PERSPECTIVE3-5 min to read

How can investors in resources respond to climate warnings?

09/11/2022
crops-drought

Authors

Felix Odey
Portfolio Manager, Global Resource Equities

2022 has brought stark warnings over the devastating impacts climate change could have. Pressure on the global food and water system is growing, and time to address its potentially disastrous consequences is running out.

A report from the Intergovernmental Panel on Climate Change (IPCC) made it clear that we are already seeing irreversible impacts from climate change. It also highlighted that without significant and immediate action, across all sectors and countries, the consequences are likely to be catastrophic.

The rapid phase-out of coal and methane emissions is needed, so too a massive ramp-up in capital investment in transitioning to a low carbon world, and carbon sequestration and reforestation. Without this action we will see rapidly rising sea levels, more extreme weather events, habitat loss, and worsening shocks to the world’s food supply.

Over 40% of the world’s population is “highly vulnerable” to climate change, according to the IPCC. The global population is expected to exceed 10 billion by 2050, which will require producing 70% more food and water compared to 2010 levels (Source: FAO, USDA, OECD, Our World in Data), and a similar ramp-up in energy consumption.

How we get there, and, specifically, the changes we make in the next decade, will shape the world profoundly. 

What role do investors play?

Changes to the energy transition, food, and water value chains are going to involve a huge reallocation of capital; upwards of $130 trillion over the next 30 years based on BNEF, WRI and UN estimates. Traditionally, this kind of capital shift has catalysed share price performance in companies successfully generating returns from higher capital expenditure.

We see multiple drivers and sources of this capital, and the IPCC report highlights that we need the solutions and drivers of change to be as wide-reaching as the problems we face.

But the solution for investors is not as simple as divestment from certain companies, or taking one or two token positions in “ESG champions”. This is a multi-decade trend that will be widespread and will require an investment perspective that manages the nuances within, and interconnections between, the most influential constituent subsectors of the changing systems.

As investors in both food & water and energy transition themes, we aim to follow a three-pillar approach to sustainability:

1. Create a universe of potential investee companies that covers the whole value chain in these thematic areas, while remaining focused on the problem these investments are trying to help solve;

2. Company by company ESG and sustainability analysis, to ensure that we differentiate companies on how they operate as well as their business purpose;

3. Engagement, with both the incumbent companies and those offering the products and services we need.

The IPCC report offers a timely warning to the perils of inactivity, and makes it clear that we have only seen the very beginning of the change that is required across systems like energy, food, and water. Overall, investment in agriculture and land sectors are going to have to increase by three to six times versus current levels in order for climate change to be effectively mitigated.

Investors, companies, governments and organisations like the IPCC need to ensure that data, capital and regulation are aligned to efficiently drive the changes we need before they become even more burdensome and difficult to make.

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Authors

Felix Odey
Portfolio Manager, Global Resource Equities

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