While we’re not there yet, the writing is on the wall: a low-carbon future is coming.
In December 2019, the European Union unveiled its Green Deal, outlining the EU’s plans to become the first climate-neutral continent by 2050, and projected at least €1trn of sustainable investments over the next decade. The recent Canadian Supreme Court ruling on the Greenhouse Gas Pricing Act’s constitutional validity, which establishes minimum carbon pricing standards for the provinces, means that this tax’s revenue will be used to support innovations that reduce greenhouse gas emissions and create sustainable approaches to industry.
Likewise, the announcement by the Biden administration that the US will begin to dramatically scale up the use of offshore wind power to generate 30 gigawatts of power by 2030—enough to power homes for 100 million people and reduce emissions by 78 million metric tons—suggests that low carbon emission technologies and initiatives are here to stay.
As national economies reduce their greenhouse gas emissions, there will be essential impacts to consider for investment portfolios. Investors need to start thinking now about how the transition to a low-carbon future will affect their portfolios and be prepared to take advantage of the investment opportunities this transition will afford, as well as manage risks.
Here are three factors to consider when gauging the carbon transition readiness of your portfolio.
What companies and sectors stand to gain?
The transition to a green energy economy will vary significantly by sector, and many investors consider its impact on their portfolio with this in mind. Sectors specializing in renewable energy and green infrastructure stand to gain in a low-carbon future. But what of those sectors that will be hit hard? Traditional energy industries, traditional automobiles, materials manufacturing, and some utilities could face the double whammy of the goods they sell becoming less sought-after coupled with rising carbon costs. However, even for companies that will need to transform the most during carbon transition, like oil companies, there remains opportunity for those willing to embrace decarbonization. There remains plenty of room for innovation in areas like transportation, energy efficiency, battery technologies, and low-carbon or carbon-negative agriculture techniques.
Don’t limit yourself to the energy sector
While the energy sector is an obvious place to start your review for the carbon transition readiness of your portfolio, don’t neglect other segments of your holdings. If there is a low-carbon future, then every sector of the economy—and every company—will have to adapt. Materials manufacturing, industrials, utilities and consumer discretionary, for example, have high exposure to the low-carbon transition.
Will there be a ‘green rush’?
There has been a tendency in the past to dwell on potential negatives about a transition to a low-carbon emission economy—the taxes, the regulation, the expense. However, what has been overlooked is the potential for positive disruptive innovation, as a whole new industry, through carbon mitigation and reduction. With the urgent need for low-carbon solutions, the market is ripe for breakthrough decarbonization technologies and innovative solutions in carbon capture, industrial electrification, hydrogen electrolysis, geothermal, and ocean de-acidification, amongst others. Opportunities may exist with widespread government support and incentives for innovation in the low-carbon transition of the economy.
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