National net zero pledges are driving big new markets

>National net zero pledges are driving big new markets

Interviewer Sean Aylmer: Maxime, the United Nations COP26 climate change summit kicked off in Glasgow this week. Why does COP26 and UN conferences like this matter?

Regnan impact investment analyst Maxime Le Floch:  Well, the UN conferences are really important because climate regulation is an extremely valuable service. But the problem is, it’s a global public good, which means that it requires some kind of international co-ordination to protect it.

Otherwise, there is a risk of a free-rider effect where some countries could emit emissions while others reduce. So the countries need to agree on some sort of globally agreed targets. And this is what they’ve been trying to do with those Conferences of Parties (COPs).

Now the issue is that the current policies – even though they’re getting a lot better and we’ve seen a massive change in the last few years – the current policies put us on track to 2.7 or 3.1 degrees of global warming, which is not enough.

Now with the COP26, this is the time since the Paris Agreement where countries need to update their national plans for reduction in greenhouse gas emissions. So this is why this is really important.

And I think this year the International Energy Agency has really set the tone, saying that to reach those climate targets there needs to be a lot more action.

For instance, the annual renewable electricity investment need to grow three times by 2030. So there’s a need for a lot more investment. There’s been a lot of investment in clean technology already, but that needs to grow further.

Interviewer Sean Aylmer: So as an investor, do you hope from COP26 you will see these roadmaps – but also real money – to build the infrastructure and the capability to have a carbon-neutral world in 2050? Which obviously means potentially there’s things to invest in.

Regnan’s Maxime Le Floch: That’s right.What’s really important with those COPs is what is done at the country level in particular. So long-term commitments from major countries, but also particularly the mid-term targets to 2030.

Now we’ve seen massive change very recently. Two months ago China committed to net zero by 2060. Also just this week, remarkably, India committed to net zero as well, which was unthinkable just a few years ago.

So this means that 84% of global CO2 emissions are now covered by net zero targets.

This is really important because that then shapes policies for renewable energy, electric vehicles, smart grids – for a lot of those investments. So that’s supportive.

In particular, something that many people expect is more in terms of carbon markets, because that could be a very clear signal for where companies need to go.

Interviewer: Soin a very tangible sense COP26 – if it’s successful – makes companies think differently about climate change and ESG, which obviously has flow-on effects for what you’re investing in or not investing in?

Regnan’s Maxime Le Floch: Yes, it’s really important.

Something I think we need to bear in mind is that there are also deeper forces.

The reason why we are seeing a lot more at the moment is that there’s also a deeper economic force at play here.

There’s a lot of green innovation accelerating. There are opportunities throughout many sectors for decarbonisation… many opportunities to make processes more efficient and reduce the energy footprint of operations. We often have a good return on investment for companies implementing them.

Those dynamics are really helping the global common action because they make the transition a lot more appealing economically.

And that’s a very powerful force for countries, but it’s a fantastic opportunity for investors.

Interviewer: Does it actually open up the investment horizon with more options now because of things like COP26 pushing companies to become more carbon neutral?

Regnan’s Maxime Le Floch: Yes, exactly. For instance, something we’ve been looking at recently is patents for green technology, where we see that kind of acceleration.

There’s been a lot of growth in those patents which really signals that innovation is accelerating and bringing new opportunities to market.

If you look at global patents in the 1990s, environmental technologies patents were just 6% of global patents. Now they’re 10%.

So they’ve been growing quite a lot.

Some technologies in terms of patent trends have been growing at 20%-30%, over the last decade in things like electric vehicle (EV) charging, autonomous vehicle technology, et cetera.

That really plays into what the International Energy Agency was saying about needing to triple investments in renewable energy.

And you can look at opportunities beyond that. Hydrogen production we need to grow 700 times compared to the level it is today. Public EV charging [needs to grow] 150 times Battery storage technology 170 times.

These are very big markets that are forming and that are accelerating.

So the more we get to net zero target, the more those markets are set to see exponential growth.

Interviewer: Finally Maxime, are you happy with how COP26 has progressed so far? It was a rocky start with G20 but it certainly has picked up pace since then.

Regnan’s Maxime Le Floch: It has. The move from India was a big step. Something that was holding back some of the discussions was the fact that the old industrial countries were seen as responsible. A lot of things have changed with China and India becoming a bigger part of the emissions equation and they recognise that.

And again, countries like China and India recognise that there’s a cost-benefit equation whereby the cost of mitigation – the cost of reducing emissions, investing in new environmental technology – is reducing dramatically and can give you benefits.

China has very good technology in batteries, electric vehicles, smart grids. These things you can actually export as a country so it makes good business sense.

At the same time, the recognised they are exposed as countries to the physical risks of climate change. That cost is now seen as higher than it used to be and the impact is nearer than expected with issues around extreme weather events accelerating and impacted those countries more.

So it’s a decent start. We are just in the beginning. Let’s hope there’s more tangible action, and in particular commitments.

The commitment by individual countries are particularly interesting to look at.

Podcast

  • National net zero pledges are driving big new markets

    2 November 2021 - 8 mins

  • Maxime Le Floch

    Analyst

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Disclaimer

This podcast is for professional investors only. The information contained within this podcast including any expression of opinion is for information purposes only and is given on the understanding that it is not a recommendation. Views as of date of recording, 02 November 2021, and are subject to change. Past performance is no guarantee of future performance. The value of investments and the income from them may go down as well as up and you may not get back your original investment.

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