A thematic framework for investing in the nature and climate transition
We’ve identified five broad investment themes that comprehensively address the challenges of climate change and nature loss.
"Nature is the essential algorithm for the future of humanity."
Inger Anderson, Executive Director, UN Environment Programme
Key takeaways
- We believe the urgency of the nature and climate transition will continue to present a broad and deep investment opportunity set, which we’ve categorized into five distinct themes.
- We view these five themes as being truly global in scope, collectively extending to virtually every asset type, market sector, investment style, and geographic region.
The full white paper version of this piece, which was featured in a special report by Savvy Investor, provides a deeper dive on the five themes.
There is a growing consensus that the inexorable nature and climate transition taking place across the globe will have profound implications for the world economy. From where we sit as a global asset manager, this ongoing, multifaceted transition also implies a vast and rich spectrum of possibilities—many of them still emerging—for discerning asset allocators.
With that in mind, we’ve identified five investment themes that we think encompass the various challenges and opportunities arising from climate change and nature loss. We believe the investable universe associated with these five themes is enormous, cuts across the global capital markets, and offers a long-term runway that all investors should explore.
Five themes for investing in the nature and climate transition
Theme 1: Natural capital
An unfortunate consequence of modern industrialized human activity is that it has done much to degrade the Earth’s natural capital, including its forests, agricultural soils, grasslands, and wetlands. Approaches to investing that aim to halt (and in many cases, reverse) this degradation are central to the thematic opportunity in natural capital. From a purely investment standpoint, sustainably managed natural capital assets can improve portfolio diversification, provide an inflation hedge, and boost long-term return prospects, all while promoting vibrant ecosystems.
Natural capital: thematic investment opportunities
- Forests/timberland
- Agriculture/farmland
- Landscape optimization
- Carbon solutions
- Biodiversity solutions
- Minerals
Natural capital by the numbers ...
The estimated value of new business opportunities resulting from investments with nature-positive outcomes is up to $10 trillion annually.
Theme 2: Water-related risks
Climate change is primarily a water crisis, as the attendant risks are often realized in the form of water scarcity and weather events like hurricanes. Governments attempting to deliver clean water and sanitation while reducing the risks face huge funding shortfalls, which opens the door to substantial opportunities to generate investment alpha through sustainable management, development, and use of water resources, infrastructure, and technology, as well as natural hazard mitigation.
Water: thematic investment opportunities
- Water technology and efficiency
- Water infrastructure
- Water resource protection
- Natural hazard mitigation
- Blue bonds
Water need by the numbers ...
The estimated global investment needed for water infrastructure, including treatment and reuse, is $6.7 trillion by 2030 and $22.6 trillion by 2050.
Theme 3: Circular economy
So-called “megatrends” such as shifting demographics, digitalization, and resource shortages are helping to fuel the global transition to a more circular economy. At its core, a circular economy limits the need for continual extraction of raw materials, creating a closed loop that maximizes efficiency of the design, manufacture, distribution, consumption, collection, and recycling of goods. This is critical because we're rapidly expending the Earth’s resources at a clip of over 1.7 times its ability to biologically regenerate.
Circular economy: thematic investment opportunities
- Resource efficiency
- Waste reduction/management
- Sustainable/recycled materials
- Natural capital supply chains
Circular economy by the numbers ...
By 2040, China alone could reap annual benefits of up to $10 trillion from key sectors of its economy adopting circular economic principles.
Theme 4: Clean energy
We see the production, storage, and management of sustainable (clean) energy from recurring natural sources as a generational opportunity for investors.
Renewable energy is readily recognizable as being emblematic of climate- and nature-oriented investment themes. Undeniably, this is an industry where tremendous amounts of capital have been spent to date in trying to evolve the global energy system. The International Energy Agency has described several areas of momentum in clean energy development, including climbing electric vehicle sales, which are contributing to increased energy efficiency across the economy and sponsoring pathways for investments to aid the clean energy transition. While these are already a not-insignificant component of the overall global energy mix, they’ll likely require massive capital inflows going forward, particularly if governments in Europe and elsewhere are to meet their stated ambition of helping to triple renewable energy capacity by 2030.
Clean energy: thematic investment opportunities
- Energy storage
- Renewable energy sources
- Power transmission
- Energy efficiency
- Clean and low carbon fuels
Clean energy by the numbers ...
It's estimated that for 2024 alone, total spending on clean energy technology and infrastructure could amount to around $2 trillion.
Theme 5: Decarbonization
A crucial part of forging a low carbon future for the world lies in supporting traditionally high-emitting sectors of the global economy in their long-term transition to net zero carbon. Accordingly, we see a wide range of decarbonization investment opportunities across asset classes and market segments. Some of these are tied to innovations that, in one way or another, involve reimagining the already-built economy and environment.
Among high-emitting sectors, approximately 40% of all greenhouse gas emissions come from buildings, making the real estate sector a prime target for decarbonization efforts. While the devil’s in the details of implementing tougher controls over buildings’ energy efficiency and power sources, there are strong incentives to help accelerate the decarbonization transition in this sector.
Decarbonization: thematic investment opportunities
- Green buildings
- Green transportation
- Climate transition technologies
- Green and transition bonds
Decarbonization by the numbers ...
In 2021, the percentage of total global carbon emissions caused by buildings was approximately 40%.
The bottom line for investors
We believe that nothing less than the fate of our planet and the future of human well-being depend on ensuring a robust, successful global nature and climate transition in the years to come. For forward-thinking investors, understanding the dimensions and dynamics of this transition is where sustainable investing may offer an array of active opportunities to make a lasting positive impact on the world, while at the same time building portfolio value for the long term.
Important disclosures
The views and opinions expressed are those of the speakers at the time of recording and are subject to change as market and other conditions warrant. This video is for informational purposes only and is not intended to be, nor shall it be interpreted or construed as, a recommendation or providing advice, impartial or otherwise, regarding any specific product or security. Unless otherwise noted, the speakers are not affiliated with Manulife
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