This week, the Middle East hosted the 28th annual United Nations Climate Change Conference, commonly known as COP28. Despite disputes about the language used in the final agreement, global banks were still optimistic about the future of climate-related investment themes.
This year’s COP28 event officially ended after two weeks in Dubai. The most notable issue spotlighted was the language used. After much dispute over the omission of the phrase «phase out», a deal was finally agreed upon by nearly 200 nations to begin «transitioning away from fossil fuels in energy systems, in a just, orderly, and equitable manner».
Onlookers highlight challenges from leading fossil fuel countries that plan to expand production. According to a recent UN report, such energy plans would lead to increased production of 460 percent for coal, 83 percent for gas and 29 percent for oil in 2030.
In contrast, global banks were relatively positive about the outcomes from COP28 and optimistic about the outlook for sustainability-related investment themes.
Long-Term Trend
According to an investment note by UBS, the fossil fuel phase-out will accelerate «regardless of the COP28 language». New goals on expanding renewable energy capacity and infrastructure will speed up decarbonization. There was also a sharp increase in funding, such as a $30 billion UAE-led initiative or a $3 billion US contribution towards a green fund.
«The fact that all nations eventually accepted a commitment to transition away from fossil fuels is a turning point for emission and climate policy, in our view,» the note said. «Different economies are clearly at varying stages of their transition, with numerous technologies, resources, and capacity across regions. But the long-term decarbonization trend is clear.»
As a result, UBS anticipates a recovery in investor confidence around many climate themes. Within public markets, it is positive on power generation, energy infrastructure, transport, industry, buildings as well as heating and cooling systems. And in private markets, it is positive on renewable infrastructure development, energy networks, storage, carbon capture, energy efficiency, and circular economy solutions.
«Invisible (Economic) Horse»
According to a Lombard Odier note by the head of sustainability research Thomas Hohne-Sparborth, the agreement settled in Dubai «reflects a transition that is already well and truly underway», including a decreasing share of power generation by fossil fuels, rising electrification rates in new vehicles and deployment of renewables that exceeds expectations.
«As investors, we believe that any global agreement on fossil fuels will act as a helpful accelerant, but that it is really the superior characteristics of the new energy system that will drive its rapid uptake,» said Hohne-Sparborth, highlighting advantages from renewables such as a near-zero marginal cost of production of energy, greater energy productivity, and lower input costs and price volatility.
«At Lombard Odier, we believe that the new energy system will outcompete today’s fossil-based system. COP28 negotiators deserve a pat on the back – but they are the cart pulled by an invisible (economic) horse.»
Interest Rate Driver
In 2023, investments in the energy transition took a hit due to «swiftly changing macro and market conditions», according to Sabrina-Janna Zeyher, an investment strategist at HSBC Global Private Banking and Wealth. However potential monetary easing by major central banks could be a positive driver.
«While near-term risks persist, valuations look appealing, and investors should adopt a longer investment horizon to look through near-term volatility,» said Zeyher in a note. «Our view of the rate plateau until the second half of 2024 in the US should help to ease some headwinds.»
HSBC advises investors to actively focus on quality companies with sustainable business models and strong balance sheets. The bank is also tactically overweight on the energy sector as a hedge against geopolitical uncertainty with a focus on companies with climate transition strategies.
