In this article from Firstline’s Portfolio Management Team, we explore the significance of the COP26 Climate Change Conference in Glasgow, the global investment trends directly linked to it, and opportunities for investors within the Caribbean basin.
This article is a 30 min read.
The recent COP26 Climate Change Conference in Glasgow was one to remember for the Caribbean. We saw the international rise of Bajan Prime Minister, Mia Mottley, as she used her platform to powerfully outline the major concerns of the Caribbean nations on the environmental and economic impact of climate change. This conference, as with many of the previous conferences, brought with it a spur of global media attention, but more importantly, actual pledges within various global industries and sectors to institute changes at their levels. What does this mean for investors?
Before we dive into the trends and opportunities, we feel it would be prudent to share a bit of background on why the various COP conferences happened, and specifically, how they decided the goals that nations around the world have co-signed on. This backstory should assist in helping investors understand why various industries are taking the steps they are taking, and to provide the extra information you need for you to pinpoint possible future trends for yourself.
The COP26 Climate Change Conference, which recently concluded in Glasgow Scotland, was first established in 1992 at the United Nations Framework Convention on Climate Change (UNFCCC) Rio Earth Summit. The first Conference of the Parties (COP) was held in 1995 in the city of Berlin Germany, and the Conference continues to convene annually to assesses the effects of the measures taken and progress made in achieving the Convention’s goals. At the 3rd conference, called COP3, binding targets for greenhouse gas (GHG) emissions came into effect, establishing what was then known as the Kyoto Protocol – which 192 nations signed to. The first evaluation period of the Kyoto Protocol ended in 2012. Since then, the underwhelming progress toward emission targets led to “The Paris Agreement” of COP21, and most recently, “The Glasgow Climate Pact.” These agreements have set a very challenging but crucial target of net zero GHG emissions by 2050.
The Kyoto Protocol established three market-based mechanisms to help countries meet emission targets:
Emissions Trading[1], according to the UNFCCC, allows countries that have emission units to spare to sell this excess capacity to countries that are over their targets. Thus, a new commodity was created in the form of emission reductions or removals. Since carbon dioxide(CO2) is the principal greenhouse gas, people speak simply of trading in carbon. Carbon is now tracked and traded like any other commodity. This is known as the “carbon market.” A big example of this in action is China’s carbon trading program[2], which is the world’s largest emissions trading system.
[1] Emissions Trading : https://unfccc.int/process/the-kyoto-protocol/mechanisms/emissions-trading
[2] “Carbon Trading The Chinese Way” by Renato Roldao: https://www.energymonitor.ai/policy/carbon-markets/carbon-trading-the-chinese-way
The Clean Development Mechanism [3](CDM), according to the UNFCCC, is a mechanism that allows a country with an emission-reduction (or emission-limitation) commitment, to implement an emission-reduction project in developing countries. In plain speak, it means a CDM project activity might involve, for example, a rural electrification project using solar panels. These types of projects can earn saleable certified emission reductions credits, each equivalent to one tonne of CO2, which can be counted towards meeting the Kyoto targets. It is the first global, environmental investment and credit scheme of its kind, providing a standardised emissions offset instrument, CERs.
[3] The Clean Development Mechanism: https://unfccc.int/process-and-meetings/the-kyoto-protocol/mechanisms-under-the-kyoto-protocol/the-clean-development-mechanism
The mechanism known as Joint Implementation[4], according to the UNFCCC, allows a country with an emission reduction/limitation commitment to earn emission reduction units (ERUs) from an emission removal/reduction project in another country. This was created to offer countries a flexible and cost-efficient means of fulfilling a part of their Kyoto commitments, while the host country benefits from foreign investment and technology transfer.
