The Opportunity
Carbon emissions and their role in climate change
Human induced climate change is a critical and urgent issue. We’re seeing impacts from more intense extreme weather events like heavy precipitation events, floods, heat waves, droughts, and wildfires. One of the major contributors to climate change is carbon dioxide, or CO2, in the atmosphere it’s the primary GHG emitted through human activities, making up 79% of all U.S. GHG in 2020’. By reducing greenhouse gas emissions, we can make a greater impact and begin to mitigate the effects of climate change.
Greenhouse gases – such as carbon dioxide, methane, nitrous oxide, and others – make up a small percentage of Earth’s atmosphere but play a significant role in regulating the temperature of the planet. Because of their chemical make-up, these gases absorb heat radiated from Earth up towards space, trapping it in the atmosphere, and warming the planet. Greenhouse gas emissions are typically quoted in CO2 equivalent metrics – or “carbon emissions.”
You may have seen or heard of different organizations discussing their impact on climate change and adopting initiatives to go carbon neutral by carbon transitioning. Companies can put a carbon transition plan is place by using lower or more efficient energy consumption, lower levels of pollution and building renewable energy technologies. This could include using renewable energy, designing products with minimal waste and investing in renewable-energy projects.
Why it’s important to consider carbon transition as part of an investment strategy:
- Future proofing investment portfolios: Decarbonization is a long-term structural trend that transcends sectors, geographies, and economic cycles. There’s strong consensus from the business, governmental and consumer community that it cannot be ignored, avoided, or delayed. Investing in companies that are showcasing a strong strategic commitment to carbon-transition investors are essentially considering the ‘new normal’ of the economy and seeking ways to future proof their portfolio.
- Direct resources towards solutions: Carbon-transition strategies typically look for companies that are effectively managing their carbon-footprint and/or those companies actively pursuing solutions to climate related challenges. For investor portfolios, this can mean direct or indirect exposure to opportunities in renewable energy technology, carbon capture and storage, sustainable agriculture, green buildings and infrastructure, sustainable transport, water management, waste management and land management among other areas. This allows investors to harness their resources towards relevant solutions to help combat the urgent but long-term problem of climate change.
Avoid potential risks
A growing number of governments around the world are committing to ambitious decarbonization goals. The pace is picking up – demonstrated through increasing climate related policies and regulation. Companies not keeping up will be at risk of greater scrutiny, intervention and forced action by governments. Furthermore, companies also face other climate related risks such as the financial impacts of severe weather events, stranded assets, consumer boycotts etc. As momentum continues on all these fronts, the question that remains pivotal is: are companies ready, willing and enroute to transitioning their business models? Or will they be at risk of losing value through inaction. A carbon transition fund asks this very question of the companies in which it invests. While the energy transition will not happen overnight, it’s important for investors to recognize that the financial impacts of climate risk and transition risk will reverberate across all industries and global markets, affecting long-term investor returns. Companies that seek to mitigate risks and capture opportunities will be in a stronger position to drive long-term value
Meera Pandit, Global Market Strategist, JPMAM
