Amid financial and geopolitical turmoil, climate transition offers unprecedented growth opportunities

After an inflationary spike resulting from the pandemic and the war in Ukraine, central banks had to raise interest rates. In line with their mandate, they are attempting to slow the economic cycle to bring inflation back to target levels. While investors are familiar with the context, the current cycle is unusual because it has emerged after a long period of exceptionally low interest rates, followed by a short period of rapid rate increases. This swift rise has exposed a series of vulnerabilities. The recent collapse of some banking institutions in the United States and Europe reminds us of the fragility of certain sectors. The contraction of bank lending will weigh on economies, and the prospect of recession could become a reality over the coming months. Geopolitical insecurity further adds to this fragile financial environment. This all suggests that markets will remain volatile and uncertain for some months. Although the market environment calls for caution, the climate transition clearly represents one of the most important opportunities for long-term investors. Today, powerful forces are at work to encourage and support this vital transition: consumer pressure, regulatory action, the transformation of industrial business models, and fair capital allocation by investors. Government action also plays a part, through public investment programmes and tax credits. The climate transition will be built around four main axes: First, electrification. Electricity is becoming the dominant energy carrier. From around 20 per cent of global energy demand in 2020, it will account for about 70 per cent by 2050. To produce electricity, we need to switch from fossil fuels to renewables (hydropower, wind, solar, and certainly nuclear). Second, agriculture and nature conservation. By 2050, we will need to feed 2 billion extra people while returning large arable areas to reforestation and biodiversity projects. We need to rethink our production and consumption methods. Third, materials. This will involve decoupling the economic growth pathway, which we want to remain strong, from that of commodity extraction. The “take, make, waste” model needs to be replaced by one of “reduce, reuse, recycle”. Construction materials must be rethought, cars will be shared and their components recycled. Lastly, carbon. The market economy model must expand to include all its externalities. Carbon emissions need to become increasingly expensive, creating essential incentive mechanisms for industrial players to adopt genuine transition strategies. In parallel, proven carbon sequestration will open the door to monetary transfers that were inconceivable until recently. As with the industrial revolution of the 19th century or the information technology revolution over the past 50 years, these transformations will have a major impact on all economic systems. Leading companies will emerge stronger, others will disappear. Most of the technologies needed for these transformations exist and are evolving into mass-market solutions. We are on the verge of an exponential acceleration of these industrial solutions that should release unprecedented growth opportunities. Several factors are driving this acceleration. First, the fall in production costs: in the renewable energy field, costs have plummeted by 60-90 per cent over the past 10 years. Next, constant improvements in performance: electric vehicles are reaching energy efficiencies of around 80 per cent compared with 20 per cent for conventional vehicles. Finally, massive support from public bodies, to the tune of hundreds of billions of dollars for the three major blocs of Europe, the US and China, are helping to speed up investment and the implementation of large-scale industrial solutions – in the field of heat pumps, electric vehicles and construction materials, for example. The war in Ukraine is another accelerating factor, spurring a renewed conviction in Europe on the importance of true energy independence. No coal comeback: Europe’s renewable energy transition is in hyperdrive To benefit from investment opportunities linked to the climate transition, it is vital to understand its nature and trajectories. This requires real, fundamental research. It is necessary to analyse the maturity level, returns and growth potential of the different technologies and to model their development. The challenge is to be able to anticipate the nature of major impending changes that will shake up many economic sectors and give rise to new business models. The energy transition alone is expected to account for almost US$4.2 trillion in global annual investment over the next 10 years. This figure is comparable to the capital expenditure of the IT sector, which now represents nearly 20 per cent of the total returns of global companies, compared to just 5 per cent in the 1990s. The climate transition is no longer a distant project. It has begun and, in many respects, it is accelerating. Investors cannot afford to ignore it. Frédéric Rochat has been a managing partner of the Lombard Odier Group since 2012. He currently jointly co-heads the group's Swiss and international private client activity.

Amid financial and geopolitical turmoil, climate transition offers unprecedented growth opportunities

.css-1mniedq{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;}In a volatile market riled by interest rate rises, banking vulnerabilities and geopolitical insecurity, climate transition is an important long-term investment opportunity

In a volatile market riled by interest rate rises, banking vulnerabilities and geopolitical insecurity, climate transition is an important long-term investment opportunity