[4] Joint Implementation: https://unfccc.int/process/the-kyoto-protocol/mechanisms/joint-implementation
By the time COP21 and the “Paris Agreement” came around, the conversation evolved to include the notion of a temperature increase target as well. The three key elements of Paris were:
COP26’s “Glasgow Climate Pact” sought to refine the Paris mechanisms with the following goals:
The conversation at Glasgow was no longer on emission reduction but on reaching net zero. “Net Zero” refers to the balance between the amount of GHG produced and the amount removed from the atmosphere. We reach net zero when the amount we add is no more than the amount taken away.
As a direct consequence of Kyoto, many countries began to introduce initiatives and taxes to push cities and corporations toward GHG emissions reduction. The rise of Environmental, Social & Governance (ESG) investing at the turn of the century may have been influenced by such policies. As corporations faced financial consequences based on their ESG behaviour, investors seeking to minimize losses would evaluate potential investments using these factors in collaboration with traditional valuation tools.
As the S & G factors gained prominence, the importance of E declined. Due to the climate initiatives being evaluated alongside social and governance initiatives a corporation could score highly in S & G to offset a low performance in E and still benefit from an ESG rating that was favourable. This meant that investors whose primary concerns were the climate and emissions were not actually receiving the benefit of their investment via an ESG categorized investment. It has meant that investors have become more shrewd when looking into climate initiatives and the claims of many companies.
Now, the COP26’s goal to achieve net zero mission by 2050 is a very challenging proposition; one that cannot be achieved without the active participation of corporations, governments, investors, and individuals. Investors face risks and opportunities not just in the future, but also now in the present transition to net zero.
A wide range of companies globally are committing to bringing all their operations to net-zero by 2050 or sooner, with some companies such as Loreal, Unilever and Astra Zeneca already making ambitious pledges of reaching some level of net zero in the next decade. There are also hundreds of other companies that have pledged to reach this milestone somewhere between 2050 and 2060. This list includes Heathrow Airport, Ford Motor Company, Walmart and multinational oil giants such as Chevron, Exon and Shell who have also pledged to be net zero by 2050.
Governments play a substantive role in influencing corporations, investors and individuals through policy, laws & legislation, and subsidies. There are currently four governments with laws mandating net zero by 2050 or sooner, three with proposed legislation and nine with policy documents.
Individuals have the most power of the groups discussed. People can protest and vote to influence government policy, they can also adjust their spending power to support the corporations that have made and backed up their commitments to net zero. The demand for environmentally sustainable products is increasing among consumers especially with the younger generations, with 73% of Gen Z consumers[5] in the U.S. willing to spend more for sustainable products. There are, as always, exceptions to the rule as many global consumers have either limited or no choice in who their utility provider is; and utilities, especially electricity generation, are major contributors to GHG emissions.
[5] The State Of Consumer Spending – Gen Z Shoppers Demand Sustainable Retail: https://www.firstinsight.com/white-papers-posts/gen-z-shoppers-demand-sustainability
For conscientious investors, (those who use their pockets to back causes that they believe in), the situation may be a bit more complex. Individuals evaluating climate investment opportunities are faced with having to do greater research to avoid investing in greenwashing. Greenwashing is when a company engages in behaviour or activities that make people believe that they are doing more to protect the environment than they really are. These activities harm the net zero movement and shake investor confidence.
There are also obstacles in the form of policy hurdles. Many governments have subsidies and incentives specifically crafted for fossil fuels, and the process of changing the focus or widening the scope of these policies has been slow moving. This means that there is a likelihood that climate-focused projects will face more red tape and be potentially slower moving than their fossil fuel counterparts. Policy hurdles can make things quite difficult for projects to complete successfully, so this is a major potential impediment.
