Investing in Climate Solutions and Climate Improvers on the Way to Net Zero

Re-published with permission from Milken Institute, the original article can be found here.

To align an investment portfolio with Net Zero — the goal of mitigating climate change by transitioning to net zero greenhouse gas emissions — it is important to first recognize that greenhouse gas emissions are highly concentrated. The publicly traded firms in 11 key emissions-intensive sectors account for about 90 percent of public company emissions and about 60 percent of all global emissions. These sectors are utilities, oil and gas, mining, construction, chemicals, engines and machinery, airlines, transportation, autos, food producers, and forestry and paper. Global decarbonization goals cannot be met without reducing emissions in these sectors (or replacing these companies with cleaner competitors). For investors’ actions to translate into real-world emissions reductions, they need to focus on the sectors that represent a large share of the problem.

There is an important role for investors to play in emissions-intensive sectors. Movement by these sectors to reduce greenhouse gas emissions could have the largest impact on real-world decarbonization, and access to capital is critical for them. The Glasgow Financial Alliance for Net Zero estimates that more than $30 trillion in investments (~4 percent global GDP annually) will be needed to finance the climate transition by 2030. This represents a meaningful increase in investment from current levels of around $10 trillion. Much of the necessary investment will need to occur in these sectors, at existing publicly traded companies or at competitors that will displace them.

How Investors Should Provide Capital

Allocating to Climate Solutions: Climate Solutions are companies whose products and services directly support moving the global economy toward achieving climate goals. For example, utilities can contribute to the climate transition by generating power from renewables instead of fossil fuels, railroads are an energy-efficient substitute for moving goods around compared to aircraft or trucks, and construction firms can manufacture efficient insulation materials to reduce emissions from heating and cooling. These companies will play an important role in reducing some of the largest categories of greenhouse gas emissions, namely electricity and heat, transportation, and industry/construction, respectively.

Allocating to Carbon Improvers: Carbon Improvers are companies on a clear and credible pathway to reducing their emissions. Companies with the largest scope to decarbonize are those with high spot emissions today — improvements in emissions-intensive sectors are most important as their emissions need to decrease most for the world to reach Net Zero. Through both capital allocation and engagement, investors can play an important role in ensuring that more and more companies take actions to decarbonize. Carbon Improvers can decrease their emissions via changes in their production processes (e.g., an aluminum producer switching from coal to hydropower) and/or through a shift in their product mix toward climate solutions (e.g., a car company shifting to make electric vehicles).

The Role of Measuring Portfolio Emissions

Climate Solutions and Carbon Improvers can have more impact on the Net Zero transition over time — but it is likely to have higher spot-emissions metrics today compared with simply reducing allocations to emissions-intensive sectors. The majority of Climate Solutions can be found in emissions-intensive sectors, as these are the companies creating the tangible products and infrastructure that are needed for a greener, net-zero economy. For example, electric vehicles are associated with far lower downstream emissions — which is how they contribute to real-world emissions reductions — but generate roughly similar emissions to internal combustion engine vehicles during production. And the most valuable improvement plans for Carbon Improvers are in companies that start out with high emissions, such that it’s valuable to reduce them.

If Climate Solutions providers and Carbon Improvers are successful in their missions, they will see falling emissions over time while having a tangible impact on real-world decarbonization. Providing capital to companies that meet these criteria aligns investors’ portfolios with the Net Zero transition.

Please see important disclaimers and other information. Information contained herein is only current as of the publish date and is intended only to provide the observations and views of Bridgewater Associates, LP (“Bridgewater”) as of the date of publication unless otherwise indicated. The views expressed herein are solely those of Bridgewater and are subject to change without notice. Every investment involves risk and in volatile or uncertain market conditions, significant variations in the value or return on that investment may occur, including the risk of a complete loss of an investor’s entire investment. Past performance is not a guide to future performance.