(Bloomberg) -- Of all the topics under discussion at the UN climate change summit in Dubai, investors are focusing on four developments most likely to affect their portfolios.
The 13-day series of meetings represents the first global assessment of progress on the climate goals established by the Paris Accords in 2015. Overall, the news isn’t good: Emissions are still rising at too fast a pace to curb the worst effects of climate change.
For investors, that reinforces long-term themes that aren’t going away. But buried in the discussions are a handful of near-term developments that signal new opportunities.
Late last week, the parties came to an agreement on funding for disaster relief and prevention in countries especially vulnerable to the effects of climate change. Materials shares rallied Monday in Asia on optimism the announcement, plus lower interest rates in the US, will lead to much-needed infrastructure spending in developing nations.
Meanwhile, a pledge to triple the world’s renewable energy capacity by 2030 would require significant upgrades to power grids across the globe, with consequences for suppliers. And agreements on methane emissions reductions will ripple across a wide swath of industries, while rules for a global carbon market will shape corporate investments in emissions reduction.
Even if the Dubai gathering concludes without concrete steps forward, the agenda for many governments will be clearer. Here’s what investors are watching.
Tripling renewable capacity by the end of the decade would require investment of more than $1 trillion a year, double current levels, according to BloombergNEF. It also would require upgrades to power grids so that they can accommodate energy from intermittent and decentralized sources, like wind and solar.
Higher borrowing costs and plunging solar and wind prices have dampened enthusiasm for renewables producers, but power grids and their suppliers are starting to gather attention. China, for example, is setting up mammoth renewables projects in pursuit of its target of 30GW of energy storage capacity by 2025. If the country announces “upgrades to improve connections and transmission and distribution of renewable power from West China to East China,” onshore power grid stocks would benefit, said Xuan Sheng Ou Yong, ESG analyst at BNP Paribas Asset Management in Singapore.
Additionally, countries in the Middle East and North Africa region have fewer permitting issues for grid upgrades than Europe, and the UAE, Oman and Egypt are already upgrading their grids and high-voltage transmission lines, according to a Nov. 28 note from HSBC Holdings Plc analysts.
“There’s obviously a massive requirement for greater investment in grid infrastructure” and equipment suppliers will benefit, said Chris Dodwell, head of policy and advocacy at Impax Asset Management. While the S&P Global Clean Energy Index has tumbled 28% this year, French smart grid solutions provider Schneider Electric SE and US components maker Hubbell Inc. have jumped almost 30%.
Nearly 200 nations agreed Thursday to run a fund to help vulnerable countries deal with climate change, with rich nations pledging at least $260 million to start the program. The so-called loss and damage fund is set to attract voluntary contributions from developed nations, which are responsible for the vast majority of historical emissions.
As details emerge about how the fund will be administered and disbursed, it will benefit engineering, construction and materials companies in developing economies, John Miller, an ESG policy analyst at TD Cowen, said in an interview. India and Southeast Asia stand to be among the beneficiaries of such a fund, given their outsize exposure to climate events, according to HSBC.
As extreme weather events become increasingly frequent, developed nations are already spending more on adaptation infrastructure. Storm water management firm Advanced Drainage Systems Inc. has gained close to 50% this year.
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The campaign by COP28 President Sultan Al Jaber for the oil-and-gas industry to reach near-zero emissions by 2030 has renewed focus on methane, the second-largest contributor to global warming after carbon dioxide.
Investors will watch whether China and India join a pledge to collectively reduce global methane emissions by 30% from 2020 levels by 2030. The US Environmental Protection Agency may also use COP as a backdrop to finalize tougher rules for the oil-and-gas sector and release more details about the methane “waste fee” authorized by the Inflation Reduction Act, according to TD Cowen’s Miller.
The developments may pressure producers to reduce methane emissions by restricting venting and flaring, making efficiency upgrades and monitoring leaks, according to the HSBC strategists. Methane monitoring software providers and makers of safety products such as MSA Safety Inc. may benefit.
China, the world’s largest emitter of the gas, released a long-awaited reduction plan last month that includes targets on methane-emitting manure from the livestock industry. That may spur dairy producers like China Mengniu Dairy Co. and Inner Mongolia Yili Industrial Group Co. to invest in methane capture and biomass fuel projects, with incentive mechanisms expected to be introduced, JPMorgan Chase & Co. analysts including Hannah Lee wrote in a note.
The carbon offsets market, once estimated to hit $100 billion, is shrinking amid weakening demand. This COP summit will address provisions for the global market expected to open in 2024, impacting developers of carbon credits like Carbon Streaming Corp. and EKI Energy Services Ltd., both down more than 50% this year.
In compliance markets, pricing is extremely varied, with an emissions certificate trading at about $75 per ton in Europe but about $10 in China.
“Carbon pricing will be a critical part of any effort to move to net zero emissions,” said Goldman Sachs Group Inc. strategists, including Michele Della Vigna, in a note. Clarity could drive demand for carbon capture and storage technologies and biomass-linked electricity among other innovations, areas already being promoted by the US IRA.
HSBC highlighted the cement industry, the world’s second-largest industrial CO2 emitter, as one that could ramp up investments in carbon capture and green hydrogen technologies.
The overhanging questions about carbon regulation are slowing down investments in emissions reduction by major polluters. The re-investment ratio for the oil-and-gas and mining sectors declined by 30% and 10% this year, respectively, compared with a 10-year average, Goldman noted.
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