Read this article to understand:
- How global megatrends are reshaping the investment landscape
- The investable opportunities related to climate change, natural resource scarcity and social change
- How the megatrends connect
Investors hoping to successfully navigate the challenges of the coming years will have to pay close attention to megatrends – the seismic and interconnected changes occurring across economies and societies.
The megatrends encompass major global themes, from technological progress to shifting geopolitical power dynamics. But the most transformational megatrends include those relating to sustainability: the climate crisis, resource scarcity and demographic and social changes, such as rising inequality.
Driven by a mixture of regulation, technology, consumer behaviour and environmental conditions, sustainability megatrends affect every company in every sector. Firms that can transition their business models in line with these forces, or offer innovative solutions amid the disruption, should be well-positioned; those that cannot risk obsolescence, if not oblivion. In this article, we explore the risks and opportunities for investors.
Climate change
Start with climate change. Without decisive action, the world looks likely to miss the Paris Agreement target of limiting temperature increases to well below two degrees Celsius above pre-industrial levels (and ideally 1.5 degrees). The physical impacts of climate change – from floods to wildfires and searing heatwaves – are already affecting companies across the world and will only become more severe.1
The physical impacts of climate change are already affecting companies across the world
But climate change will have much wider implications. New regulation is damaging the revenues of carbon-intensive businesses. Improvements in technology and increasing investor focus on environmental, social and governance (ESG) factors are influencing the corporate landscape in myriad ways.
Climate mitigation
Climate mitigation is the effort to reduce or eliminate greenhouse-gas emissions. The key driver here is policy: governments are likely to expand existing carbon-pricing programmes and introduce other regulatory measures to meet climate targets.
Figure 1: Scenarios for climate policy, emissions and temperatures
CO2 emissions by scenario
How carbon prices may develop under different climate scenarios
Note: Full explanation of these scenarios is provided in the references, below.
Source: Network for Greening the Financial System, September 20222
Revenue streams among carbon-intensive businesses can be wiped out at the stroke of a legislator’s pen. Restrictions on the most polluting activities are already being enacted, threatening industries such as air travel and aviation freight.3
As well as wielding the stick against laggards, politicians are increasingly offering carrots to companies leading the way on climate mitigation. Take the US government’s Inflation Reduction Act, an ambitious package including $370 billion in subsidies for green energy. Among the beneficiaries will be specialists in solar and wind power, but also providers of parts and services across infrastructure supply chains.4
A mixture of fiscal sweeteners, falling costs and evolving consumer preferences is boosting the fortunes of several sectors, including electric vehicles. But the effects of these developments are radiating far beyond “green” sectors most obviously aligned to the climate transition. Take mining companies, which are seeing surging demand for the metals required for the technologies that enable electrification, such as copper and lithium.
Climate adaptation
Even under the most ambitious mitigation scenarios, the negative effects of climate change will become more pronounced over the coming years, especially in the Global South. Adaptation is imperative.
Despite this, only a fraction of the damage caused by storms, floods and wildfires is currently insured (see Figure 2). The increased likelihood of extreme weather events will raise the level of risk in insurance contracts and allow some insurance and reinsurance companies to benefit from higher pricing.
The increasing frequency of heatwaves and droughts means water security has become another crucial investment theme
The increasing frequency of heatwaves and droughts means water security has become another crucial investment theme. As climate change contributes to greater water scarcity, water utilities and companies working on desalination or water re-use technologies could be well positioned.
While droughts hit in some areas, others will be inundated as sea levels rise and flooding events become more frequent. New building methods and infrastructure are needed to protect low-lying towns and cities. Design and engineering companies with expertise in adaptation, along with firms developing resilient and sustainable building materials, will be able to offer solutions.
