Whether you think that Greta Thunberg is a brave visionary or a hysterical brat, there’s no question that she has captured the current zeitgeist. It has become impossible to escape the conversation around climate change.
Even as recently as two years ago, it was not a major political agenda item, but now it is a key topic in elections around the world. Its significance is also considered to have become central to how asset managers go about making decisions.
Predominantly, this has been about assessing the risks to business models and assets that climate change presents. And those risks are substantial. However, there is also another side to the issue.
“In terms of our estimates, climate change puts 15% of the value of global investments at risk in terms of what companies might have to do to offset their carbon footprints,” says Charles Prideaux, the global head of investment at Schroders.
“But there is also an opportunity,” he adds.
“$2 trillion of investment is needed in climate solutions to meet the Paris Accord commitments.”
There’s more to it
Under the Paris Agreement, nearly 200 countries committed to keeping global temperature increases to well below two degrees from pre-industrial levels. That requires reducing greenhouse gas (GHG) emissions by 80% per capita around the world.
The discussions around how this will be achieved tend to centre on fossil fuel industries, particularly power generation. However, electricity and heat production only account for 25% of global GHG emissions, while industry accounts for a further 21%.
It is therefore not just the most obvious parts of the economy that will have to go through a transformation to meet the Paris goals. Many other areas will face major disruption as well. Most prominent among those is agriculture.
“It’s clear that a monumental shift is required in the way we produce and consume food,” says Isabella Hervey-Bathurst, an equity analyst at Schroders. “By the middle of this century the global population will reach almost ten billion people, and because of rising incomes, the demand for calories will be rising even faster than that.
“Over the next 40 years, we need to produce more food than we produced in the last 8 000 years.”
That would mean a 95% increase in beef production by 2050. However, current models of agriculture won’t allow for this.
“Livestock farming accounts for about 15% of GHG emissions,” Hervey-Bathurst explains. “And it’s an inherently inefficient way of producing calories. For every 100 calories [of] feed you put in, you get one calorie out.”
The focus, therefore, has to be on more efficient plant-based foods.
Specifically, there is growing interest in ‘alternative meats’.
“Innovation is advancing the range of animal-free proteins available,” says Hervey-Bathurst. “For example, there is a company called Memphis Meats growing meats in the lab using cell cultures at a fraction of the environmental impact. That technology is probably 10 years away from being commercial, but there are already companies like Beyond Meat and Impossible Foods, which are creating plant-based meats.”
These are products that look and taste like meat, but are made from textured vegetable protein.
“These products are commercial today and the consumer response has been very positive so far,” says Hervey-Bathurst.
“These products are not targeting vegetarians,” she adds. “They are targeting meat eaters.”
The global market share of these alternative meats is currently below 1% of global meat consumption. However, Schroders’ analysis shows that if they grew to just take the same market share as plant-based milks currently enjoy, it would be a $140 billion market from less than $14 billion today.
Wear it well
Another sector facing potentially major shifts is the textile industry. It isn’t widely seen as a target in the transition to a low carbon economy, but the global textile industry produces more carbon than the international aviation and maritime shipping industries combined.
“For every one ton of textiles produced, 17 tons of CO2 equivalent are released,” says Hervey-Bathurst. “And it’s not just carbon that we have to worry about in the textile industry – it also uses roughly 4% of global fresh water.”
As the graph below shows, the fibres that have the highest carbon intensity are synthetics. Natural fibres on the whole use more water, but to varying degrees.
“Cotton is incredibly water-intensive to produce, but the wood-based cellulosic fibres like viscose and lyocell have a very minimal water impact,” Hervey-Bathurst points out.
“So, overall, these wood-based cullulosic fibres screen as the most sustainable fibres.
“They are produced from cellulose from wood in a closed-loop process, which maximises the reuse of water and minimises waste,” she explains. “The best-in-class producers in this industry are also fully vertically integrated – they own and maintain their own forests from which they source the wood.”
An example is JSE-listed Sappi, which has largely reinvented itself from a paper company into a producer of cellulose.
“We are quite excited about the potential for this particular kind of fibre, and it is only 6% of the global textile industry today,” says Hervey-Bathurst. “We think that share could probably be a lot higher.”
Profit from change
It is these sorts of changes that will present significant opportunities for investors over the next few decades.
“Ultimately our job as active managers is to make returns for clients out of change,” says Prideaux. “The dynamic we have now is that a good company today doesn’t necessarily always make a great investment. Great investments come from change, and we need to be able to identify where a company is going to be a winner by embracing more of what’s going to become more important.”
Patrick Cairns attended the Schroders International Media Conference in London as a guest of Schroders. His travel and accommodation were covered by the host company.