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Posted on Apr 21st, 2021

Capitalizing on Carbon Neutrality: The Past, Progress, and Potential

Over the centuries, efficiency was the only parameter we used when deciding on energy sources. From wood to coal, then natural gas and other fossil fuels, negative externalities were never a part of the business equation. However, global consensus surrounding the threat posed by climate change is reforming how we assess the energy supply chain, calling for drastic changes to how we live and work.

With Biden taking office as President of the United States, there are renewed and ambitious commitments from global leaders to reduce greenhouse gas emissions and embrace climate change initiatives, such as carbon neutrality—the goal to build a carbon-neutral world outlined in the Paris Agreement in 2015.

  • Canada has pledged to reach this goal and plans to reduce emissions by 30% relative to 2005 levels by 2030.
  • The US has joined the 2050 goal, also with an interim goal to decarbonize the electricity supply by 2035.
  • The European Union agreed to increase its targeted greenhouse gas emissions reduction to 55% from 40% by 2030, and expects to legislate its climate neutrality objective later this year.

What has to happen to hit net zero by 2050?

The move to a net-zero economy will be a long transition, with solutions coming from traditional and new energy infrastructures. Reaching these goals will require substantial investment from both governments and companies around the world.

We are not only moving away from an energy source—we are trying to change how we do everything. This is a monumental task that not all companies will be able to adapt to.

Climate change isn’t a problem isolated to fossil fuels. It will be far more wide-reaching,and each sector needs different solutions. We have to change everything from the way we grow our food, to the way we build things, to how we get places and transport things, to how we keep ourselves warm.

The following table illustrates the scope of the problem, along with some of the most prevalent issues requiring new solutions on a massive scale.

Table depicting which sector uses the percentage of total GHG emmissions

All these changes need to be made while the population is still growing—to an estimated 10 billion by 2100. This means we have to produce more food, build more housing, and generate more electricity while trying to come up with new technologies and processes to replace existing ones. This will require governments and the private sector to work together to produce new technologies and incentivize the adoption of existing ones.

Investment opportunities from climate change

Climate change will challenge business models. Adapting will present obstacles to some industries and enable the growth of others, creating winners and losers within sectors as businesses race to adapt and innovate. Keeping a pulse on carbon neutrality initiatives will be key to understanding business models and how they will perform in years to come.

Success will come from identifying future industry leaders and investing in companies positioned to benefit from the policy and economics of the fight against climate change. Strategic investments will require a new framework of incorporating the externalities we have been able to ignore for centuries. What worked before will not work in the future. Once-successful business models might be on a collision course with the new normal. The future of investing will be in companies poised to thrive in the fight against climate change.

While the challenge we face is massive, so is the investment opportunity which is why we are launching the Purpose Energy Transition Fund on April 27, 2021, to broadly capture these themes.

— Graeme Cooper is Vice President of Product at Purpose Investments

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