14 July, 2023 / Research

10 global climate trends affecting sustainable investing

By Michael Nelson

EIU analysis shows an increasingly complex economic environment for ESG investors

10 global climate trends affecting sustainable investing

With climate change already one of the biggest factors determining economic and social prosperity, market insight group, the Economist Intelligence Unit (EIU), has released a new paper outlining the major global transformations that could have a lasting impact on sustainability investment.

The report, The Climate Change Crisis, examines the economic changes taking place across multiple sectors and provides insight on the need for economies to adapt to change. Using a number of key charts, the paper also analyses the impact of the growing pool of finances designed to facilitate the transition to a cleaner economy, as well as areas where this funding falls short of expectation.

Here are the top 10 trends that could have implications for ESG investments.

1. Investment in sustainable finance is expected to dip before recovering
Ultra-low interest rates during the pandemic helped create a boom in sustainable financing, but in the face of a rapidly changing global landscape due to the war in Ukraine, high inflation and rising interest rates, investors are pivoting away from ESG funds. While transformation in sustainability reporting standards will not be enough to cause a rebound in 2023, it is expected to lay the foundation for recovery heading into 2024.

2. More money is needed for Africa to meet its climate objectives
Africa has the largest funding gap between public and private investment linked to sustainability, despite exposure to severe climate-related hazards such as prolonged drought and extreme flooding. Additionally, most current funding arrives from development banks in the form of loans rather than grants, adding to the continents economic burden. Without further external funding, Africa is set to fall short of its climate goals.

Source: EUI, The Climate Change Crisis, 2023

3. China’s coal consumption is expected to peak in 2026
Under pressure to decarbonise the country’s energy and emission-intensive industries, China is rapidly expanding its solar power output. The EIU is predicting that coal consumption in China will peak in 2026 before steadily declining, a trend that could act as an indicator of larger global changes in the long term.

4. Uncertainty caused by the energy crisis could impede Europe’s energy transition
Several European countries have increased their use of coal to generate electricity in the wake of the energy crisis, signalling that energy security is being prioritised over energy transition, at least in the short term. While the EU has reduced the permitting process for renewable energy plants to six months, stricter emissions targets may be set in the long term.

5. Deforestation in Brazil is expected to slow down
Under Jair Bolsonaro, deforestation had become the main source of CO2 emissions in Brazil. This is expected to change under the tenure of the country’s new president, Lula, who is due to enact policy which should help to reduce illegal deforestation. This should attract significant international support.

6. Wind energy expansion will fall short of the 2050 target
Despite rapid expansion, the share of wind power in total electricity generation is due to reach just half of the level required to reach net-zero emissions by 2050 under the expected policy environment.

7. The UAE is expected to channel oil money into renewable energy
While investment in the UAE is consolidating its position as one of the world’s largest hydrocarbon producers, its government is aiming to channel some of this additional wealth into ensuring it hits its target of net-zero emissions by 2050. Investments in solar energy at home, and other renewable energy sources abroad, are spearheading the drive to revamp the country’s image, with COP28 set to take place in Dubai later in the year.

8. CO2 emissions for e-fuels are expected to be higher than for electric cars
The use of e-fuels as an alternative to fully electric vehicles is a point of contention among automakers, with some German companies lobbying for them to be exempt from the EU’s 2035 ban on the sale of new fossil-fuel cars. According to the EIU, producing more power from renewables can help facilitate a reduction in emissions from electric vehicles and e-fuels.

Source: EIU, The Climate Change Crisis, 2023

9. Lack of rainfall is leading to a spike in food prices
Severe and repeated droughts in Africa are hitting cereal production, elevating food prices on the continent. Government attempts to ease cost-of-living pressures through subsidies are stretching budgets to their limits, and accelerating climate change presents another major downside risk. Additionally, in Europe, consistent below-average rainfall is expected to cause further issues for the agriculture sector, which has already been hit by increased labour and energy costs. Lower crop yields in 2023 could push food prices higher and add to inflationary pressure.

10. Fossil fuel to remain a significant share of total global energy consumption
The EUI are forecasting the share of fossil fuels in total global energy consumption to drop from 81% to 78% between 2022 and 2032. Most of this reduction is expected to be driven by the electricity sector, which will be quicker to adopt lower-emission sources for power generation, but other sectors require a quicker transition to clean transportation and alternatives for industrial uses. A mix of incentives and strict regulation will need to be adopted to accelerate the transition in these areas.

A part of the Mark Allen Group.