Another issue for climate investors is that historically, net zero projects generally provide lower returns in the short and medium term. Generally, the payback period for a climate friendly project is longer than the non-climate friendly comparable, and in some jurisdictions the polluting comparable still benefits from the government subsidies we just spoke on. This is a situation that investors should actively monitor as according to a report from the International Renewable Energy Agency[6] (Irena), the short to medium-term investment case for return opportunities outside of fossil fuels has also recently become more robust, thanks to updates in technology, pricing, and policy developments. Certainly for investors with a European outlook, in 2021 Francesco La Camera, Irena’s director general, said “Today renewables are the cheapest source of power. Renewables present countries tied to coal with an economically attractive phase-out agenda that ensures they meet growing energy demand, while saving costs.”[7]
However, whilst the pull of renewables and their future focus is clear, for many investors who prefer to have their decisions backed up by quantified data, they are still quite hesitant. This is because there are still many technical obstacles prevalent within the climate sphere as the data methodologies, their consistency, and their application vary from jurisdiction to jurisdiction.
[6] International Renewable Energy Agency: https://www.irena.org/publications
[7] “Majority Of New Renewables Undercut Cheapest Fossil Fuel On Cost”: https://www.irena.org/newsroom/pressreleases/2021/Jun/Majority-of-New-Renewables-Undercut-Cheapest-Fossil-Fuel-on-Cost
The companies within this category that have made commitments to net zero through emission reduction are opportunities within themselves. Corporations such as BP, Chevron, and Shell, have outlined detailed strategic plans to reduce emissions and reach net zero by 2050. The opportunity for an investor here is due to the investments they have made into research, technology, and infrastructure that is funding the creation of innovative solutions – such as technologies that can decarbonise the fuels themselves. There is also the opportunity for oil and gas companies to easily build businesses in the transport and trading of hydrogen in what could ultimately become a major global commodity. As they begin to execute on these initiatives, investors will benefit financially from the potential increase in stock prices.
Blackrock launched the iShares € Govt Bond Climate UCITS ETF (NASDAQ: SECD) in 2020, and Strategy Shares launched its NZRO ETF (NASDAQ:NZRO) in January 2022. These ETFs focus on the E component of ESG investing and actively seek out opportunities to provide funding to the climate change and net-zero objective.
SECD offers investors a chance to gain exposure to Eurozone, investment grade government bonds with a focus on climate considerations. They also give investors a climate risk-adjusted approach to accessing Eurozone government bonds. And also give access to Eurozone government bonds whilst seeking to provide a higher exposure to countries less exposed to climate change risks and a lower exposure to countries that are more exposed to climate change risks.
NZRO invests in companies that are committed to curbing or mitigating the deleterious effects of climate change. Strategy Shares invests profits into private initiatives focused on halting and reversing the impact of climate change. The NZRO ETF screens for climate conscious companies but also takes an active approach in reversing climate change through outside initiatives. The Fund will seek to invest in companies with the clear sustainability goals, including companies such as:
As demand for climate sensitive investing becomes more prominent, these ETFs will likely outperform the market as new funds flow into the underlying securities.
Along with the global carbon trading market, carbon capture and sequestration is a tool that many conglomerates in the energy sector are hoping would pan out to allow them to meet their 2050 targets.
Carbon Capture or Sequestration(CCS) is the process of capturing and storing CO2 before it is released into the atmosphere. The technology can capture up to 90%[8] of CO2 released by burning fossil fuels in electricity generation and industrial processes such as cement production. Once the CO2 has been captured, it is compressed into a liquid state and transported by pipeline, ship, or road tanker. The CO2 is then pumped underground, usually at depths of 1km or more, to be stored into depleted oil and gas reservoirs, coalbeds, or deep saline aquifers, where the geology is suitable. Alternative uses for the captured carbon include for Enhanced Oil Recovery, where CO2 is injected into oil and gas reservoirs to increase their extraction. Enhanced oil Recovery has been done in Trinidad and Tobago for many years.
Currently, CCS is a highly expensive technology to implement; they are seen as high risk and capital intensive. This limits the economic viability of the project and for alternative uses of the captured carbon. This fact, paired with its present days issues with implementation, has caused many polarising views as to its success.
