DR.CHENJIAZI ZHONG

Climate issues are among the world’s biggest challenges. Fossil fuel emissions accumulating in the atmosphere and trapping more of the sun’s energy are expected to drive global temperatures above 1.5 degrees Celsius (°C) or 2.7 degrees Fahrenheit within the next decade (Diffenbaugh & Barnes, 2023; Valone & Panting, 2019). Latest evidence using artificial intelligence (AI) and machine-learning methods also indicate global warming is on the verge of crossing this 1.5°C threshold (Diffenbaugh & Barnes, 2023). Even if the climate-forcing pathway is substantially reduced and greenhouse gas (GHG) is mitigated, the possibility of failing to hold global warming below 2°C remains (Diffenbaugh & Barnes, 2023). The central objective of the Paris Agreement is its long-term temperature goal to hold global average temperature increase to “well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels”. 

1.5-Degree Investment Universe 

Achieving the 1.5°C climate goal would require major business, economic and societal shifts, and each shift is enormous. The trade-offs for businesses are critical.

Shifting dietary, cultivation and curbing waste. Reducing emissions needed for the 1.5-degree pathway implies reducing the share of ruminant animal protein in the global protein-consumption mix, adopting new cultivation approaches, curbing the waste associated with growing, transporting and refrigerating food, and the methane released as the organic material in wasted food decomposes

Electrification. Electrification is a massive driver of decarbonization:

1. Electrifying road transportation. Electrifying road transportation, shifting to a cleaner source of energy rapidly and leveraging either batteries with sustainably-produced electricity or fuel cells with sustainably-produced hydrogen to power electric engines are required for decarbonization. Biofuels can also contribute to this transition. 
2. Electrifying buildings.Space and water heating, which typically rely on fossil fuels such as natural gas, fuel oil and coal, are the primary emission contributors. Decarbonization requires construction and the building sectors to expand the use of district heating and blending hydrogen or biogas into gas grids for cooking and heating. 
3. Electrifying industries. Industrial subsectors with low- and medium-temperature heat requirements, such as construction, food, textiles and manufacturing, would need to accelerate the electrification of their operations quickly.

Decarbonizing power and fuel. Replacing thermal assets with renewable energy would require a dramatic ramp-up in the manufacturing capacity of wind turbines and solar panels. The 1.5-degree pathway also requires increasing the use of sustainably-sourced bioenergy, including biokerosene, biogas and biodiesel. Green hydrogen, the hydrogen produced from renewable energy, and blue hydrogen, which is created using natural gas and the resulting carbon dioxide emissions stored via carbon capture and storage, would play a huge role.

1.5-Degree Investment Opportunities and Approaches

The general philosophy of investing in the 1.5-degree themes is to invest in the companies that enable technological responses to climate change and solve for green consumption. Like most equity-investing strategies, an effective approach is to target the companies and subsectors not well understood by the market. Some 1.5-degree themes for consideration: 

• Materials technology: innovative materials, recycling, carbon capture and storage solutions and industrial decarbonization
• Transportation technology: sustainable and alternative fuels, lightweighting technology for aviation and maritime and efficiency technology 
• Power technology: grid solutions, hydrogen solutions and power optimization solutions
• Engineering technology: heating and cooling technology, sea-level abatement, AI monitoring solutions and smart building systems
• Green consumption: alternative and synthetic proteins, gene-edited proteins, cellular agriculture and DNA synthesis and sequencing 

Short-listing the target companies using a bottom-up fundamental approach, focusing on identifying the companies that provide competitive advantages over the general market over a three- to five-year duration. To enhance the upside, taking short positions in the companies that are least likely to navigate climate changes or the transition successfully, for instance, the companies with or have: 

• Heavy industrial GHG emitters
• Displaced or replaced aviation and maritime technologies
• Under exposed carbon credits
• Displaced or redundant power technologies
• Heavy carbon non-shifting GHG emitters
• Environmentally challenged inputs 
• Non-shifting traditional protein manufacturers at risk of product substitution or displacement

The investment opportunities for 1.5-degree themes rest on the premise that a confluence of factors has the potential to create an exponential growth opportunity to deliver strong investment returns. The opportunity set in climate investing is increasing because climate-change themes are unique in their ability to be truly global in reach, impactful by the size of market opportunity and diverse in portfolio construction given the number of sectors and industries with thematic exposure. 

Keywords: Paris Agreement, global warming, 1.5 degrees Celsius, 1.5°C, clean technology, cleantech, net zero, carbon capture, electrification, decarbonization, investment portfolio, climate investing, climate impact investing, climate-aware investing

References

Diffenbaugh, N. S., & Barnes, E. A. (2023). Data-driven predictions of the time remaining until critical global warming thresholds are reached. PNAS, 120(6), e2207183120. https://doi.org/10.1073/pnas.2207183120

Valone, T. F., & Panting, J. (2019). Quantitative carbon dioxide, temperature, and sea level relation for the future of terrestrial fossil-fueled technology: An accurate predictive model based on Vostok 420 kY historical record. 2019 IEEE International Symposium on Technology and Society (ISTAS), Medford, MA, USA, 1-8. doi:10.1109/ISTAS48451.2019.8937887.