The weather is changing for investors focused on climate change

Erin Bigley: Why should equity investors consider climate change-focused investments when looking for opportunities?

Kent Hargis: We’re seeing a lot of investment increase through the wind and solar energy transition and the growth of electric vehicles, and we expect it to grow much faster than the market over the next decade. We also see that the private sector supports or complements the public sector.

Erin Bigley: David, what are you looking at?

Dave Wheeler: We see financial flows actually lining up behind government policy, technological innovation and the need to address climate change. So when you think about investment opportunities, certainly companies that provide solutions to the climate change problem should have strong tailwinds for their businesses over the next few years.

Kent Hargis: So it’s actually more than just excluding companies that are at risk of climate change. It really takes advantage of those opportunities.

Erin Bigley: How has the climate-focused investing landscape changed over the past year or so?

Kent Hargis: The United States is increasing investment in renewable energy, solar and wind, with the goal of reducing carbon emissions by up to 40%. On the European side, we are seeing similar spending efforts, again focused on increasing renewable energy. The changes and constraints here have to do with actually allowing projects to actually get started, and we’re also seeing some progress and relaxation of some of the rules moving forward, and actually getting these investments off the ground. Some have started and are on track. What we all strive for.

Erin Bigley: COP 28 has just concluded, what impact do you think this will have on climate-focused investments?

Dave Wheeler: When we think about COP 28, as well as other policy developments taking place around the world, we see that a political consensus around the need to tackle climate change is indeed in place. And I think they will ultimately accelerate the deployment of capital into solutions to address the challenges.

Erin Bigley: So can climate-focused strategies work in challenging environments?

Kent Hargis: We believe investing in very high quality, attractively priced companies can do very well in this environment. Therefore, we prefer companies with operational excellence – companies that continue to innovate in terms of quality. We favor companies with low impact, those with pipelines extending many years into the future. And companies with more diverse customer bases are less exposed to a single customer, reducing the risk of mispricing and profitability issues.

Dave Wheeler: One thing I think is that capital inflows are not dependent on economic growth or business cycles. For example, the last four years have been quite bumpy, but the amount of capital being pumped into decarbonization has doubled over this period. Therefore, we see long-term growth in this sector and should not be susceptible to economic slowdowns.

Erin Bigley: So how do you think this field will evolve in the coming years?

Dave Wheeler: These, along with high inflation, supply chain bottlenecks and rising interest rates, are acting as headwinds to the performance of climate investments. But as we move forward, I think those will move into the rearview mirror and climate-related investments will have smoother sailing.