THIS MATERIAL IS A MARKETING COMMUNICATION.
How Serious are the Threats from Climate Change?
Climate change is a dominant issue among policymakers, scientists and investors. It is re-shaping the future of the energy industry through financing, regulation, technological innovation and investor activism, with a seismic shift in the global capital-allocation landscape.
There has been a particular focus on the persistently high temperatures and the frequency of natural disasters across the globe, particularly in the past decade. While there is still debate on whether we can attribute an increase in the number and severity of natural catastrophes directly to climate change, there is a general acceptance that the frequency of at least some of these events, such as extreme heatwaves, flooding and wildfires, correlate with global warming.
Various academic studies on the effect of climate change have tried to quantify the impact it has on world economies. This research has utilized multiple approaches, with a recent report suggesting that changing temperatures could reduce global GDP by 3–7% over the longer-term (with most of these forecasts up to Year 2100).
Temperature Change and Sea Levels
Earlier research pointed toward variations of the impact of climate change on different countries, with developed economies seemingly less exposed to the effects of global warming, while emerging nations appeared more vulnerable. However, recent studies have found that this is no longer the case. The new analysis is based on current assessments of either temperature change or a rise in sea levels, which itself could be understating the effect our changing climate has on economies because estimates have risen over time. A recent United Nation climate report highlighted that escalations in global temperatures mean that extreme and rare oceanic events could become more commonplace by year 2100, with low lying cities and coastal areas particularly at risk.
A Rise in Incidents
Natural-loss-related events are typically classifi ed into four categories:
Our research data suggests that the number of natural-loss incidents is rising by around 5%–6% per annum, compared with the ten-year historical average of 2%–4%. Weather-related events are an essential driver: in 2018, these accounted for approximately 90% of both the total number of natural hazards and the financial losses from such incidents. Moreover, weather-related damage has reached roughly USD $2.8 trillion in the past decade, which is more than 30% above the cumulative losses seen in the previous ten years.
CO2 emissions are at their highest levels in human history, reaching 53.5 gigatons (Gt) in 2017. This increase is being driven by several man-made factors, broader industrialization and the burning of fossil fuels, which have resulted in steadily rising global temperatures. Based on average readings over the period 1951 to 1980, 18 out of the 19 warmest years on record have occurred since 2001, with 2018’s temperature 0.8°C (1.44° F) above average.
Paris Agreement Goals
An additional 1.5 billion people will inhabit the planet by 2040 – some 20% more than in 2018 – nearly a third higher than today. This will bring unparalleled disruption. Studies suggest we could see the mass migration of up to 200 million people globally over the first half of this century, an additional one billion people could be at risk of infectious diseases, and 20–30% of species may face extinction.
The Paris Agreement’s long-term temperature goal is to keep the increase in average global temperatures to within 2°C above pre-industrial levels; and pursue efforts to limit the rise to 1.5°C, recognizing that this would substantially reduce the risks and impact of climate change. Global greenhouse gas emissions need to be at or around net-zero by year 2050 to halt climate change and achieve the goals outlined in the Paris Agreement. This means we must move from 53.5 gigatone (Gt) of CO2 to zero by balancing the amount released into the atmosphere with that taken out. It is more realistic than a gross-zero target but still extremely ambitious. Clear opportunities to reduce emissions do exist, such as a rise in renewable power generation, the transition to electric vehicles, carbon capture and storage (carbon sequestration), hydrogen, and the development of biofuels.
Morgan Stanley estimates that global power generation capacity will expand by 3,900 gigawatts (GW) between 2017 and 2030, with almost all of this expected to come from renewable sources. The carbon intensity of power generation should fall from 0.53 megatons (Mt) per terawatt hour (TWh) in 2017 to 0.35Mt per TWh in 2030. Total global carbon emissions from power production are expected to fall by nearly 3Gt over the next decade, with the mix shift enough to offset the growth in overall demand for electricity.
Decarbonizing transport, which is responsible for 24% of global CO2 emissions (29% in the US), is critical on the path to net-zero emissions. Furthermore, batteries and fuel-cells also play a crucial role in the decarbonization of power generation (responsible for another 42% of CO2 emissions). Although electric vehicles – both battery electric vehicles (BEVs) and fuel cell electric vehicles (FCEVs) – generate zero tailpipe emissions, there are still emissions from well to wheel, which take into account the emissions from the power source. Battery manufacturing and the battery supply chain are now in focus, so original equipment manufacturers need to pay attention to where and how the battery (and components) are made.
Take the UK, for example, where the annual driving range of 12,000 km consumed 1.7 megawatt hours (MWh) of electricity in 2018 (including over 55% that came from clean energy), which resulted in 380kg of CO2 emissions. This compares with 1.8 tons of CO2 per year for traditional vehicles when using the 119 gram/km emission target for 2017 in Europe and another 7.5 gram/km from oil extraction, refining and delivery. With improvements in the efficiency of the battery supply chain and an incremental power mix that is considerably greener than the existing combination, lifecycle CO2 emissions from electric vehicles will continue to fall. We estimate that there will be an 8–56% reduction in CO2 emissions in battery pack production, making BEVs better than traditional vehicles through the lifecycle in all regions.
