We live in a world of accelerating disruptions, from geopolitical tensions to the rise of AI, and including the structural issue of climate change. Today we focus on the latter, as in just a month, the UAE will host the 28th UN Climate Change Conference of the Parties (COP28).
September 2023 was the hottest on record. COP28 is happening at a crucial time, and at the right place: the UAE has the vision, the pragmatism, energy expertise, and a unique diplomatic position in the international community.
As background, the UN says climate change refers to long-term shifts in temperatures and weather patterns. It has happened, a lot, to a 4-billion-year-old planet. According to NASA, the last 800,000 years saw eight cycles of ice ages and warming.
They were natural, with variations of the Earth’s orbit impacting solar energy. The last ice age ended 12,000 years ago, starting the modern climate era. The current warming trend is different: according to the Intergovernmental Panel on Climate Change (IPCC), it is the result of human activity, which burns fossil fuels along with economic development.
The current warming trend is different: according to the Intergovernmental Panel on Climate Change (IPCC), it is the result of human activity, which burns fossil fuels along with economic development.
This produces atmospheric greenhouse gases (GHG), trapping the sun’s heat. The IPCC states that the Earth’s average surface temperature is now +1.1 degree warmer than before the Industrial Revolution. Alarmingly, the rate of change is the fastest of the last 10,000 years.
The international community took action and the COP started – the Kyoto protocol in 1997 or the Paris agreement in 2015 have been attempts to set legally binding GHG emissions targets, to limit warming to a defined level. The road is paved with undeniable good intentions, but there are divergences as the transition comes at a price.
Emerging nations affirm their right to development, especially as their contribution to centuries of GHG accumulation is arguably minor. Developed nations verbally commit to help, but action doesn’t always follow.
Internal and international politics don’t help; the US signed the Paris agreement, withdrew, and rejoined. The Nord Stream pipeline’s explosion and subsequent gas leaks released millions of tons of CO2 equivalent. Germany, which had shut their nuclear power plants a decade ago, brought back coal-fired facilities online when Russian gas stopped flowing.
What about your investments?
Let’s start with the bad news. First, the worst-case scenario is a nightmare: vast areas become unlivable, their assets valueless, with climate refugees and battle for vital resources. Rethink everything for your investments under this scenario: water and food become more valuable than any million in the bank.
Rethink everything for your investments under this scenario: water and food become more valuable than any million in the bank.
Fortunately, the transition avoids it. Bad news again, it is inflationary.
Massive investments are required - an estimated $2 trillion a year for a +1.5 degree scenario - as well as immense quantities of commodities to build clean energy capabilities and the infrastructure of holistic electrification. Neither capital nor materials are cheap.
The macro consequence is that some inflation is structural. It is not just the green transition: adaptation also requires capital, raw materials, and energy. Another bad news is that not everyone will make it: some business models will disappear; some countries will increase debt, and/or taxes, to unbearable levels.
Some may simply fail.
Now, the good news. I will pick three.
- When the world needs capital, the investor is in a strong position to receive fair compensation. Bonds, carefully selected of course, have a rejuvenated role to play in your portfolio.
- Commodities are not dead. You need energy now to build the future of energy – the COP28 will have no hypocrisy about it. Without oil, gas, copper, lithium, you name it, nothing happens. What matters is to select the best players, who integrate sustainability into their process. To illustrate, the carbon intensity of a barrel of oil extracted from our region is four times smaller than in Canada.
- The climate emergency increases the value of the solutions, creating an incentive for innovation, and rewards for investors. It is, again, about careful selection including both business and sustainability attributes, rather than only relying on sometimes misleading ESG credentials.
Climate change is a critical challenge for humanity. For investors, funding the transition is not only part of the solution, but also an opportunity for returns. Humanity solves everything with cooperation, which will thrive in Dubai next month, and with innovation.
We are in the AI era, can it help? When Google assigned its DeepMind’s AI the task to reduce their datacenters’ energy consumption, the result was a 40 per cent cut. Let’s keep hope!