[8] “How Efficient Is Carbon Capture And Storage by Andrew Moseman and Howard Herzog, Senior Research Engineer at the MIT Energy Initiative”: https://climate.mit.edu/ask-mit/how-efficient-carbon-capture-and-storage
In “The Global Status Of CCS 2021” report by The Global CCS Institute[9], limiting global warming to 2C requires installed CCS capacity to increase from around 40 million tonnes per annum (mtpa) today to over 5,600 mtpa by 2050. To create this, it will require between US$655 Billion to US$1,280 Billion in capital investment till 2050. Many international oil and gas businesses such as BP, Shell, Total, Eni, and Equinor have announced substantial CCS investments in order to achieve their net zero emission targets. In fact, there are three facilities in the United Arab Emirates and Saudi Arabia that already account for 10% (3.7 mtpa) of global CO2 captured each year, compared to Europe’s 4% (1.7 mtpa), that are poised for growth. There are even companies within Trinidad and Tobago that are already seeking partnerships to launch such a project. UTT and UWI have jointly proposed to undertake the development of a National Carbon Dioxide Storage Atlas[10]. The atlas would be a key component of the programme to develop full-scale carbon capture and CO2 enhanced oil recovery deployment. In Norway, Tina Bru, the Norwegian Minister of Petroleum and Energy, has said “for over 20 years, Norway has been successfully deploying CCS in the country’s climate mitigation plans and actions.” According to David Byers, CEO of emissions capture and storage research group CO2CRC, carbon sequestration is not a new technology, and has been successfully used around the world since the 1970s.
[9] “Global Status of CCS 2021 – CCS Accelerating To Net Zero by The Global CCS Institute”: https://www.globalccsinstitute.com/wp-content/uploads/2021/11/Global-Status-of-CCS-2021-Global-CCS-Institute-1121.pdf
[10] “Carbon Capture Utilization and Storage by Ministry of Energy and Energy Industries of the Government of Trinidad and Tobago”: https://www.energy.gov.tt/our-business/carbon-capture-utilization-and-storage-ccus/
This contrasts completely with views that the CCS technology has already proven itself to be a failure – particularly as it pertains to how the technology works within the fossil fuel energy infrastructure. Some scientists have found after analysing current CCS projects in action, it works out to be 6 times more expensive than electricity generated from wind power backed by battery storage[11]. Chevron’s Gorgon Gas Plant in Western Australia, the world’s largest carbon capture and storage project dedicated to reducing greenhouse gas emissions, has been plagued with technical issues from inception, and after over US$55 Billion of investment, and several years of operation, it is currently millions of tonnes short of its emissions capture promises, having only injected close to 5 million tonnes of CO2 as of mid-July 2021. This shortage will cost Chevron a carbon credit bill to Australia approaching $100 Million.
While these problems are occurring, so are major policy updates within a range of jurisdictions. In the US, the US Energy Act of 2020 was passed, which authorised more than US$6 Billion for CCS research, development, and demonstration. In Canada, a “Strategic Innovation Fund – Net Zero Accelerator” was also announced to provide CA$3 Billion over the next 5 years to fund initiatives including decarbonisation projects for large emitters. Also, the UN estimates that carbon storage solutions could generate US$800 billion [12] in annual revenues by 2050, worth US$1.2 Trillion today, surpassing the current market capitalisation of the oil and gas majors.
Technologies that can improve the cost and efficacy of carbon capture will revolutionize the net zero movement. Companies that operate in this space are opportunities to watch, as if the technology were to become more cost effective and efficient, the profitability margins would be vast.
[11] “Reality Check: Why CCS Has No Role In Australia’s Energy System by Associate Professor Bruce Mountain”: https://d3n8a8pro7vhmx.cloudfront.net/auscon/pages/18314/attachments/original/1607381522/Bruce_Mountain_CCS_report_Dec_2020.pdf?1607381522
[12] “An Investor Guide To Negative Emission Technologies And The Importance Of Land Use by UN-PRI”: https://www.unpri.org/download?ac=11980
Investors are increasingly moving to diversify their portfolio with a mixture of upstream, midstream, and downstream businesses and their associated technologies. For upstream, there is an increased focus on investing in wind and solar generation, and biomass.
