While COP 26 may not have gone far enough in delivering actionable climate resolutions, it has shifted the focus on battling climate change. Environmental solutions are now setting the pace for policy and regulation and expectations are high for next year’s COP 27. Jon Wallace, Fund Manager, Environmental Solutions and Rhys Petheram, Head of Environmental Solutions, explain why the outlook for environmental investing is dependant on the US, and uncover six key themes set to define the future.
Momentum from COP 26 must be maintained
The recent COP 26 climate conference has been lauded as a milestone, but we believe it did not go far enough, despite changing the rhetoric around the climate crisis. Environmental outcomes are no longer peripheral, rather core to policy and investor impetus. One of the positive results from the summit was the renewed focus and momentum which has built around battling climate change. However, it is not only critical to keep this momentum up as we head into 2022 but we need to see the gap between commitment and action begin to close. For us as investors, it is all about action: only greater collaboration and alignment of global policy will see the world reaching vital climate and natural capital-related targets.
We hope the positive momentum begun in Glasgow will continue into next year’s COP 27 conference in Egypt. This will help to hold governments and organisations accountable and keep the impetus behind developing climate-related policy.
All eyes on US to set precedent in 2022
Looking ahead to 2022, our outlook is largely dependant on what happens in the US over the next few weeks. The ‘Build Back Better’ bill has made it through Congress but still needs to be passed in the Senate. If it is able to get through the Senate without any meaningful changes to the clean energy or climate-related pledges, then this would be hugely significant for the entire industry.
Why are the events taking place in the US so critical to the industry? Put quite simply, the US is one of the largest emitters and therefore, the opportunities available in sectors such as clean energy and de-carbonisation is equally large. If the ‘Build Back Better’ bill is passed, it would not only lead to trillions of dollars of investment in sustainable infrastructure but would signal to the rest of the world that tackling climate change is a priority for one of the world’s largest economies and a country which had previously been notoriously slow to act.
Another key theme next year will be the development of the sustainable bond market. 2021 has already been a record-setting year for green finance with issuance of labelled sustainability bonds expected to top $1 trillion. With much of this debt issued in the lead up to COP26, the market will need a fresh impetus in 2022 order to match the issuance of 2021. This is another area where the role of the US will be decisive, as over 50% of global corporate bonds are issued by US domiciled issuers, compared to just 11% of green bond issuers. If the US can take the lead and fully embrace sustainable bonds, in a more impactful way, it would significantly help reduce the climate capital gap and accelerate opportunities within the entire industry. The elephant in the room remains the US Treasury market, with any developments to issue green debt from that market likely to spur a broader acceptance of the instrument.
Six themes set to define the future
Our industry experience and strong track record of investing in the companies of tomorrow has led to us identifying six key investment themes which we believe will address key climate and natural capital solutions in the coming decades:
- Green mobility
- Clean energy
- Green buildings & Industry
- Sustainable agriculture & Land ecosystems
- Circular economy
- Sustainable oceans & Freshwater systems
These themes represent a diverse range of topics which go beyond the traditional subjects associated with environmental investing and cover issues such as biodiversity loss and wider forms of degradation to the natural world. We expect this encouraging trend to continue, providing a healthy stock-picking landscape of companies focussed on environmental solutions.
Ultimately, we see technology and innovation as key to combating the climate and environmental crisis. These solutions are now setting the pace for policy and regulation – a welcome reversal to the previous relationship. As investors, the scale of change required to reverse global warming is creating significant opportunities to support environmental solutions companies, which provide products and services critical to achieving sustainability targets. It is becoming ever more evident that these solutions will spread widely and to as-yet unpenetrated sectors of the global economy. As attitudes toward addressing climate solutions shift, we see a broadening of the value chain beyond the conventional lens. The opportunities throughout the market that this creates will be plentiful and we remain well-positioned to identify them.
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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.