Regardless whether you believe in the anthropogenic roots of climate change, there is now ample scientific evidence that the earth is warming and that extreme weather events are becoming more frequent and severe. This has caused, and will continue to cause, significant social and economic losses through damaged infrastructure, supply chain disruptions, and increased commodity price volatility, among other deleterious effects.
Alex LaPlante
In response, governments around the globe have begun to enact stringent environmental policies, with 170 countries ratifying the Paris agreement and committing to reduced carbon emissions targets and increased low-carbon investing. This has sent a strong signal to businesses and investors alike that a lower-carbon future lies ahead.
The nascent transition to a low-carbon economy poses risks and challenges for businesses. But it also brings many new opportunities, as government regulations and technological innovations create new markets in renewable energy, climate-smart agriculture, green buildings, carbon-efficient transportation, and other infrastructure.
First and foremost, the renewable energy market continues to grow rapidly. The cost of clean energy, particularly solar, has fallen dramatically, amplifying the effects of government policies that mandate reductions in fossil fuel usage. Bloomberg New Energy Finance projects that there will be $7.4 trillion in new renewable energy investment by 2040. The growth of clean energy production necessitates further investments in new infrastructure for energy storage and delivery. According to International Finance Corp., this market will see a tenfold increase by 2025.
Direct investment opportunities don’t end there. For example, green buildings, which incorporate a variety of energy-saving innovations, have attracted even more investment than renewable energy.
The $5 trillion agriculture industry, which is uniquely susceptible to the effects of climate change and responsible for almost one-third of carbon emissions, continues to see growth as businesses seek to address the challenges of food security and climate change through climate-smart agriculture.
Over the next decade, the transportation sector, with its rapidly growing green-market, will see trillions more in investment. Having proliferated in the passenger car market, hybrid and electric vehicles sales grew 40% year-over-year in 2016 — a trend that is projected to continue. Governments are also investing in electric transit solutions as well as new bus rapid transit and light-rail infrastructure.
Opportunities for green investments are by no means restricted to the United States or other advanced economies, either. In fact, an estimated $23 trillion in climate-intelligent investment opportunities is expected to be realized in emerging economies between now and 2030, allowing businesses to further diversify their operations and green-investment portfolios internationally.
Those who have fewer opportunities for direct green investment still have several ways to profitably participate in the transition to a low-carbon economy. For one, all businesses can invest in improving their energy efficiency and waste management to reduce their greenhouse gas emissions. According to a recent World Wildlife Fund report, 190 Fortune 500 companies that initiated carbon-reduction projects realized nearly $3.7 billion in savings in 2016 alone.
Moreover, recent innovations in the financial services sector allow businesses to finance other entities’ low-carbon initiatives. Green bonds, which are issued to finance projects that have positive environmental and/or climate benefits, allow investors to fund a wide range of low carbon and climate resilient assets and projects. The Climate Bonds Initiative reported the green bond market to be $221 billion in 2017, an increase of more than 100% from 2016.
Also, environmentally conscious exchange-traded funds provide cheap, transparent ways for investors to purchase equity in a range of sustainable companies. In many cases, these funds can provide hedging against climate-related risks while offering equal or even superior performance relative to the overall market.
Climate change is a reality that brings with it potentially devastating economic and social losses. But businesses that are proactive in seeking out climate-related opportunities can gain from supporting the global transition to a lower-carbon future, offsetting the risks with new opportunities.
Alex LaPlante, PhD, is managing director, research, at the Global Risk Institute.