Midstream, almost 2/3 of all climate tech investment going into mobility and transport[13] according to PwC. In 2019, transporting freight by road was responsible for more than 40% of global oil demand, making commercial vehicle fleets a prime target for decarbonization and opportunity. In terms of mobility and transport, investments in Electric Vehicles (EVs) lead the charge here (if you’d like to read more about investing in EVs, click here to read our article). However, the electrification of commercial vehicles has proven to be a challenge as the batteries produced for EVs have not been light enough or powerful enough to move large vehicles over long distances. There is the opportunity here for hydrogen to become a critical energy carrier in supporting decarbonisation in sectors like industry and heavy transport.
High-energy density with zero-carbon combustion make hydrogen well suited to address 30% of greenhouse gas emissions across a diverse set of sectors from aviation, to buildings to transport. In terms of industry, the steel sector is one of the largest industrial emitters of greenhouse gases, producing 7-9% of total emissions globally. Using green hydrogen instead of oxygen to power the reduction of iron as a feedstock for electric furnaces has been proven to be a route to zero-carbon steel. Major steel producers in Europe are now piloting steel production with hydrogen.[14]
In terms of vehicles, hydrogen vehicles have an output of water from the exhaust. Whilst this is great news, the current cost of producing hydrogen is comparatively higher than electricity and fossil fuels. This does not write off the potential of this sector, as Hydrogen can be produced with low carbon emissions through electrolysis from renewable electricity or through steam methane reformation of natural gas in combination with CCS.
[13] State of Climate Tech 2021 – Scaling Breakthroughs For Net Zero: https://www.pwc.com/gx/en/services/sustainability/publications/state-of-climate-tech.html
[14] “Innovating To Net Zero: An Executive’s Guide To Climate Technology by McKinsey Sustainability”: https://www.mckinsey.com/business-functions/sustainability/our-insights/innovating-to-net-zero-an-executives-guide-to-climate-technology
The hydrogen fuel cell vehicle market was valued at US$651.9 million in 2018, and is projected to reach at $42,038.9 million by 2026, growing nearly 67% between 2019 and 2026[15]. The key factors that are impacting this growth are the surge in environmental concerns, the increase in government initiatives for the development of hydrogen fuel cell infrastructure, high initial investment infrastructure, and technological advancement.
There are several emerging entities in this sector, Nikola Motors and Hyzon Motors are new entrants to the market that have invested in the development of Hydrogen-powered fuel cell trucks. Toyota, Honda and Hyundai already have hydrogen-powered fuel cell sedans on the market, and many other companies such as Audi, BMW, Daimler, and GM have cars on the way. As regulations tighten and fossil fuel costs increase, hydrogen alternatives become much more attractive.
There is also growing interest in the technology within methane emission reductions. It is an area that has well established solutions as well as the growing use of innovative sensing and detection technologies. The prominence and usage of these technologies are only set to grow with the global focus on net zero by 2050.
Downstream, there is the opportunity to invest in technologies that decarbonise processing, such as CCS for industrial processes, the global roll out of electric vehicle charging infrastructure, smart home technologies that drive efficiency within consumers, and low carbon technologies that assist with heating buildings.
[15] “Hydrogen Fuel Cell Vehicle Market by Vehicle Type and Technology: Global Opportunity Analysis and Industry Forecast, 2019-2026 by Allied Market Research”: https://www.alliedmarketresearch.com/hydrogen-fuel-cell-vehicle-market
In the Caribbean specifically, much of the opportunity to investors will be driven (or limited) by the policy of governments. There is an opportunity for governmental corporations to source climate financing to develop infrastructure such as renewable energy plants. In a region of islands, with several volcanoes, we can develop tidal, solar, wind or geothermal renewable energy facilities based on a cost benefit assessment.
