How to achieve the climate goals

How to achieve the climate goals

28 June 2022

Many economies want to achieve climate neutrality by 2050, and huge efforts are needed to make this a reality. Major investments must be made in the technologies and infrastructure that will make the energy transition possible. This opens up many opportunities for investors. Particularly given that interest in sustainable investment has increased in recent years. Read more about the recently launched tracker certificates: the Green Energy Strategy Index and the Green Technology Strategy Index in the blog post.

Important milestone

In recent years, topics such as carbon reduction and climate and environmental protection have come increasingly into focus, thanks in part to media interest in Swedish climate activist Greta Thunberg, the Fridays for Future movement, the international community's agreement on the Paris climate goals and the growing importance of renewable energy. The reduction of greenhouse gas emissions has recently given way to other topics in the media. However, this does not mean that the search for ways and means to achieve climate neutrality and reduce carbon emissions has come to a halt. The UN Climate Change Conference in the French capital Paris in December 2015 was a breakthrough.

At the conference, 197 countries agreed on a new global climate protection agreement. The agreement entered into force on 4 November 2016, by which time it had been ratified by 55 countries that emit at least 55% of global greenhouse gases. Targets include limiting global warming to "well below" 2 degrees Celsius compared to the pre-industrial era. At the same time, however, the aim is to limit warming to 1.5 degrees Celsius. The capacity to adapt to climate change will be strengthened and established as an equal objective alongside the reduction of greenhouse gas emissions, while financial resource flows will be aligned with climate targets.

Climate neutrality by 2050

The contribution to be made to reducing greenhouse gas emissions will initially be decided by each state on its own. An inventory is made every five years. In addition, the national climate protection contributions must be updated and increased every five years from 2025 onwards. Developed countries support developing countries in mitigation and adaptation efforts through technology development and transfer, capacity building and financial support. The European Union (EU) aims to be climate neutral by 2050, with 55% of greenhouse gases saved by 2030 compared to 1990 levels. The EU's Climate Change Act sets these targets in law for the first time. Part of the law will include, for example, a tightening of the EU's current emissions trading scheme. So far, energy companies, energy-intensive industry and parts of aviation have participated in it, while the upper limits on total emissions from individual economic sectors have been lowered each year.

Even larger annual reductions are now planned. In addition, aviation will no longer receive free emission allowances in the future. Shipping will also participate in emissions trading. From 2026, emissions trading will be extended to buildings and transport. In the transport sector, stricter CO2 emission standards are also planned for passenger cars and light commercial vehicles. From 2035, only zero-emission new cars will be allowed to be registered. However, for battery electric or fuel cell vehicles to have a chance, the charging infrastructure needs to be expanded. Refueling and charging stations will be built on major roads every 60 kilometers for electric cars and every 150 kilometers for hydrogen cars. Another way is a carbon tax at the border on certain imports. In this way, carbon dioxide emissions will not be shifted to other countries, while European companies will remain competitive.

Coal power fuels economic recovery

However, recent developments also show that action is needed. COVID-19 has had a massive negative impact on economic development in many parts of the world. Phases of such economic downturns always give our planet a kind of breathing space. This could already be observed as a result of the global financial crisis of 2007/2008. However, the recent lull was not very long. As early as 2021, global carbon dioxide emissions will not only return to pre-crisis levels. According to statistics from the International Energy Agency (IEA), emissions of energy-related carbon dioxide equivalents amounted to 36.3 billion tonnes last year. Energy-related in this case means that emissions from energy combustion and industrial processes are recorded.

The increase compared to Corona in 2020 was almost 2.1 gigatonnes or about 6%. In 2020, emissions had still decreased by 5.2 percent, or about 1.9 gigatonnes, compared to 2019. However, according to the IEA, vaccination programs and extensive support measures by many governments have led to a rapid economic recovery and thus also to a recovery in CO2 emissions. It also points to some special effects, such as rare weather phenomena, which have led to unusually high carbon burning, while more energy was produced from renewable sources than ever before. By 2021, coal accounted for more than 40% of the increase in carbon dioxide emissions. According to the IEA, its emissions were 15.3 gigatonnes.

Opportunities for alternative energy production

 For the largest emitters, the power sector is in the lead. In 2021, it accounted for around 14.6 gigatonnes of carbon dioxide emissions. China in particular saw a large increase. It would therefore be beneficial to rely on renewable energy sources, especially for electricity generation, as the economic recovery has mainly led to an increase in demand for electricity. While China's GDP grew by more than 8% in 2021, electricity demand in the world's second largest economy increased by about 10%. At the same time, around 56% of this increase was met by coal-fired power.

Despite the popularity of coal-fired power plants, there have also been encouraging developments in the renewable energy sector. According to the IEA, renewables and nuclear together accounted for a larger share of electricity generation than coal in 2021, with electricity production from renewables reaching a new record level of more than 8 000 terawatt hours (TWh), an increase of around 500 TWh compared to 2020. Wind and solar power would have contributed 270 and 170 TWh respectively, while hydroelectricity production would have fallen by 15 TWh due to drought in the US and Brazil. In the future, an increasing share of electricity is expected to come from renewable sources.

Renewable energy should also play an increasingly important role in other areas, such as heating, so that renewable energy as a whole should have some growth potential. Market Research Future (MRFR), for example, estimates that the global renewable energy market will grow by an average of about 8.5% to around USD 2.9 trillion by 2027. This growth should be accompanied by an equally rapid increase in installed capacity. According to Mordor Intelligence, it reached about 2,867 gigawatts (GW) in 2020 and was expected to reach a level of about 4,800 GW in 2027, which would correspond to an average annual growth rate of 7.6 percent between 2022 and 2027.

