OF ALL the topics under discussion at the UN climate change summit in Dubai, investors are focusing on four developments most likely to affect their portfolios.
The 13-day series of meetings represents the first global assessment of progress on the climate goals established by the Paris Accords in 2015. Overall, the news is not good: Emissions are still rising at too fast a pace to curb the worst effects of climate change.
For investors, that reinforces long-term themes that are not going away. But buried in the discussions are a handful of near-term developments that signal new opportunities.
Late last week, the parties came to an agreement on funding for disaster relief and prevention in countries especially vulnerable to the effects of climate change. Materials shares rallied on Monday (Dec 4) in Asia on optimism the announcement, plus lower interest rates in the US, will lead to much-needed infrastructure spending in developing nations.
Meanwhile, a pledge to triple the world’s renewable energy capacity by 2030 would require significant upgrades to power grids across the globe, with consequences for suppliers. And agreements on methane emissions reductions will ripple across a wide swath of industries, while rules for a global carbon market will shape corporate investments in emissions reduction.
Even if the Dubai gathering concludes without concrete steps forward, the agenda for many governments will be clearer. Here is what investors are watching.
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Grid upgrades
Tripling renewable capacity by the end of the decade would require investment of more than US$1 trillion a year, double current levels, according to BloombergNEF. It also would require upgrades to power grids so that they can accommodate energy from intermittent and decentralised sources, such as wind and solar.
Higher borrowing costs and plunging solar and wind prices have dampened enthusiasm for renewables producers, but power grids and their suppliers are starting to gather attention. China, for example, is setting up mammoth renewables projects in pursuit of its target of 30 GW of energy storage capacity by 2025. If the country announces “upgrades to improve connections and transmission and distribution of renewable power from West China to East China”, onshore power grid stocks would benefit, said Xuan Sheng Ou Yong, environmental, social and corporate governance (ESG) analyst at BNP Paribas Asset Management in Singapore.
Additionally, countries in the Middle East and North Africa region have issued fewer permits for grid upgrades than Europe. The United Arab Emirates, Oman and Egypt are already upgrading their grids and high-voltage transmission lines, indicated a Nov 28 note from HSBC Holdings analysts.
“There’s obviously a massive requirement for greater investment in grid infrastructure” and equipment suppliers will benefit, said Chris Dodwell, head of policy and advocacy at Impax Asset Management. While the S&P Global Clean Energy Index has tumbled 28 per cent this year, French smart grid solutions provider Schneider Electric and US components maker Hubbell have jumped almost 30 per cent.
Island infrastructure
Nearly 200 nations agreed last Thursday to run a fund to help vulnerable countries deal with climate change, with rich nations pledging at least US$260 million to start the programme. The so-called loss and damage fund is expected to attract voluntary contributions from developed nations, which are responsible for the vast majority of historical emissions.
As details emerge about how the fund will be administered and disbursed, it will benefit engineering, construction and materials companies in developing economies, said John Miller, an ESG policy analyst at TD Cowen. India and South-east Asia stand to be among the beneficiaries of such a fund, given their outsized exposure to climate events, said HSBC.
As extreme weather events become increasingly frequent, developed nations are already spending more on adaptation infrastructure. Storm water management company Advanced Drainage Systems has gained close to 50 per cent this year.
Methane monitoring
The campaign by COP28 president Sultan Al Jaber for the oil and gas industry to reach near-zero emissions by 2030 has renewed focus on methane, the second-largest contributor to global warming after carbon dioxide.
Investors will watch whether China and India join a pledge to collectively reduce global methane emissions by 30 per cent from 2020 levels by 2030. The US Environmental Protection Agency may also use COP as a backdrop to finalise tougher rules for the oil and gas sector and release more details about the methane “waste fee” authorised by the Inflation Reduction Act (IRA), said TD Cowen’s Miller.
The developments may pressure producers to reduce methane emissions by restricting venting and flaring, making efficiency upgrades and monitoring leaks, said the HSBC strategists. Methane monitoring software providers and makers of safety products such as MSA Safety may benefit.
China, the world’s largest emitter of the gas, released a long-awaited reduction plan last month that includes targets on methane-emitting manure from the livestock industry. That may spur dairy producers such as China Mengniu Dairy and Inner Mongolia Yili Industrial Group to invest in methane capture and biomass fuel projects, with incentive mechanisms expected to be introduced, JPMorgan Chase analysts including Hannah Lee wrote in a note.
Pricing carbon
The carbon offsets market, once estimated to hit US$100 billion, is shrinking amid weakening demand. This COP summit will address provisions for the global market expected to open in 2024, impacting developers of carbon credits such as Carbon Streaming Corp and EKI Energy Services, both down more than 50 per cent this year.
In compliance markets, pricing is extremely varied, with an emissions certificate trading at about US$75 per tonne in Europe but about US$10 in China.
“Carbon pricing will be a critical part of any effort to move to net-zero emissions,” said Goldman Sachs Group strategists, including Michele Della Vigna, in a note. Clarity could drive demand for carbon capture and storage technologies and biomass-linked electricity among other innovations, areas already being promoted by the US IRA.
HSBC highlighted the cement industry, the world’s second-largest industrial carbon dioxide emitter, as one that could ramp up investments in carbon capture and green hydrogen technologies.
The overhanging questions about carbon regulation are slowing down investments in emissions reduction by major polluters. The re-investment ratio for the oil and gas and mining sectors declined by 30 and 10 per cent this year, respectively, compared with a 10-year average, Goldman noted. BLOOMBERG
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