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Goldman Sachs Asset Management Statement on the Russia-Ukraine War. Read it here .

   

August 2021 | GSAM Connect

Investing in the Climate Transition

  • Over the last four decades, the battle against climate change has been fought against a backdrop of relative indifference, if not skepticism, from consumers and the voting public worldwide.
  • The will of the people, industry and politicians have not been aligned to bring about any meaningful change in emission reduction and sustainable practices.
  • Technological innovation has struggled to provide the tools to successfully fight climate change.
  • We have now reached an inflection point where the support from politicians, consumers and technology has never been greater and more unified.
  • We believe this will trigger a green revolution, entirely transforming our current way of life and offering highly attractive potential investment opportunities.

 

Investing in the Green Economy – Why Now

Knowledge and understanding of climate change, and its potentially devastating implications, is not new. Since the first hard evidence of ozone depletion was presented in the 1970s, the scientific and environmental communities have been at loggerheads with politicians and industrialists about what needs to be done. Over the last four decades, this battle has been fought against a backdrop of relative indifference, if not skepticism, from consumers and the voting public worldwide. Until now.

The latest manifestation of a concerted international attempt to address global warming and reduce carbon dioxide emissions, is the Paris Agreement of 2016. Its main objective is to hold the increase in the global average temperature to well below 2C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5C above pre-industrial levels by 2030, recognizing that this would significantly reduce the risks and impacts of climate change.

However, if we rely only on current climate commitments of the Paris Agreement, temperatures will likely rise to 3.2C this century which could have catastrophic consequences. To limit global temperature rise to 1.5C, all scientific evidence suggests emissions must be below 25 gigatons (Gt) by 2030. Based on current policies from member nations, emissions will be ~50 Gt CO2e by this date – twice the environmental target.1

 

EXHIBIT 1: The Emissions Gap

In order to meet the Paris Agreement goal of keeping global warming to ≤1.5 degrees, GHG emissions need to be reduced by ~50% by 2030

Source: Climate Action Tracker, as of May 2021. For illustration purposes only.The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation.

 

Clearly, the degree of legislation, taxes and tariffs required to bring emissions under control in the targeted time frame is challenging for nations across the globe. Politicians across the world have failed to reach agreement on more stringent measures. The corporate sector, outside of regulation, will typically need a commercial reason to change. And so far, the world’s consumers and voting public has not shown clear, universal tolerance for bearing the cost of climate change mitigation.

In short, the will of the people, industry and politicians have not been aligned to bring about any meaningful change in emission reduction and sustainable practices. Until now.

 

A Millennium’s Problem. A Millennial Solution.

In fact, for many years, general climate change indifference and a belief that someone else will solve the issue have largely resulted in inaction. But today’s younger generations, spearheaded by the most powerful demographic on the planet – the Millennials – are increasingly aware of the potential consequences of inaction and have a different perspective. Having grown up in an age of greater environmental enlightenment, with a technology-facilitated global perspective and greater awareness of the planet’s fate, they are agitating to bring about more urgent change to protect their and their children’s future.

Millennial consumers are beginning to vote with their wallets and they, together with Gen Z, will eventually become dominant at the ballot box.

Crucially, younger generations are not only more concerned about the environment, but their spending has also started to reflect their values. Therefore, we believe that consumer demand for sustainably sourced goods and services will force companies to adapt and find new solutions, because there will be a commercial and competitive imperative to do so. Eventually, it may become a political imperative to do so as well, as more effective legislation will reinforce the momentum of the transition.2,3

 

Exhibit 2: What Keeps You Up at Night

Millennials worry about the environment

Source: Deloitte Global Millennial Survey 2019. For illustration purposes only

 

Exhibit 3: Put Your Money Where Your Mouth Is

Millennials are willing to pay more for sustainability

Source: Sustainable Brands Survey: Millennials and Women Leading the Sustainable Investing Charge.

 

Tech to the Rescue

In addition to political and societal inaction, technological innovation has struggled to provide the tools to successfully fight climate change. Until now.

Technological innovation has a critical part to play in facilitating the industrial transitions needed to move towards a lower emission and sustainable future. Now deep into the digital age, appropriate innovation and the emergence of new solutions are likely to accelerate.

Cost curves often explain how technology, which has previously been only featured in our most detached sci-fi fantasies, makes it into the real life. In the early days, renewable energy sources and electric vehicles (EVs) had to cut corners to get ahead, with governments often playing a willing accomplice. However, over the last decade, both renewables and EV batteries have already reached cost parity and are even incrementally more cost competitive than their old foes like coal and oil as well as the internal combustion engine.4

 

Exhibit 4: Crashing Cost Curves

Innovation in battery technology drives EVs toward cost parity

Source: BloombergNEF – Electric Vehicle Outlook, 2020. For illustration purposes only. “ICE” is an abbreviation for internal combustion engine. The economic and market forecasts presented herein are for informational purposes as of the date of this document. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this document.

 

Exhibit 5: EVs are Going Mainstream

Large economies propel exponential growth in market share

Source: BloombergNEF – Electric Vehicle Outlook, 2020. For illustration purposes only. “ICE” is an abbreviation for internal combustion engine. The economic and market forecasts presented herein are for informational purposes as of the date of this document. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this document.

 

Today, we are observing cost curves dipping lower across all areas of the green economy, including circular economy solutions, carbon capture, and plant-based food. As commercial scalability becomes reality in those areas, billion dollar industries may develop overnight, driving greater sustainability while offering highly attractive potential investment opportunities.

 

Investing in Planet A

As there is no Planet B, we believe we need to focus our investments into the planet we all live in. Our world needs to arrive at an environmentally sustainable growth model. As part of this transition, we recognize the importance of funding innovative companies actively involved in solving for some of the challenges ahead. This includes, in our view, businesses engaged in the areas of clean energy, resource efficiency, sustainable consumption, the circular economy, and water sustainability.

We believe we have crossed the point of no return. Disruptive companies aligned to these five key themes may be poised to spearhead the green revolution and benefit from meaningful demand tailwinds. Even in a world without targeted government stimulus, the green investing space is not going to disappear. As such, investors are in the unique position to buy into a multi-decade growth story that, in our view, can drive greater sustainability as well as returns.

 

 

1 Source: Climate Action Tracker, as of May 2021. For illustration purposes only.

The economic and market forecasts presented herein are for informational purposes as of the date of this document. There can be no assurance that the forecasts will be achieved.  Please see additional disclosures at the end of this document. A green economy is defined as low carbon, resource efficient and socially inclusive. Source: UN Environment Programme.

This financial promotion is provided by Goldman Sachs Bank Europe SE.

2 Source: Deloitte Global Millennial Survey 2019. For illustration purposes only.

Source: Sustainable Brands Survey: Millennials and Women Leading the Sustainable Investing Charge.

Source: BloombergNEF – Electric Vehicle Outlook, 2020. For illustration purposes only. “ICE” is an abbreviation for internal combustion engine. The economic and market forecasts presented herein are for informational purposes as of the date of this document. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this document.

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