Climate Change Sectors Heat Up

From digital factories to plant-based clothing, climate change investing is much more than just investing in renewable energy, according to the Templeton Global Equity Group. The team peels back the multiple layers of the investible climate change universe, and considers how companies can contribute to reducing carbon emissions on a global scale.

Sustainable investing has seen considerable growth over the last five years and shows no sign of slowing down, as awareness around crucial sustainability topics continues to grow. We have seen a steady pace in sustainable investment asset growth in Europe, North America and Australia. And for Asia, the region has quietly caught up, with more than double the asset growth in this space than any other region.1 In the past year alone, funds associated with climate change saw some of the highest investor inflows, in part boosted by government stimulus steered toward national climate-change goals.

Such robust growth suggests to us a marked shift in both investor and company attitudes toward environmental, social and governance (ESG) factors. There’s debate among market commentators whether integrating ESG considerations in actively managed strategies can lead to beneficial outcomes for the environment—without sacrificing returns for investors. We have found that the two goals are not mutually exclusive and can often be quite complementary.

Global Climate Change Plans Delayed, Not Derailed

In 2020, public health challenges surrounding COVID-19 meant that political focus in addressing the world’s climate challenges had to take a back seat. Despite a 6% annual drop in carbon dioxide emissions in 2020 brought on by COVID-19 lockdown measures—where, for example, some residents of India were able to see the Himalayan peaks for the first time in decades—pressing global climate issues remain as economic activity resumes. On the whole, the planet faces significant challenges in meeting the objectives of the 2015 Paris Agreement, where governments have signed up to limit global warming to well below 2°C above pre-industrial levels.

Since 2015, greenhouse gas (GHG) emissions have continued to steadily rise.2 Signatories of the Paris Agreement recognize that increased action is needed and major countries like the United States, China, Japan, the United Kingdom and the European Union have committed to new net-zero targets.3

If governments are to meet their nationally defined contribution (NDC) targets, we expect to see increased policy actions going forward, with more comprehensive climate frameworks; for example, taking measures to incentivize companies to reduce GHG emissions. This may include imposing restrictions on burning fossil fuels, carbon taxes, or carbon trading schemes.

In our view, the beneficiaries of these changes are companies belonging to one or more of three groups: first, those that are developing products that aid in reducing emissions, second, those that adopt new technologies or processes to reduce their own carbon footprint, and third, those that operate in very low carbon-emitting sectors.