scope to grow. Deposit schemes for plastic bottles is one area where regulation has aligned with technology and consumer preferences. There are around 1.4 trillion drinks containers produced every year and one solution for recycling these are reverse vending machines which can be found at supermarkets.
TOMRA, the market leader in reverse vending solutions, is currently able to recycle around 40 billion of these containers every year.
It employs complex, sensor-based technology to make sorting recycling seamless and this is really the cutting edge of their business.
Clearly this is an area that could benefit enormously from additional countries introducing reverse vending schemes, or schemes that would more generally encourage recycling.
In preparation for this month's COP26, Francesco Conte, manager, JPM Climate Change Solutions fund, identifies five broad categories to address climate change