The climate crisis we collectively face may be the defining story of our age. We already are witnessing its devastating impact through rising temperatures and frequent destructive weather events. Limiting global warming to the Intergovernmental Panel on Climate Change's target of 1.5°C above pre-industrial levels will demand unprecedented levels of global will and coordination.
Advisors who are struggling to determine where and how to impact invest for clients can use the ideas here as a pathway.
It is estimated that global energy-related emissions must fall 30% from 2019 levels by 2030, decline 75% by 2040, and drop to net-zero by 2050. Road transport emissions must be cut 11% by 2030 and fall to 80% below 2019 levels by 2040.
Thankfully, more than 130 countries have set or are considering a target of net-zero emissions by mid-century, supported by numerous cities and companies.
This broad support should provide tailwinds for investments that help reduce greenhouse gas (GHG) emissions. For investors, decarbonization investments offer the opportunity for solid returns and a positive social and environmental impact.
Opportunity Set
The vast majority of decarbonization investment falls into five categories: electricity and power generation, food and agriculture, mobility and transport, industry, and the built environment. This built environment refers to the human-made environment that provides the setting for human activity, including homes, buildings, zoning, streets, sidewalks, open spaces and transportation.
1. Electricity and Power Generation
Government subsidies have encouraged the decarbonization of power generation since the early 2000s. indeed, solar and wind technologies have become a key part of the energy mix, and new-build renewables are now cheaper than coal in much of the world.
However, the burning of fossil fuels for electricity still accounts for 25% of U.S. GHG emissions. Private capital is financing innovations that look to improve the reliability of — and thereby facilitate greater adoption of — renewable energy, such as smart grid and battery storage technologies. Meanwhile, for businesses that will struggle to transition to cleaner fuel, significant capital is flowing into carbon-capture technologies.
2. Food and Agriculture
Globally, food systems account for over a third of GHG emissions. Decarbonization efforts across agriculture are expected to drive the value of the AgTech market up to $22.5 billion by 2025, from just $9 billion in 2020.
Numerous innovations have emerged across the value chain. The vertical farming sector, for example, in which crops are grown on stacked surfaces, is expected to grow six-fold globally from 2018 to 2026 to reach a market value of $12.8 billion. Elsewhere, artificial intelligence (AI) and machine-learning algorithms are helping optimize growing conditions and improve crop yields.
Alternative proteins are also booming. With cattle farming responsible for nearly 10% of global emissions, people are increasingly turning to plant-based meat alternatives, according to the Food and Agriculture Organization of the United Nations. The global meat substitutes sector is worth $21 billion and expected to grow by a further 12% by 2024.
3. Mobility and Transport
Transport is responsible for nearly 30% of U.S. GHG emissions, with most coming from cars, trucks and buses. However, significant innovation in the electric vehicle (EV) space, including in supporting technologies like batteries and charging networks, is helping slow the pace of vehicle emission growth. The overall EV market is expected to grow nearly five-fold by 2026 to more than $700 billion.
Beyond EVs, there also are tailwinds in areas such as eco-friendly micro-mobility— for example, solar-powered e-bikes — and low carbon fuels in areas such as trucking and aviation, for which battery technology is not yet suitable.
