We have a long-held conviction that environmental challenges are central to global development. Addressing both the causes and effects of these challenges is inevitable, with environmental solutions currently crossing a watershed moment where they are no longer deemed peripheral, but instead integral to future pathways and markets.
We invest in securities that we believe are positioned to benefit from these trends by enabling the solutions to environmental challenges, with a focus on climate mitigation, adaptation and natural capital restoration. We look to investments that are making a material contribution in six critical environmental solutions themes: Clean Energy, Green Mobility, Green Buildings & Industry, Sustainable Agriculture & Land Ecosystems, Sustainable Oceans & Freshwater Systems and Circular Economy.
The great energy shock of the last 18 months – and the critical role that “clean’’ solutions are playing in responding to the long-term challenges of energy security, affordability and climate change – serve to highlight the crucial importance of environmental solutions in solving these unavoidable and era-defining issues. What follows are our views on where we see similar step-changes in the year ahead and beyond.
Food system security for the long term
Food security is a key topic that gained greater prominence earlier this year after Russia’s shocking invasion of Ukraine disrupted grain supplies. It was a prominent topic at the meeting of the Group of 20 leaders in Bali in November and the United Nations COP27 gathering in Egypt. We expect food systems will come under greater pressure and scrutiny as the connected issues of affordability, security and sustainability continue to challenge the sector.
Food production accounts for 25% of greenhouse gas emissions, 30% of global energy consumption, 72% of freshwater usage and 40% of land usage, according to the UN Food and Agriculture Organization. This makes agriculture both a major contributor to climate change, water stress and biodiversity loss, as well as being a sector that will be severely disrupted by these. Knock-on impacts for food security are already being felt.
The agricultural industry is ripe for solutions to solve these sustainability-linked problems, via both novel and existing commercial technologies and services. Food security runs across several of our themes including Circular Economy, Sustainable Oceans & Freshwater Systems and Sustainable Agriculture and Land Ecosystems.
With these powerful drivers for change, we are seeing early signs of progress. Recent approval of cellular (or “lab-grown’’) meat products for the first time by the US Food and Drug Administration marked an unprecedented step that changes the landscape for the development of new technologies — previously thought to be decades away. The combination of global food security, technological ambitions and sustainability benefits are likely to be driving regulatory agendas, resulting in an acceleration of such markets in 2023 and beyond.
More quality in Green Bonds
There is a growing understanding of the key role that fixed income can play in climate finance — financing energy-efficient buildings, for example. In the market for Green Bonds (debt securities specifically designated to finance environmental and social projects), there has been an emphasis on the quantity of issuance and not necessarily the quality, or how effectively the capital raised from the bonds are deployed.
We think better regulation can help improve the quality of these bonds. For example, the European Commission has proposed legislation to create a voluntary Green Bond Standard. This would allow issuers of green bonds to demonstrate that they are funding legitimate green projects and allow investors to assess, compare and trust that their investments are sustainable.
US policy game-changer
We see passage of the US Inflation Reduction Act (IRA) by Congress in 2022 as a milestone, providing a decade-long support for climate solutions and industrial policy. We think 2023 will see the global “stocktake’’ of climate ambitions concluding at COP28, with the potential for increased ambitions now more likely than at any other time. The IRA represents the largest-ever US government investment in addressing climate change — $370bn over 10 years — though it passed the Senate by the narrowest of margins. There is a yawning gap between stated climate ambition in the US and federal policy that has consistently prevented more ambition on the global stage. We see the IRA as a significant and positive step – albeit from a low base – that could provide a game-changing boost for global diplomacy and cooperation on climate.
Adaptation or mitigation – or both?
Responding to climate change requires a two-pronged approach, adaptation and mitigation. Climate adaptation refers to adjusting to and preparing for the changing climate – improving infrastructure to manage floods and rising temperatures, for example, or building resilience in natural ecosystems, cities and communities. Mitigation refers to reducing emissions of the greenhouse gases that cause climate change, with solutions such as clean energy or electric cars, for example. The extent of action taken to address climate mitigation will directly impact the extent of climate adaptation activities required in the future.
The Intergovernmental Panel on Climate Change findings indicate the planet will be exposed to a changing climate for decades due to the existing concentration of greenhouse gas emissions in the atmosphere. Despite this, there is a significant skew to climate mitigation rather than adaptation in climate finance. Only 7% of all climate finance was allocated to adaptation in 2021, according to a study by the Climate Policy Institute.
We are naturally interested in solutions, projects and services, which promote “co-benefits’’ of mitigation as well as adaptation. These can help to minimise mitigation and adaptation agendas “competing’’ for capital, and likely can grow significantly over time.
Solving environmental challenges will define this decade and this century. Governments globally are recognising the significant role of the financial sector in meeting these challenges, as the transition will require unprecedented public and private investment to install existing and to develop new environmental solutions technologies to mitigate and adapt to climate change and restore natural capital. In meeting these vital environmental objectives, we believe these solutions also offer robust, long-term investment opportunities.
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.