In 2017 Barbados benefited from the UAEs Joint Implementation US $50 million Caribbean Renewable Energy Fund as funded and commissioned a 420-kW solar photovoltaic farm. The solar farm gave Barbados a fuel cost reduction of BDS$10 million annually, has a total generation capacity of 10MW, can power 7,700 homes, and reduces CO2 by 21,000 tonnes annually.
The fund has identified at least four other countries inclusive of Barbados to fund additional projects. The commitment of over US$100 billion in the ‘’Glasgow Climate Pact” opens significant similar opportunities for the Caribbean. To capitalize on them, Governments in the region need to develop and enact policies which position themselves and industries to benefit from investment into carbon capture infrastructure. They can create “green” business zones and provide incentives for companies seeking to use carbon capture technologies to produce fertilizer, plastics and building materials and carbon methane.
An already net-zero nation, Suriname, signed an agreement in 2021[16] with oil company TotalEnergies, under which the company will pay US$50 million in return for carbon credits, as part of the Emissions Trading program.
Guyana is another Caribbean nation in transition due to 85% of its land area covered by tropical rainforest in conjunction with the multiple investments in their growing oil and gas sector. They have currently developed a Low Carbon Development Strategy to begin integrating Guyana’s forest and climate services with emerging global carbon markets.
Then there is the option to further develop the Caribbean’s main industry, tourism. However, if climate change continues unabated tourism wouldn’t be our primary concern, the effects of Dorian on Bahamas in 2019 is a clear reminder of this. Ecotourism projects structured around the regions tropical forest, wildlife, coral reefs and unique land formations will not only provide a variation to the sun sea and sand options currently provided; it will bring visitors from developed countries face to face with what they can lose because of climate change. By enhancing the Caribbean product to show case what is most at risk from climate change the region can appeal to a different side of human behaviour. Also forest and reefs are highly effective tools of “natural” carbon capture. Costa Rica has led the region in eco-tourism for almost three decades and has seen visitor numbers grow from three hundred thousand people in the late 1980’s to over 3 million people by 2019 bringing in over US $2 billion in revenue annually.
[16] “TotalEnergies Partners With The Government of Suriname To Contribute To Preserve Forests As Carbon Sinks”: https://totalenergies.com/media/news/press-releases/TotalEnergies-Contributes-to-Preserve-Suriname-s-Forests
Changes to individual spending patterns can present significant opportunities for the Caribbean. With the potential of a “carbon tax” being added to all airfare globally, tropical vacation spots may be increasingly selected due to proximity. This may work in the favour of many Caribbean islands that are currently competing with tourists that go to the Mediterranean, Pacific and Indian Ocean islands for vacation. Air travel to these destinations will contribute significantly more carbon, and as such a higher carbon tax fee, than a Caribbean flight.
In the retail sector, users are more willing to pay a premium for upcycled fashion. In October 2022, Chloé, a luxury fashion brand, changed its business model to publicly reflect its social justice and environmental policies as it has seen that its consumer base cares about truly sustainable fashion. The shoe soles of “Lou”, Chloé’s new footwear line, are made with Ocean Sole, a social enterprise that upcycles slippers washed up on Kenya’s beaches. Other brands such as Rihanna’s Fenty Coral Reef Safe products, and Will.i.am’s Ekocycle are also within this space.
The Caribbean is known for its creativity in design and also its innovative use of sustainable materials to make art and accessories. Caribbean entrepreneurs can innovate and create sustainability-branded products, partner with other international designers/companies, or build new relationships with established Caribbean entities to market themselves as climate consensus artists to tap into this growing market.
As the world’s businesses make the shifts required to achieve the global net-zero target, the various economies will have their varying growth cycles. The key here is monitoring the changes and knowing when is the right time to seize opportunities or turn away from risks.
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