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Solving the Climate Crisis: Five Areas That Could Make a Difference

For the future of the world’s economies and the people who live in them, climate change can no longer be ignored—and investors may have a role to play.

CONSIDER THESE DISTURBING STATISTICS: By 2050 there could be as many as 1 billion climate refugees fleeing water scarcity, crop failure and rising sea levels.1 In the U.S., extreme weather events already cost anywhere between $300 billion and $500 billion every five years.2 And almost one-third of the world’s population is exposed to deadly heat levels for at least 20 days a year.3

“Climate change is not just an environmental issue,” says Savita Subramanian, head of Environmental, Social and Governance (ESG) Research and U.S. Equity and Quantitative Strategy for BofA Global Research. “It has strong implications for society at large.” Its potential impacts on both humans and the global economy are nothing short of seismic.

Why many investors are paying attention

As the world looks to develop solutions to these challenges, investors could have an important role to play, says Haim Israel, head of Thematic Investing for BofA Global Research and lead author of a wide-ranging report on the topic titled “Emission Impossible?”. He points to three key developments that are pushing climate change to the front of many investors’ minds.

Photo of Haim Israel, head of Thematic Investing for BofA Merrill Lynch Global Research“The economics of climate change solutions have been shifting for the better. This problem used to be very expensive to address. That’s not the case anymore..”—Haim Israel, head of Thematic Investing, BofA Global Research

“First of all, there’s public understanding that climate change is not a myth,” he says. That is driving activism at all levels and prompting companies to raise capital for clean measures such as supporting reforestation, shifting to renewable energy sources or simply being more transparent about their carbon footprint. “Secondly, Wall Street and the capital markets are getting behind finding viable solutions, and we are seeing more money going to companies that have environmental policies,” Israel says.

The third, and most fascinating, development is that “the economics of climate change solutions have been shifting for the better,” Israel says. “This problem used to be very expensive to address. That’s not the case anymore.” He notes that it’s now cheaper to produce energy from renewable sources, like solar and wind, than fossil fuels. In the U.S., there are now three times as many clean energy jobs as there are in the fossil fuel industry.4 As a result of these changes, Israel’s team calculates that the climate solutions market could double from around $1 trillion at the start of 2020 to more than $2 trillion over the next five years.

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Photo collage of three images including a desert, a field of crops and a body of water with land in the background. The header title reads: The risks of inaction

The numbers speak for themselves on the potential consequences if we fail to act fast on enacting climate solutions. Here, a look at the impact on the planet’s people and places.

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Photo of a sunset in the horizon. The header title reads: global temperatures

The past five years were the hottest since records began, and the 20 warmest years on record were in the past 22 years.
Source: NOAA, NASA, 2019.

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Photo of a farm with dying crops in the foreground and an irrigation system in the background. The header title reads: heat stress

By 2100, heat stress linked to climate change could cost the global economy $2.4 trillion every year in productivity and economic losses, most notably in agriculture and construction.
Source: International Labour Organization, 2019.

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Photo of a street with a utility pole that has been knocked over by a storm. The header title reads: extreme weather

In the U.S., 40% of all cities in 2018 were affected by some form of extreme weather—such as a storms, droughts, heat waves, floods or wildfires—compared with only 15% to 20% during the 20th century.
Source: NOAA National Centers for Environmental Information, 2020.

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Photo of a woman carrying a bowl of water in a field of dirt. The header title reads: water scarcity

Water scarcity is likely to worsen due to warming, ice melt and heat waves. Two billion people currently live in countries or regions experiencing high water stress, and by 2030, an estimated 700 million people could be displaced by intense water scarcity.
Source: United Nations, 2019.

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Photo of a city with skyscrapers in the background and water in the foreground. The header title reads: rising sea levels

Indonesia is spending $34 billion to move Jakarta, its capital of over 10 million, inland, because of rising sea levels and increasing floods.  And by 2050, more than 800 million people around the world could be at risk from rising sea levels brought on by global warming.
Source: Indonesian government, 2019; C40 Cities, 2020.

 

Climate change and the coronavirus

Photo of Savita Subramanian, head of Environmental, Social and Governance Research and U.S. Equity and Quantitative Strategy, BofA Global Research.“We continued to see strong investor interest in sustainable investments, even during the dramatic sell-off that started earlier this year.”—Savita Subramanian, head of Environmental, Social and Governance Research and U.S. Equity and Quantitative Strategy, BofA Global Research

But how do we stay focused on the long-term (or even medium-term) picture when more immediate concerns, such as the coronavirus pandemic, are creating economic disruption and uncertainty? Subramanian notes that ESG exchange-traded funds saw continued inflows during the recent market turmoil (based on weekly flows between January 9 and March 18, 20205). “The idea that climate concerns go away during times of stress is false,” she says. “We continued to see strong investor interest in sustainable investments, even during the dramatic sell-off that started earlier this year.”

Additionally, the pandemic has sped up the adoption of many climate-friendly and energy-efficient solutions, some of which may be here to stay. “The pandemic has really hastened the mission to have a lower carbon footnote from both a technology and an industrial perspective,” Subramanian notes. “Companies have realized they don’t need to fly people out to Hong Kong five times a year and can do a lot more through video conferencing and chats and apps on their phones than they have in the past,” she adds.

