COP28: A Debate In The Desert That Cannot Hide An Unstoppable Trend

Swiss wealth and asset manager, Lombard Odier, has released a commentary by its Head of Sustainability Research, Thomas Höhne-Sparborth, on his key takeaways from the ongoing COP28 in Dubai and the opportunities present for investors.

Thomas Höhne-Sparborth

The annual Conference of the Parties (COP) on climate change always seems to come around faster than anticipated. With Lombard Odier on the ground at COP28, we hear from our Head of Sustainability Research as to some of his key takeaways and impressions from the event so far.

This is a Global Exercise in De-Ostrichification

Surrounded by desert and in a region where oil and gas form a key component of the economy, it would be all too easy to conclude that little change is likely. But look underneath the surface, and it is clear that a seismic shift is in fact in motion.

Investment in clean energy overtook investment in fossil fuels five years ago and today significantly exceeds it. Solar energy is now the cheapest source of energy on the planet. Sales of electric vehicles have increased from 4% of new vehicles sold in 2020 to an expected 18% in 2023. While some are still in denial, the energy transition is palpable, as is the move to new economic systems that will outcompete existing ones.

The Transition is Moving Fast; We Simply Started Too Late

To many, climate progress seems glacial at best, with achievements eight years after the Paris Agreement still falling well short of the ambitions set at the time. But that is not to say that, in economic or civilisational terms, this is a slow transition. Reversing a millennia-old trend in energy use and emissions over the span of just a few decades would be the fastest and most fundamental economic transition in our collective history.

Our much-delayed start in the transition has robbed us of the luxury of time; but even at that much-too-slow transformation, the speed and scale of shifts in markets will be unprecedented.

COP28 is Giving us Food For Thought

COP28 continues a trend towards the broadening of the climate agenda to encompass broader systemic issues. In one of the most underappreciated outcomes thus far, 130 countries have agreed to embed consideration of food systems into their individual climate action plans. Food systems are responsible for most biodiversity loss, agrochemical pollution, deforestation, and water use. It is wildly inefficient, with nearly 80% of land use used to support animal agriculture.

As obvious as these problems are, so too are the solutions, spanning from moves to regenerative forms of agriculture, precision farming, and alternative proteins – investable opportunities that should greatly benefit from the focus that these 130 countries will be affording it.

This Transition Does Not Just Make Environmental Sense, But Economic Sense

The climate solutions on show at COP28 tend to have one thing in common: efficiency. Electric vehicles are four times as efficient in their well-to-wheel energy efficiency, alternative proteins

would use a fraction of the land and water required for traditional animal protein, and additive manufacturing can reduce material usage by as much as 90% for some components. Resource efficiency translates to lower input and operating costs – and, incidentally, lower exchange rate risks and price volatility. Environmental savings, in other words, translate to economic savings, which is at the root of the investable opportunity available to investors.

This is Not a Niche Thematic Opportunity, But a Question of Asset Allocation

Market turmoil of the last two years has shown the impact of disruptions in energy and food systems, on everything from inflation to global supply chains. Our research, at Lombard Odier, has focused on the extent to which global GDP and markets may be reconfigured, owing to shifting opportunities.

In listed markets, projections of earnings must begin to take into account disruptions linked to wider system changes, as valuations shift. Real estate, comprising nearly US$340 trillion in global wealth, is ill-prepared for new energy label requirements and a focus on embodied emissions. Private markets will be the key to some of the most disruptive solutions, while new asset classes – from carbon to nature-based solutions – will emerge. All of this, as investors, raises questions not just around thematic opportunities, but around asset allocation.

We Need About a 1000x Increase in New Investment Commitments in Nature – and it Will Come

Today, investment in nature-based solutions is estimated at US$154 billion per year and would need to at least triple to 2030 to meet objectives around nature and climate. At COP28, several welcome initiatives were announced, mobilising hundreds of millions of dollars of additional investment per year for nature-based solutions.

Ultimately, we need commitments three orders of magnitude larger to bridge the gap, but we believe this need not be a fantasy. As we pour trillions into mitigating energy-related emissions, markets must inevitably begin to put a fairer value on the nature-based assets that today provide free sequestration. Much like one can buy a run-down apartment in London at a discount and renovate it, so too can investments in neglected land drive improvements in crop yields, land value, and added returns from carbon sequestration. To investors, this poses an attractive opportunity.

US$3-5 Trillion Per Year of Required Investment Sounds Like a Lot – But it Really Isn’t

Estimates of the enormity of the climate challenge and capital requirements to address it tend to produce eye-watering figures. For instance, the IEA estimates current investments in clean energy at around US$1.8 trillion in 2023, as part of total energy investments of US$2.8 trillion. By the early 2030s, around US$4.5 trillion would need to be spent – all on clean energy – to meet pathways to net zero by 2050.

But only some of this represents a net increase, the rest representing a shift in investment. Moreover, global gross capital formation in 2021 amounted to US$26 trillion – so even if we include all associated spending ex-energy, we are talking about an increase in global investment rates of 10-20%. This would not be atypical in the context of past innovation cycles, with some US$4.7 trillion spent on IT alone last year.

Relentless Technology Gains are Impossible to Compete With

In 2023, cleantech names have been hurt in markets. Rising interest rates have pushed up costs and construction. Consumer markets have been weak, and large stockpiles depressed demand. Cleantech indices have underperformed as much as 40-50% year to date.

None of that would unfamiliar to long-term investors investing in technology revolutions, with both cleantech and IT having gone through similar drawdowns before continuing their relentless march toward value creation. In all that, superior appeal, functionality and cost-competitiveness are what has driven unforgiving progress in past innovations, and the energy transition is no exception.

Batteries are a case in point, with energy density in lithium-ion batteries having improved at a rate of approximately 5-6% per year from 90 Wh/kg in the early 1990s to 500 Wh/kg as of today. At these rates, energy density doubles over a little more than a decade – a tall challenge for current, more mature technologies to keep up with.

Conclusion: There is More to COP28 Than Meets the Eye

Underlying all of the usual debates found at any COP, we find a growing and unstoppable trend. On the ground and at our own events on nature and industry, we have seen a change in the tone of discussion, when we speak to some of the forward-thinking companies involved in the transition. A change that involves a shift from a reluctant discussion around commitments and targets to discussions on the engineering challenge ahead, as industry leaders seek to edge ahead of their competitors in capturing the prize that this reshuffling of the global economy may offer.

And as investors, that is something we can be excited about.