The biggest investment opportunity in history

Climate change is a big challenge, but it comes with a huge investment opportunity. It's still the early days.

As COP26 is gathering in Glasgow this month, climate change and what we’re going to do about it is once again dominating the headlines. And rightly so. The sustainability revolution is, in the words of Al Gore, “the single biggest investment opportunity in history.” There’s a growing sense of urgency, and the sheer size of the task is clear:

We have to re-do the industrial revolution all over again.

This is not so much about new climate targets as it is about how to reach them. How can we possibly rebuild the whole economy? Most, if not all, carbon emissions are related to business and the economy somehow. For the sake of our argument, it’s not important how emissions are split between the public and the private sector. In theory, it would be possible to reduce emissions in the public sector par ordre du mufti. But in practice, the question is the same for both sectors: How can we do it?

One option, in theory at least, would be to radically shrink economic activity to a net-zero degree. This borders on abandoning most of our economies and going back to a pre-industrial lifestyle. The approach is best known under the degrowth moniker. We’ve discussed this option before, and it doesn’t look like it has become any more realistic since then. Another option is massive investment in sustainability and thus in carbon-neutral technologies, businesses, and companies.

Back to short-termism?

This is something that has been brewing for a while. Larry Fink, the CEO of Blackrock, has led the financial pack on this quest. Low interest rates have forced all investors to be sustainable investors, like it or not. That’s because investors routinely discount future earnings with the appropriate interest rate. The lower this interest rate, the lower the discount. The future becomes more valuable.

Now, this also means that rising interest rates would bring us back into short-term thinking. And with inflation rates already rising, we might be on the cusp of this scenario. But in the meantime, everything is in place for a surge of sustainable investments. As long as central banks keep printing money, there won’t be a shortage of available capital. And, almost naturally, it will flow into renewable energy, instead of coal, oil, and gas.

However, according to the International Energy Agency (IEA), this won’t be enough to get developing economies on the sustainability investment track:

Alongside the necessary policy and regulatory reforms, public financial institutions – led by international development banks and larger climate finance commitments from advanced economies – play crucial roles to bring forward investment in areas where private players do not yet see the right balance of risk and reward. 

Economist Jeffrey Sachs gives a rather bright outlook with regard to the economic realism of net-zero:

First, we have vast potentials of renewable energy. Second, the costs of that renewable energy are essentially already at parity with fossil fuels, or better. I see no cost obstacles or financial obstacles to getting to net zero by 2050 — no back-breaking financial barriers, no profound technological barriers that can’t be straightened out.

Sustainability, investment and innovation

Besides policy changes and regulation, which is what COP26 is about, there are other bottlenecks: talent and innovation. Someone has to do all the work. The sustainability revolution won’t play out by automation alone. It needs skilled workers on different levels who are willing to take the money and pick up the work. Almost inevitably, this will add further fuel to a new war for talent.

The second bottleneck is related to the question of how we’re going to achieve the net-zero goal. This is Larry Fink’s take on that:

Getting to net zero carbon emissions by 2050 is going to require a revolution in the production of everything we produce, and a revolution in everything we consume. The process of creating fuel, food and construction materials, with all the needs that we have as humanity, it all has to be reinvented. And that’s going to require a large amount of investment, a large amount of ingenuity and a large amount of innovation.

Bill Gates expects that climate tech will produce 8 to 10 Teslas, a Google, an Amazon and a Microsoft. In other words: another revolution, at least as big as the digital revolution – which, by the way, will continue to play out over the next few decades. Azeem Azhar adds more areas with huge potential: carbon capture and storage (worth $2 trillion over the next 20 years), biofacturing (an estimated $4 trillion business by 2040), food, or the transport and industrial sectors.

Today is the early days

Biofacturing is shorthand for the use of biology to replace petroleum chemistry, as pioneered by companies like Zymergen. Founded in 2013, Zymergen went public this year. The stock then plunged in August after warnings that revenue will come later than expected, and the founder resigned from the CEO role. It’s a familiar-sounding story to anyone who still remembers the dot-com craze. But despite hiccups like this, biofacturing is the kind of innovation the world needs.

Today feels like the early days of software and computing, if we follow Bill Gates. Much of the technology is still in the labs, won’t be economically viable, will need a lot of investment, and will have a high failure rate. But the upside is huge as well, and so we can expect plenty of venture capital to be available. Remember, it’s the biggest investment opportunity in history. Let’s not waste it.

Photo by Fredrika Carlsson on Unsplash