Solving the Puzzle
Two complementary paths will enable the world to reach net-zero emissions: conservation and sequestration. Sequestration is critical to solving the climate change puzzle and achieving net-zero carbon emissions. The conservation cost curve has a broader scope for low-cost decarbonization opportunities and a smaller range of uncertainty but steepens exponentially beyond the mid-point. The sequestration cost curve, on the other hand, offers fewer low-cost solutions and is more uncertain, but provides tremendous long-term potential if an economic solution for direct-air carbon capture is developed.
While it is generally accepted that carbon sequestration is vital to achieving net-zero carbon emissions, the rate of carbon sequestration technology deployment remains, to-date, sub-scale. Carbon sequestration efforts can be classified into two main categories; natural sinks (natural carbon reservoirs that can remove carbon dioxide by, for example, reforestation, afforestation and agroforestry), carbon capture, utilisation, and storage technologies (CCUS).
Although carbon sequestration has seen a revival in recent years, it has not yet reached large-scale adoption and the economies of scale that traditionally lead to a breakthrough in cost competitiveness, especially when compared with other CO2-reducing technologies, such as renewables. Despite the vital role sequestration plays in any scenario of net carbon neutrality, investment in carbon capture and storage (CCS) facilities over the past decade has been less than 1% of funds allocated to renewable power. Although we see a definite upswing in CCS pilot plants after this ‘lost decade’, we do not know where costs could settle if CCS attracts the similar economies of scale as solar and wind. Most of the cost of carbon capture and storage comes from the process of sequestration and is inversely related to the CO2 concentration in the air stream from which CO2 is sequestered. The cost curve of CCS, therefore, follows the availability of CO2 streams from industrial processes and reaches its highest cost with direct-air carbon capture and storage (DACCS), where the economics are highly uncertain (most estimates are between USD 40 to USD 400 per ton), and only small pilot plants are currently operating. The importance of DACCS lies in its potential to be almost infinitely scalable and standardized, therefore setting the price of carbon in a net-zero emission scenario.
Hydrogen will Play a Key Role
Clean hydrogen is not a commercial technology that contributes to decarbonization. However, it offers a material opportunity to reduce carbon emissions in industrial processes, mobility, and utilities. The Hydrogen Council, an independent industry association, was launched in 2017 by a group of energy, transport and industry companies (including Air Liquide, Alstom, Engie, Daimler, GM, Honda, Shell, Statoil, and Linde) to help hydrogen facilitate the energy transition. The Council’s vision is for hydrogen to account for 18% of final energy demand by 2050, which would imply a tenfold increase in demand (to 550 million tons per year) and the creation of an industry with $2.5 trillion of global revenue (from hydrogen and related equipment).
Biofuels currently represent around 3% of global transport fuel demand and provide a low carbon solution for the continued use of the combustion engine. They are made from biomass materials, most commonly in the form of liquid fuels, such as ethanol and biodiesel, and are usually blended with petroleum fuels (gasoline, diesel and jet fuel), but are sometimes used on their own. Biofuels are generally considered both renewable (they depend on renewable feedstock sources) and sustainable (they burn cleaner than fossil fuels). Currently, they are the only viable replacement for petroleum transportation fuels as they can be utilized within legacy internal combustion engines. Biofuels are also technically feasible for use in the aviation and marine markets, but the availability of suitable fuels is still low.
This document contains the opinions of Mirae Asset Global Investments (HK) Limited (“MAGIHK”) and is intended for your use only.
It is not a solicitation, offer or recommendation to buy or sell any security or other financial instrument and shall not constitute any form of regulated financial advice, legal, tax or other regulated service. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. MAGIHK makes no representation as to their accuracy or completeness and therefore do not accept any liability for a loss arising from the use of this document.
All Investments contain risks. Forecasts, past information and estimates have certain inherent limitations. Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these opinions are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.
Past performance is not a guarantee or a reliable indicator of future results. Before making any investment decision, investors should read the applicable fund prospectus for details and the risk factors. Investors should ensure they fully understand the risks associated with the applicable investment and should also consider their own investment objective and risk tolerance level. Investors are advised to seek independent professional advice if in doubt.
This document is issued by MAGIHK (Licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance). This document has not been reviewed by the Securities and Futures Commission and no part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission of MAGI HK.
Staying Ahead with Mirae Asset’s Latest Insights
Disclaimer & Information for Investors
No distribution, solicitation or advice: This document is provided for information and illustrative purposes and is intended for your use only. It is not a solicitation, offer or recommendation to buy or sell any security or other financial instrument. The information contained in this document has been provided as a general market commentary only and does not constitute any form of regulated financial advice, legal, tax or other regulated service.
