Climate Risk: Investment Opportunities in Sustainable Energy and Food
Produced by Bloomberg Media Studios in partnership with Standard Chartered.
The war in Ukraine has accelerated focus on an area that might be surprising for some. Besides national security and energy dependence, climate change is increasingly gaining attention as one of the consequential global challenges.
The war in Ukraine has accelerated focus on an area that might be surprising for some. Besides national security and energy dependence, climate change is increasingly gaining attention as one of the consequential global challenges.
In July 2022, fears over US energy security helped unlock a historic $369 billion bill for climate and clean energy programs. This is the largest single investment made towards climate change in US history and will significantly further the development of the US clean energy industry.
This concept of climate risk as national security risk is, however, not new.
As early as 2007, the Centre for Naval Analyses (CNA) examined how both are interlinked.[¹] The CNA Military Advisory Board, comprising retired US military generals, was brought together to study the threats posed by climate change and address the consequences of climatic shifts. It has since published a series of related reports, with findings on how the Department of Defence can be a powerful catalyst of energy innovation, the need for bold actions to support clean energy innovation to decrease dependencies on fossil fuels, and how a 30% reduction in the use of petroleum in the US would significantly improve national security.[²]
With the war in Ukraine, we have seen these dependencies and vulnerabilities play out. In fact, Europe’s dependency on Russia for about 40% of its gas through old Russian pipelines was called out in one of CNA’s 2009 reports.[³]
Climate Risk as Global Security Risk – Key Areas for Investors to Watch
To mitigate climate risk as a global security risk, Standard Chartered identified energy transition and sustainable foods among the top environmental themes to watch.
Energy Transition – Renewable Energy as “Freedom Energy”
German Finance Minister Christian Lindner referred to renewable electricity sources as “the energy of freedom”. This has gained momentum as European leaders call for an acceleration of the transition to renewables in response to the war. Many of the strategies to reduce dependency on Russia’s oil and gas are the same policy measures to reduce emissions, and this is giving an additional boost to the energy transition.
The REPowerEU plan announced in March 2022 has prioritized the European Union’s commitment to decarbonize and includes a key role for renewable energy and renewable gas such as green hydrogen production to replace natural gas.[⁴] Germany is among the countries that have brought forward their transition plans by 15 years. This includes targeting 100% renewable energy by 2035 and increasing onshore wind and solar projects such that 80% of its power could come from renewables as early as 2030. The European Commission targets, through REPowerEU, to accelerate the EU’s existing Fit for 55 plan, aiming for a 55% reduction in carbon emissions by 2030 versus 1990.
Investment Opportunities: The focus on renewables in the EU offers investors continued opportunities in the sector and its related supply chain, especially in battery storage and hydrogen. Both are seen as priorities for clean, reliable energy innovation and help address the intermittency of solar and wind. There is also demand for alternative, low-carbon raw materials such as aluminum and copper for clean energy generation and storage technologies. According to a 2017 World Bank report,[⁵] the demand for aluminum and copper is expected to reach 103 million tons and 29 million tons by 2050 respectively, based on a scenario where the world will get 2 degrees warmer. That is the equivalent of 65 years of aluminum production from Australia and 17 years of copper production in China, based on 2020 production levels.
Energy Transition – a Note of Caution on Coal
In the short term, however, we are seeing an increase in coal production in Europe. Germany, Italy, Austria and the Netherlands are turning back to coal to help Europe through the current energy crisis. In June 2022, Germany announced that it will reopen its coal plants while the Dutch government said it would remove a cap on production at its coal-fired energy plants.[⁶]
Investors should be cautioned, though, that the coal industry is in structural decline, so any short-term demand or price spike is unlikely to be sustained over the long run.
Food Security and Sustainable Foods
Beyond energy security, food security is as important for national security. The Russia-Ukraine war has raised food security concerns in many countries because of the potential for food supply disruptions.
The world has seen increasing food prices as a result of the war, bringing heightened consciousness on the dependencies we have on a small number of countries for food. Russia and Ukraine are among the most important producers of agricultural commodities globally, contributing a significant portion of global barley, wheat and maize output. Combined, the two countries accounted for an average 19% of global grain output between 2016/17 and 2020/21. They are also huge producers of sunflower oil, accounting for over 50% of global output during this period.[⁷]
Just as war threatens food security, so does climate change.
The other threat to food security is the concentration of global food production. According to McKinsey, 60% of global food production occurs in just five countries: China, the US, India, Brazil and Argentina.[⁸] Further concentration happens in just a few regions within these countries. For instance, 88% of India’s wheat production comes from just five states in the northern part of the country. The implications are clear: extreme weather events in those regions could affect a large portion of global production.
Climate change also leads to higher temperatures that can adversely affect growing conditions. For example, corn has a plant physiological threshold of about 20 degrees Celsius, beyond which yields decline dramatically.[⁹]
Investment Opportunities: As focus shifts to improving food security, sustainable agriculture will increasingly be in the spotlight. Investment opportunities arise in companies either contributing towards or making significant progress in agricultural efficiency and sustainable practices will stand to benefit, as well as those developing climate mitigation and adaptation solutions. This includes precision farming driven by data, advanced seed technologies and climate resilient crop development.
As interest in investing in these thematic ideas grows, Standard Chartered’s team of experts continues to delve deeper to identify the latest trends and opportunities in Sustainable Investments, helping investors curate compelling solutions to complement their investment portfolios across international markets.
[¹] Center for Naval Analyses [²] Center for a New American Security [³] Center for Naval Analyses [⁴] European Commission [⁵] World Bank [⁶] Reuters [⁷] Food and Agriculture Organization of the United Nations [⁸] McKinsey [⁹] Journal of Experimental Botany