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 1. HOW CAN I INVEST FOR CLIMATE CHANGE

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HOW CAN I INVEST FOR CLIMATE CHANGE?

Investors have a role in helping to slow, stabilize, potentially reverse—or
adapt to some inevitable—climate change

12/17/2021

Dr. Sarah Kapnick

The effects of climate change—extreme storms, heat, drought,1 rising seas—are
being felt in every region of the world. They increase water and food scarcity,
physical risks and damage to lives and property. To date, most climate investing
has gone to building out renewable energy generation and storage. Adaptation, by
contrast, has been underfunded.

Looking at the sources of carbon (Exhibit 1) makes it clear that reducing energy
emissions, important as it is, won’t be enough. Along with emissions reduction
across all sectors, carbon removal and the retrofitting of physical assets for
some inevitable climate change will be needed, too. Each of these three Rs
offers investors a range of potential opportunities.

Energy production and consumption are major sources of the emissions causing
climate change, but other sources also need reduction

Exhibit 1: Sources of global greenhouse gas emissions



Source: Climate Watch, World Resources Institute; data as of 2016. Direct
industrial processes include cement (3%), chemicals and petrochemicals (2.2%).
Energy use in industry includes mining and quarrying, construction, textiles,
wood products and transport equipment (such as car manufacturing). Data is
latest available; global granular sectoral composition is not updated regularly.

How can investors participate in stabilizing climate change—achieving a
“net-zero” world in which emissions from a range of sources are brought to zero
or balanced out by carbon removal? Along with investments to reduce emissions in
(decarbonize) the energy supply, here is a set of approaches that employ all
three Rs to adapt to climate change: greenhouse gas reduction, removal and
retrofitting.

The three Rs of climate investing: Reduce, remove and retrofit

Investors can participate in these three approaches through associated
investment opportunities in traditional and emerging technologies (Exhibit 2).

Investors can participate in the three Rs’ and the opportunities they present

Exhibit 2: Climate investing approaches and how they work



Source: J.P. Morgan Asset Management; information as of December 2021.

Reduce
Emissions reduction, which includes the decarbonization of the energy supply,
has been a major focus of climate investments. There are also less well-known
opportunities to reduce energy demand and to transform other (nonenergy)
carbon-intensive processes.

Decarbonization of the energy supply can be accomplished by accelerating
renewable energy generation and storage. The deployment of these technologies
can be further incentivized through regulation such as market-based Renewable
Portfolio Standards for utilities, which increase the amount of clean energy.

Reductions in energy demand can also decrease emissions (especially in the near
term, before the power grid comes to rely on renewable sources) while reducing
operating costs, making reductions economically desirable even absent climate
considerations.

The transformation of carbon-intensive processes is also needed—for example,
introducing lower carbon versions of cement formulation; finding raw materials
that can substitute for those presently derived from oil and gas (e.g.,
plastics, fertilizer); and improving resource efficiency more broadly to reduce
demand for virgin raw materials, catalyze more recycling and develop a circular
economy. 

Remove
Carbon removal is necessary to reach net zero in situations where carbon-neutral
substitutes are not available. Excess greenhouse gases can be removed
(sequestered) from the atmosphere two ways—naturally and mechanically.
Greenhouse gases can even be removed from the ocean, which absorbs CO2.2

Nature-based carbon removal: Carbon is naturally sequestered in trees, plants,
soils and plankton. The mature forestry industry currently provides investible
timber products.3 Nonprofits, governments and private funders have supported the
development of other nature-based removal projects (e.g., soils, kelp,
mangroves), but standards for verifying carbon removal are still evolving.

Mechanical carbon removal: The technology to lock carbon underground or within
new materials is still nascent. The U.S. Department of Energy recently announced
the Carbon Negative Shot, with the goal of reducing the cost of mechanical
removal below USD 100 per ton of carbon or its equivalent (tCO2e).4 For
perspective, a similar program was developed for solar more than a decade ago.
The success of today’s solar industry suggests such actions can bear fruit over
time.

Retrofit
The World Bank estimates that up to USD 500 billion will be needed each year
until 2050 to globally adapt to climate change. Yet even as adaptation requires
upfront costs, it can lead to multiples of benefits from avoided damages.5 We
highlight three broad adaptation categories, each with potential investment
opportunities.

Water efficiency: Solutions are needed to increase water supply in the face of
regional droughts, changes in precipitation patterns and overpumping of wells.
In the U.S. in 2020, droughts alone caused USD 259 billion in damages.6

Reinventing food and agriculture: Global population growth and changing consumer
habits will raise food demand by 2050, requiring greater agricultural
productivity. At the same time, resource scarcity, from water to arable land, is
placing stress on regional productivity. Agriculture will need to adapt to
changing climate conditions and if it is to feed a greater number of people.

The built environment: Investments are needed to protect against damage from
climate extremes and to allow for continuous operations. Due to their
multi-decade lifetimes, buildings and infrastructure need to be built or
retrofitted to withstand the climate of the future, in addition to climate
change that has already happened.

Where do we go from here?

Some of these opportunities are spearheaded by start-ups seeking venture funding
for innovations involving a higher risk of technological failure but potentially
higher returns. More mature options, like energy production, have longer track
records with lower return profiles. These differing return profiles create an
opportunity for diversification across climate investing. All of these areas are
important to addressing the effects of climate change, and investing across them
can create robust return opportunities for investors.

Several nonprofits have developed grant programs, technology scaling and
fundamental research on climate solutions. For more information, please look
into Elemental Excelerator, Prime Coalition, Center for Climate and Energy
Solutions and Carbon180.

1 Dr. Sarah Kapnick, “Preparing for climate change: How drought will change the
U.S. West,” J.P. Morgan Asset Management, August 16, 2021.


2 National Academies of Sciences, Engineering, and Medicine, A Research Strategy
for Ocean-based Carbon Dioxide Removal and Sequestration Washington, DC:
National Academies Press, 2021.

3 Dr. Sarah Kapnick, “The global carbon market: How offsets, regulations and new
standards may catalyze lower emissions and create new opportunities,” J.P.
Morgan Asset Management, October 14, 2021.

4 The Carbon Negative Shot, unveiled in November 2021, is the U.S. government’s
first major effort in carbon dioxide removal, based at the Department of Energy
Office of Fossil Energy and Carbon Management. It calls for innovation in the
expanding field as a key facet of achieving net-zero emissions by 2050.

5 Arame Tall, Sarah Lynagh, Candela Blanco Vecchi et al., “Enabling Private
Investment in Climate Adaptation and Resilience: Current Status, Barriers to
Investment and Blueprint for Action,” World Bank, March 2, 2021.

6 Data from the National Oceanic and Atmospheric Administration.

Risk Summary

Investing on the basis of sustainability/ESG criteria involves qualitative and
subjective analysis. There is no guarantee that the determinations made by the
adviser will align with the beliefs or values of a particular investor.
Companies identified by an ESG policy may not operate as expected, and adhering
to an ESG policy may result in missed opportunities.


RELATED ARTICLES


THE GLOBAL CARBON MARKET

Sarah Kapnick, Ph.D., our Senior Climate Scientist and Sustainability
Strategist, explains why interest in carbon markets and emissions trading
systems is surging—to both help halt climate change, and for investors, to
potentially achieve long-term returns.

Read more




PREPARING FOR CLIMATE CHANGE

As the Western U.S. drought moves towards a megadrought, it's time to start
preparing for climate change. Explore how climate-based phenomena may unfold.

Read more



Article Tags:
 * Environmental Social And Governance
 * Climate change


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