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Asset Management | ESG Edge

Decarbonization: the upcoming multi trillion dollar opportunity

January 2021

We are approaching a unique 'use it or lose it' moment in economic history

Despite an estimated 7% decline in the lockdown induced fossil fuel burn in 2020, Earth's average surface temperature (at 1.2 degrees Celcius above preindustrial age levels) has risen to levels dangerously close to the Paris climate agreement's threshold of 1.5 degrees Celcius. The Intergovernmental Panel on Climate Change (IPCC) states that global carbon emissions must decline by nearly half to 2030 and reach net zero by 2050 to have at least a 50% chance of limiting warming to 1.5 degrees Celcius. If we fail to do so, the IPCC warns, humanity will face extreme changes in weather patterns and ecosystems, massive economic damage, and unprecedented social and political upheaval. The world today has less than two decades to make serious cuts in carbon emissions to avoid the tipping point into a future of catastrophic climate change.

Climate change is an existential crisis, BUT the solution - decarbonization - is a historic business opportunity

Decarbonization refers to the reduction or elimination of carbon dioxide from energy sources. According to the World Economic Forum, full decarbonization of our energy systems is the only solution to climate stabilization. Interestingly, deep decarbonization, while being a solution to climate change risk, also promises to be the single biggest commercial opportunity of the current century, equivalent to an estimated spending of USD 85-110 trillion, spread over the next thirty years. Out of this, areas that are expected to witness some of the biggest investment towards decarbonization are:

The above estimates are from the Energy Transitions Commission. They put annual investment towards decarbonization in just the above mentioned four areas at a staggering USD 1.5-1.8 trillion.

The pillars of a successful decarbonization strategy are built around the following:

1. Decreasing carbon intensity of global electricity production to near zero by 2050, through massive investments in renewables. The Energy Transitions Commission¹ states that on average, over the next thirty years, the world will need to build five to six times as much wind and solar power per year (80,000 to 100,000 TWH/annum) as in 2019.  
2. A fully electrified surface transport system with accelerated investments in charging infrastructure². The transformed energy system would include more than a billion electric vehicles worldwide by 2050, according to IRENA (International Renewable Energy Agency) estimates. 
3. Massive increase in hydrogen production (from 60mt annual capacity today to 900mt annual capacity by mid-century) and carbon capture infrastructure (world must build 240mt/year versus existing 33mt total capacity currently).

While the cost of deep decarbonization is estimated to be anywhere between USD 85 - 110 trillion³, there are benefits too. Through 2050, the amounts saved by reducing the net energy subsidies and curtailing the environmental health damage would exceed investments by three to seven times. Investments in the energy transformation could create about USD 98 trillion in additional GDP gains by 2050 compared to current plans, IRENA's analysis shows. Jobs in the energy sector would increase by 14% with the transformation. New jobs would outweigh job losses, even with the decline in jobs linked to fossil fuels. Renewable energy jobs would grow at an estimated 64% across all technologies by 2050.

A number of factors are setting the stage for a golden age in renewables. Declining costs, owing to the advances in automation, AI driving productivity and efficiency, lower energy costs, and more effective storage are aiding this historic transition to renewable energy.

On the other hand, as a result of the energy transition needed, oil demand could drastically reduce from 100 million barrels per day (bpd) in 2019 to around 10 million bpd by mid-century, and thermal coal use would be completely phased out. This will have ramifications on the fossil fuel sectors, which could see stalled assets.

At Avendus ESG strategy, we have been cognizant of this and have consciously constructed a greener portfolio that has 72% lower carbon emission and 58% lower carbon emission intensity compared to its benchmark.

We may be reaching a pivotal point on a global decarbonization initiative - a unified global response to a global crisis

With the frequency and ferocity of climate related incidents rising by the day and with the swearing-in of a climate aware administration in the United States, we may have reached a pivotal moment in building a consensus on mitigating climate risk through commitments to decarbonization. Every citizen, corporate, government and investor is a stakeholder here because climate change is a global concern and needs a global response. If every stakeholder is aligned on decarbonization, we will not only be able to limit global warming and emissions but will also be able to generate robust economic advantages, which will raise living standards in developing countries and create employment across the world.

A unified, coordinated global initiative where governments push carbon pricing and regulation, the asset management industry embraces sustainability, corporates sign up on net zero commitments and society demands cleaner air could result in a much needed global movement to usher in decarbonization at scale. This defining, multi trillion dollar opportunity is staring us in the face.

Let's embrace it!

Sources

¹ Making Mission Possible - Delivering a Net Zero Economy
^{2 and 3} Transforming the energy system, IRENA

Authored by: Abhay Laijawala, MD and Fund Manager, Avendus Capital Public Markets Alternate Strategies LLP

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