The climate changed in 2019.

Against a backdrop of repeated extreme weather events around the world, the year has seen school children on strike, an unprecedented wave of public climate demonstrations around the world, and sustained media coverage of the topic.

Consumers responded with unexpected speed – rejecting plastic packaging and meat; joining waiting lists for electric vehicle launches and seeking positive impact investments.

The concept of “Net zero” captured the imagination of policy makers struggling to explain limited progress over the past 30 years.

As we look ahead to 2020, we see growing evidence for Impax’s investment belief: that a shift to a more sustainable global economy is underway, creating opportunity and risk for companies and their investors, particularly:

  • Textiles will become the new plastic
  • New energy infrastructure roll-out will accelerate
  • It’s going to be a pivotal year for climate change policy
  • Sustainability positioning will become a feature of competition for capital 

Textiles will become the new plastic

Public concern has been rising across the breadth of environmental issues in addition to climate change: local air pollution in Asia; water scarcity in South Africa, India and Australia; and, globally, regarding the overuse of plastics. That latter issue has triggered a raft of legislative initiatives around the world. Companies are responding with, for example, smart non-plastic packaging that can extend shelf-life and reduce food waste. These trends have provided tailwinds for companies offering solutions. So what might be the next environmental concern to rise up the agenda? We see the textile industry as a likely next target.

The falling cost of textiles and the explosion of fast fashion in recent years have created a ballooning – but largely overlooked – environmental impact. Producing textiles (especially cotton heavy) is water and energy-intensive,  and the trend towards mixing different types of fibres within clothing can make recycling difficult if not impossible. Currently just 15% of textiles are recycled, according the US Environmental Protection Agency, while the apparel and footwear sector is responsible for around 8% of greenhouse gas emissions.

The European Union plans to focus on the textiles sector in 2020, and we expect the issue to rise in public consciousness. This will create opportunities for producers of sustainably produced textiles, and those offering recycling solutions.

Water usage by fibre type and production phase
(million megalitres)

Source: Ellen MacArthur Foundation, A new textiles economy: Redesigning fashions future, (2017, https://www.ellenmacarthurfoundation.org/publications/a-new-textiles-economy-redesigning-fashions-future).

New energy infrastructure roll-out will accelerate

In the power ecosystem, wind and solar generation is now at the tipping point in competing with fossil fuels due to the falling technology costs. But the disruption is extending far beyond generation: new technologies and business models in smart grids, energy storage, control systems, distributed generation and demand response present investment opportunities.

Similarly, in the transport sector, electric vehicle model launches are becoming a common feature of incumbent car manufacturers. In parallel, charging infrastructure is increasingly visible along major arteries and fast charging (up to 350kW) is now viable. 

Global passenger vehicle sales by drivetrain (units)

Source: BNEF as at 30 November 2019

Part of the reason that concern about climate change is growing is because its impacts – once expected unlikely to materialise until the second half of the 21st century – are being felt now. While that is spurring greater efforts to reduce emissions, it is also prompting companies and individuals to adapt to a changing climate and to invest in resilience.

Considerable investment is required in water infrastructure as patterns of precipitation change, which plays into a longstanding focus area at Impax. But, with power grids becoming vulnerable – as seen in California, following extensive wildfires – interest is also growing in back-up and autonomous power generation.

A pivotal year for climate policy

Increasing public concerns about climate change are triggering the first policy responses that are in line with what climate science tells us are needed to avert dangerous impacts. The UK’s legislation to reach net-zero emissions by 2050, passed in June, is just the first of a growing wave of similar commitments around the world. At the UN Climate Action Summit in September, more than 65 countries signaled their intent to achieve net zero by 2050.

Beyond the initial sound bite, net zero targets are interesting to analyse as they require sector-specific decarbonisation roadmaps.  In the UK these have already been prepared for the power sector and road transport is being outlined. Over the next 12 months we expect these to expand to cover heavy industry and similar plans for other countries.

These roadmaps will lay the ground for what could be a pivotal year for climate action as countries within the Paris Agreement are due to submit their Nationally Defined Contribution in the run up to next December’s climate talks (to be hosted by the UK). Action plans will need to add up to deliver against pledges made to assuage protesters this year.

We see the US Presidential election as an influence with three potential directions:

  1. do nothing (Trump),
  2. increase carbon taxes (other Republicans and some Democrats),
  3. introduce Green New Deals (Warren, Sanders). 

Either way, risks to investors (economic transition or physical climate impact) are significant.

Sustainability positioning will become a feature of competition for capital         

Notwithstanding the encouraging direction of travel for many companies which are willing and able to adapt – we believe the transition to a more sustainable economy will be pose insurmountable strategic challenges for others. As investors seek sustainability orientated strategies and products in place of investments in companies linked to polluting activities, the likelihood of unsubstantiated claims of delivering an environmental solution rather than a problem (aka “greenwashing”) are growing.

The EU has responded in 2019 with a Sustainable Finance Taxonomy, which sets out which economic activities can make a substantial contribution to climate change mitigation and dictating which investment products can be described as ‘sustainable’. This approach, just the latest in a series of well-established taxonomies derived and regularly updated by the private sector, has its merits: in some ways, mirrors Impax’s Environmental Markets classification which we have been using for almost 20 years to define our investible universe.

Of value is its implication that there are simply some areas of economic activity which, ultimately, will not exist once the transition to a sustainable economy has matured.

Avoiding hidden transition risks and uncovering “greenwashing” claims will require in-depth analysis and engagement with individual companies. Independent scrutiny from the media, environmental observers and regulators will also be important to protect unadvised investors from strategies which claim to be climate proof but aren’t backed up by the rigorous assessment of net CO2 impact, policy risk and modelling of physical climate risk.

While the climate has changed, our investment thesis remains steadfast. A shift to a more sustainable global economy is underway, creating opportunity and risk for companies and their investors.

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