Vontobel Green Energy Strategy Index

 For the world to move to renewable energy and meet the ambitious climate targets, huge investments are needed from both governments and the private sector. Electricity from wind, solar and hydro is likely to play an increasingly important role in the future. Consequently, suppliers of the necessary equipment, such as rotors for wind turbines, are also in demand. In addition, it is necessary to provide the corresponding infrastructure.

Efforts are still being made to extend the electricity grids in such a way that electricity produced by wind power can be transported from windy parts of nations to the industrial centers. However, this is only one of the problems to be solved during the energy transition. Therefore, there are also many areas of activity for those working in the sector. For investors, this area is investable, for example through the Vontobel Green Energy Strategy Index, which includes companies involved in energy production using wind and solar power, hydroelectric power and fuel cells. The corresponding suppliers and companies that make the infrastructure possible are also represented. Companies involved in energy production using renewable energy sources and the products and services that are important to this industry are eligible for the index selection.

 

These are divided into six categories: solar, wind, hydro, hydrogen, infrastructure companies and suppliers. The index values can come from both developed and emerging markets. Companies must generate a significant portion of their revenues from energy production from renewable sources or related products and services. Companies that generate a significant part of their revenues from coal or fossil fuels are excluded. An MSCI ESG rating lower than 'BB' also leads to disqualification. Eligible companies are selected from each category based on market capitalisation. Liquidity characteristics are also taken into account: the stocks in question must be marketable in such a way that index adjustments are possible within a reasonable time.

 

Even more starting points

In the energy transition, renewable energy is not the only lever that needs to be used. Sustainable investment is therefore also a much broader issue. Storage technology, for example, is essential to the success of the energy transition. As we know, the sun does not shine 24 hours a day. And the wind blows erratically. It is therefore necessary to develop technologies that allow electricity produced using solar energy to be used at night or on cloudy days. Similarly, electricity from wind power can be used on days when there is little wind. However, mankind must not only think about how to use sustainable energy sources. There are also huge opportunities to save energy and resources.

In recent years, for example, consumers have been able to see the positive impact that energy efficiency can have not only on the environment but also on their own wallets, with more efficient fridges or washing machines on their electricity bills. The subject of energy efficiency does not stop there. The Federal Environment Agency, for example, has identified a potential to save 10% of final energy consumption in Germany, from around 8,750 petajoules in 2014 to around 7,910 petajoules in 2035. With additional efforts in all sectors, final energy consumption could even be reduced by 27% to around 6 380 petajoules. In this situation, more efficient products, more efficient production methods in industry and also changes in consumer behavior are needed.

In the past, our consumer society has encouraged us to throw away goods, and a major problem has arisen with plastics, as nature cannot break down this material. Therefore, the shift towards a circular economy where more and more goods are recycled will also be an important part of environmental and climate protection in the future. Particularly since for many people, the success of the energy transition or climate and environmental protection is already a matter of survival. This can be seen, for example, in the case of sustainable water supply. The world's population is growing, while many people are already struggling with water shortages. The Vontobel Green Technology Strategy Index focuses on these issues.

Vontobel Green Technology Strategy Index

The Vontobel Green Technology Strategy Index focuses on companies that provide solutions or technologies to address key environmental and climate protection challenges. This includes, for example, the transition to a low-emission economy. The focus is on energy production from renewable sources (wind, solar, hydro), storage technologies, but also products and services to increase energy efficiency or reduce air and environmental pollution. But just as much focus is on companies offering products and services to deal with resource scarcity, as in the case of drinking water supply.

 

Conclusion

Achieving global environmental and climate goals requires not only energy production based on renewable energy sources. The corresponding infrastructure and associated products and services are also an important part, as are appropriate storage technologies and improved energy and resource efficiency. The circular economy, where as many products as possible are recycled, is also an important objective, while sustainable water supply is becoming increasingly important, especially in view of trends such as the growing world population. The new tracker certificates on Vontobel Green Energy Strategy Index and the Vontobel Green Technology Strategy Index also make these topics investable for private investors. A fee of 1.25% per annum is charged for the management of each of the indices. Investors bear the market risk of the stocks included in the indices in the same way as a direct investment. As the indices are calculated in US dollars, there is a currency risk for products with a different product currency.

Selected risks:

Currency risk: as the currency of the underlying index is US dollars and the index contains equities and securities quoted in currencies other than SEK or Euro (for example the US dollars), the value of the certificate also depends on the exchange rate between the respective foreign currency (for example the US dollars) and Euro (the currency of the certificate). Therefore, the value of the certificate (in euro) may fluctuate significantly over the lifetime of the certificate.
Market risk/price change risk: the value of the certificate may also fall significantly below the purchase price during the lifetime of the certificate due to the factors that determine the market price if the value of the underlying instrument falls.
Issuer/credit rating risk: Investors are exposed to the risk that the issuer and guarantor are unable to meet their obligations under the product and the guarantee - for example, in the event of insolvency (illiquidity/over-indebtedness) or an official decision to take liquidation measures. Such an order from a resolution authority may also be issued in the context of insolvency proceedings in the event of a crisis of the guarantor. A total loss of the invested capital is possible. As a debt security, the product is not covered by deposit protection.

Important legal information
Legal notice
This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.
The products are not capital protected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

12/08/2022 18:01:13

 

Write a Comment

 

  

 

  

 

* Required fields need to be filled in