 

 

5 industries creating climate solutions

While some potential energy-efficient solutions—such as increased investment in public transportation—may be adversely affected by the coronavirus in the near term, Israel believes the world will continue to seek out ways to reduce its carbon footprint. “It’s not just our kids’ problem anymore,” he adds. Here are a few of the promising areas that Israel says could play a pivotal role in driving climate solutions now—and into the future.

Illustration of a lightning bolt inside of a circle made up of two arrowsRenewable energy. Annual wind and solar energy volumes are expected to double over the next 10 years, as improvements in efficiency, scale and equipment prices should make these sources even cheaper.6 These are also complementary energy sources, which suggests that they will develop in tandem: Wind power tends to work better in the winter and at night, and is more abundant in colder regions and coastal areas; solar, meanwhile, works better in the summer and during the day, and tends to be more abundant inland, in dry and desert regions.

 

Illustration of a car with a plug coming out of the hood inside of a circleElectric vehicles. Similarly, annual electric vehicle sales, which currently number around 3 million this year, are forecast to grow dramatically in the coming decade, reaching as high as 43 million by 2030.7 Some of the transition may come from an unlikely source: the increased development of large electric vehicles such as SUVs, trucks and vans. For commercial vehicles—whether designed for ride-sharing or long-haul transport—the fuel savings would be significant, thus potentially hastening the switchover.

 

Illustration of a battery inside of a circleEnergy storage. Much of the growth of the electric vehicle market will depend on the increased production of more powerful and cheaper batteries. And while the challenges of storing the energy created by wind and solar have hampered their advancement in the past, with better technologies and evolving energy and climate policies, renewed investment in storage could set the stage for a major transition to renewables.

 

Illustration of a cow inside of a circleMeat alternatives. Animal products represent around 15% of global greenhouse gas emissions,8 while animal farming contributes significantly to deforestation and land use. These are some of the reasons behind a growing trend toward reducing our reliance on meat and other animal products, along with the development of meat substitutes such as plant-based burgers.

 

Illustration of a greenhouse with plants growing inside of a circleVertical farming. Meanwhile, vertical and greenhouse farming technologies use much less water and land, and are more climate-resilient than traditional open-field farming. They also require less transportation, since urban and greenhouse farms can be built closer to population centers. The one drawback: These new farming technologies tend to use more energy—something that renewable sources, like solar and wind, could potentially help supply.

The bottom line is, everything in our planet is connected. And as the Earth’s climate changes, every corner of society—wealthy or poor, giant corporations or solitary individuals—will be affected. This also means that everyone will have a role to play in helping build a more sustainable world in the coming years. “The 2010s were a lost decade when it comes to ameliorating climate change,” says Israel. “As we head into the 2020s, we need to move forward very fast.”

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The ABCs of Investing in Climate Action

Photo of Jackie VanderBrug, head of Sustainable and Impact Investment Strategy in the Chief Investment Office for Merrill and Bank of America Private Bank

“The current pandemic has given us a sense that we’re all in this together, and that’s also true for the threats presented by climate change,” says Jackie VanderBrug, head of Sustainable and Impact Investment Strategy in the Chief Investment Office for Merrill and Bank of America Private Bank. For those interested in investing in climate solutions, VanderBrug suggests considering a three-pronged “ABC framework.” Here’s how it works.

Image icon of the letter AAvoid. This is a way to help reduce negative environmental or social effects and manage risk by limiting your exposure to certain companies or industries. For example, you could consider an equity strategy that filters out companies with high greenhouse gas emissions or with governance issues that could result in environmental fines or lawsuits in the future.

 

Image icon of the letter BBenefit. This approach focuses on specific social or environmental themes or practices that create broad benefits and that also have the potential for competitive long-term returns. For example, you could consider exchange-traded funds centered around clean energy or clean water solutions. You could also consider corporations that are actively revising their business models around climate risks and opportunities—for instance, companies that have “best-in-class” environmental practices, such as producing clothing using less water or sourcing from factories that use renewable energies. “Such companies might have lower costs of business, lower costs of goods sold, and that might make them more adaptable in times of price hikes or shortages,” says VanderBrug.

 

Image icon of the letter CContribute. This approach lets you support potential solutions by targeting measurable environmental and social outcomes and companies that are actively innovating around issues related to climate change. “This is where you might consider green bonds (bonds that are specifically earmarked to raise money for climate and environmental projects),” says VanderBrug, “as well as strategies that invest in companies with particular solutions in, for instance, the water value chain, or in the sustainable food and agriculture chain, or in energy or forestry.” You might also consider municipal bonds tied to climate-related projects—such as green transit or an update to a water system—and also take into account the sustainability profile of those who are issuing the bonds.

This ABC framework allows you to ask yourself what you hope to achieve with your investments, and then to pursue those goals with a variety of solutions, VanderBrug says. Of course, each investor is different, and investing in climate action may be only one of several strategies you could employ.

As always, speak with your advisor about the type of investments and strategies that are most appropriate for you.

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1 United Nations University, 2017.

2 NOAA, National Centers for Environmental Information, 2020.

3 Nature Climate Change, Mora et al, 2017.

4 E2.org, Clean Jobs America 2020, April 2020

5 BofA Global Research and SimFund, 2020.

6 BloombergNEF, 2019.

7 BloombergNEF, Deloitte, IEA, 2019.

8 Food and Agriculture Organization of the UN, 2019.

Information is as of 06/10/2020

Opinions are those of the author(s), as of the date of this document and are subject to change.

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