The Latest IPCC report: How it Will Impact Climate ETFs

The Intergovernmental Panel on Climate Change (IPCC) released a Synthesis Report in March 2023, summarizing five years of reports and concluding our current climate situation as well as what urgently remains to be done. The implications of the Sixth Assessment Report – AR6 Synthesis Report: Climate Change 2023 – offer pointers to the investing community on the areas most critical for financing and the key considerations that are shaping investing for the climate.

This article discusses three highlights that investors can take away from the report, in anticipation of upcoming climate investing trends and to maximize the impact of capital mobilization for global climate goals.

We have a very narrow window of opportunity to limit warming to 1.5C

Specifically, within that window, the global community must cut at least 43% of emissions from 2019 levels by 2030. Public and private capital has only seven years from now to mobilize financial flows on a scale significant enough to rapidly accelerate this transition. Over the next several years, we will see what should be the greatest growth potential for climate investments as momentum builds for global climate goals. There is a greater likelihood that we are looking at a 2C threshold, given the extremely tight timeline and the fact that current financial flows lag behind what is necessary to achieve this limit.

There is still a gap between climate mitigation financing and fossil fuel financing

Current levels of finance for climate mitigation measures (as opposed to climate adaptation) are not enough to limit global warming to 2C and below, and this is true of all economic sectors and regions. Compound this with the fact that finance for fossil fuels is still greater than climate finance and the call to action is quite clear: the most immediate solution for financial market players is to drastically reduce fossil fuel financing, with the goal to eliminate fossil fuels completely, while redirecting capital to support the green energy transition as the world weans itself off its carbon-based appetite. While this is ongoing, continued financing of fossil fuel activity should require the use of carbon capture and storage as funding criteria.

One of the conclusions of AR6 is that the benefits of climate mitigation, in the long run, exceed the cost of footing this bill. Investors should focus on climate mitigation rather than adaptation if they want to reap the biggest rewards. Financing for nature-based solutions, for example, supports the direct removal of greenhouse gas emissions from the atmosphere while potentially incorporating a social element such as community-based forest economy. By contrast, climate adaptation financing allows emissions to run their course, focusing instead on living through the damage, such as climate-adapted infrastructure and social safety programs. Climate adaptation tends to be the easier option, as we saw at COP27 where the outcome of days of climate negotiations was the establishment of a Loss and Damage fund for climate-vulnerable countries, and no wins for climate mitigation. If we want to limit warming, portfolio designers should focus on climate mitigation financing, looking at a mix of core trends and a select few thematic interests that can appeal to personal values.

The energy system must reduce dependency on fossil fuels

ETF categories that play a key role in the energy transition will continue in popularity. Battery Value-Chain is currently one of the fast-growing thematic categories, thanks to growing demand for batteries that power electric vehicles and facilitate renewable energy storage. Lithium-ion batteries are enabling a decarbonization of the transportation sector, a major source of global emissions.

Other climate- and energy-related ETFs are also trending. Net Zero 2050, Carbon Transition, Alternative Energy, Hydrogen Economy, Solar Energy, and Wind Energy all constitute separate ETF categories, demonstrating plenty of diversity in choice and opportunities in the climate investing space. Some of these ETF categories like Net Zero 2050 and Alternative Energy are megatrends that are not about to go anywhere due to sustained governmental and private sector drive, thus offering the potential for stable returns for a climate portfolio. And it may not be a surprise to see more novel and speculative ETF categories emerge that capture the opportunities in carbon sink management, nature-based solutions, and ocean health, among others, as holistic solutions for climate action.

For investors looking to capture the growth potential of the energy transition, Trackinsight’s ETF screener can help to identify, compare and select funds within specific thematic categories. Alternatively, Amundi offers a comprehensive range of ETFs aligned to key sustainable development goals (SDGs) including Climate Action (SDG #13) and Affordable and Clean Energy (SDG #7).    

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.