The views and information discussed or referred in this document are as of the date of publication. Certain of the statements contained in this document are statements of future expectations and other forward-looking statements. Views, opinions and estimates may change without notice and are based on a number of assumptions which may or may not eventuate or prove to be accurate. Actual results, performance or events may differ materially from those in such statements. In addition, the opinions expressed may differ from those of other Mirae Asset Global Investments’ investment professionals.
Investment involves risk: Past performance is not indicative of future performance. It cannot be guaranteed that the performance of the Fund will generate a return and there may be circumstances where no return is generated or the amount invested is lost. It may not be suitable for persons unfamiliar with the underlying securities or who are unwilling or unable to bear the risk of loss and ownership of such investment. Before making any investment decision, investors should read the Prospectus for details and the risk factors. Investors should ensure they fully understand the risks associated with the Fund and should also consider their own investment objective and risk tolerance level. Investors are advised to seek independent professional advice before making any investment.
Sources: Information and opinions presented in this document have been obtained or derived from sources which in the opinion of Mirae Asset Global Investments (“MAGI”) are reliable, but we make no representation as to their accuracy or completeness. We accept no liability for a loss arising from the use of this document.
Products, services and information may not be available in your jurisdiction and may be offered by affiliates, subsidiaries and/or distributors of MAGI as stipulated by local laws and regulations. Please consult with your professional adviser for further information on the availability of products and services within your jurisdiction. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.
Information for EU investors pursuant to Regulation (EU) 2019/1156: This document is a marketing communication and is intended for Professional Investors only. A Prospectus is available for the Mirae Asset Global Discovery Fund (the “Company”) a société d'investissement à capital variable (SICAV) domiciled in Luxembourg structured as an umbrella with a number of sub-funds. Key Investor Information Documents (“KIIDs”) are available for each share class of each of the sub-funds of the Company.
The Company’s Prospectus and the KIIDs can be obtained from www.am.miraeasset.eu/fund-literature . The Prospectus is available in English, French, German, and Danish, while the KIIDs are available in one of the official languages of each of the EU Member States into which each sub-fund has been notified for marketing under the Directive 2009/65/EC (the “UCITS Directive”). Please refer to the Prospectus and the KIID before making any final investment decisions.
A summary of investor rights is available in English from www.am.miraeasset.eu/investor-rights-summary/.
The sub-funds of the Company are currently notified for marketing into a number of EU Member States under the UCITS Directive. FundRock Management Company can terminate such notifications for any share class and/or sub-fund of the Company at any time using the process contained in Article 93a of the UCITS Directive.
Hong Kong: It is intended is for Hong Kong investors. Before making any investment decision to invest in the Fund, Investors should read the Fund’s Prospectus and the information for Hong Kong investors (of applicable) of the Fund for details and the risk factors. The individual and Mirae Asset Global Investments (Hong Kong) Limited may hold the individual securities mentioned. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.
Singapore: It is not intended for general public distribution. The investment is designed for Institutional investors and/or Accredited Investors as defined under the Securities and Futures Act of Singapore. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Monetary Authority of Singapore. Please consult with your professional adviser for further information on the availability of products and services within your jurisdiction.
Australia: The information contained in this document is provided by Mirae Asset Global Investments (HK) Limited (“MAGIHK”), which is exempted from the requirement to hold an Australian financial services license under the Corporations Act 2001 (Cth) (Corporations Act) pursuant to ASIC Class Order 03/1103 (Class Order) in respect of the financial services it provides to wholesale clients (as defined in the Corporations Act) in Australia. MAGIHK is regulated by the Securities and Futures Commission of Hong Kong under Hong Kong laws, which differ from Australian laws. Pursuant to the Class Order, this document and any information regarding MAGIHK and its products is strictly provided to and intended for Australian wholesale clients only. The contents of this document is prepared by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Australian Investments & Securities Commission.
Swiss investors: This document is intended for Professional Investors only. This is an advertising document. The Swiss Representative is 1741 Fund Solutions AG, Burggraben 16, CH-9000 St. Gallen. The Swiss Paying Agent is Tellco AG, Bahnhofstrasse 4, CH-6431 Schwyz. The Prospectus and the Supplements of the Funds, the KIIDs, the Memorandum and Articles of Association as well as the annual and interim reports of the Company are available free of charge from the Swiss Representative.
UK investors: This document is intended for Professional Investors only. The Company is a Luxembourg registered UCITS, recognised in the UK under section 264 of the Financial Services and Markets Act 2000. Compensation from the UK Financial Services Compensation Scheme will not be available in respect of the Fund. The taxation position affecting UK investors is outlined in the Prospectus. This document has been approved for issue in the United Kingdom by Mirae Asset Global Investments (UK) Ltd, a company incorporated in England & Wales with registered number 06044802, and having its registered office at 4th Floor, 4-6 Royal Exchange Buildings, London EC3V 3NL, United Kingdom. Mirae Asset Global Investments (UK) Ltd. is authorised and regulated by the Financial Conduct Authority with firm reference number 467535.
Copyright 2023. All rights reserved. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of Mirae Asset Global Investments (Hong Kong) Limited.