The world also needs to adjust in other, more surprising ways. For instance, evidence suggests warming temperatures may prolong breeding seasons for certain pest species, damaging crops but boosting growth in the $22 billion global pest-control market.5
Figure 2: Total climate-related damages and those covered by insurance, 2000-2022
Source: Environmental Research, June 28, 20226
Investable themes related to climate change
Climate mitigation
- Decarbonisation of transport:
- Opportunities: EVs, batteries, fuel cells, rail, traffic software, electrification of flight
- Decarbonisation of energy:
- Opportunities: Electricity infrastructure and value chains, nuclear, hydrogen, mining for rare earths
- Improvements in efficiency across industry and the built environment:
- Opportunities: Industrial ICT, energy management in buildings
Climate adaptation
- Need for greater water security
- Opportunities: Utilities, desalination, water re-use
- Transition to climate-friendly agriculture
- Opportunities: Biotech, chemicals to improve yields
- Rising sea levels
- Opportunities: Aquaculture, sea defences, infrastructure construction
- Rising temperatures
- Opportunities: Treatments for water-related diseases and illnesses related to warmer weather; pest control as rising temperatures prolong breeding seasons
- Increased frequency of extreme weather events
- Opportunities: Insurance, reinsurance, microinsurance
Resource scarcity
While the threats of climate change are now relatively well understood, less attention has been paid to risks associated with the human destruction of nature.
Since 1970, there has been an average fall in global animal populations of 69 per cent, mostly due to human-driven habitat loss, pollution and global warming.7 This has devastated biodiversity: the delicate balance and complex variety of life on Earth. It has also brought serious risks to human civilisation, affecting the availability of the resources on which it depends.
Governments are belatedly moving to protect nature. Major economies have announced a “30-by-30” pledge to safeguard 30 per cent of land and oceans by 2030, along with a promise to increase funding for biodiversity issues. As momentum builds, the World Economic Forum (WEF) estimates the transition to a “nature-positive” economy could generate $10 trillion of business opportunities over the next decade.8
Sustainable land
Many industries share the blame for unsustainable land-use practices, but farming, particularly farming to produce meat, is the principal culprit. Inflicting further damage on nature through intensive farming will limit countries’ ability to produce the food required by growing populations.
Governments are under pressure to increase the food supply while curbing the worst climate and biodiversity impacts of agriculture. New regulation is in the offing: the EU’s “Farm to Fork Strategy” targets reductions in the use of pesticides (by 50 per cent), fertiliser (20 per cent) and agricultural antibiotics (50 per cent) by 2030.9
As these trends play out, companies whose products contribute to sustainable land use should benefit. WEF research suggests precision agriculture methods, which are less damaging to nature, could also improve productivity, boosting large-scale farm yields by 40 per cent over the next two decades.10 Companies such as industrial technology firm Trimble are seeing increasing demand for their products, including GPS sensors that enable tractors to deploy fertiliser more accurately.11
Firms that can demonstrably limit their impact on nature already benefit from government subsidies and are more likely to escape punitive taxes and regulation.12 At the same time, consumers are selecting foods produced without harming the natural world, fuelling demand for plant-based alternatives to meat and dairy, as well as organic produce.
Figure 3: Projected growth in alternative proteins
Note: H = High growth scenario. L = low growth scenario. Remainder are base case scenarios.
Source: FAIRR, October 25, 202213
Sustainable oceans
Greater awareness of damaging land use and extinction of terrestrial species is matched by public uproar at the effects of human activity on the oceans.
Tackling the causes of ocean pollution is another area of focus for politicians, businesses and consumers
Global seafood consumption is expected to be 18 per cent higher in 2030 than in 2018 and tackling the industry’s most damaging methods is a key priority. China, Japan and the EU recently banned certain fishing practices and tighter regulation is driving new innovations, notably in land-based aqauaculture, fish feed – based on insect and algal sources rather than other fish – and vaccines for diseases among farmed seafood species.
Tackling the causes of ocean pollution is another area of focus for politicians, businesses and consumers, with plastics the principal target. Retailers and manufacturers that reduce the number of single-use plastics in their products by shifting to other materials should avoid regulatory penalties and attract new customers.
Figure 4: Plastics pollution (million metric tonnes)
Source: Aviva Investors, August 202214
The circular economy
These developments are driving a related trend – the circular economy. Predicated on the “three Rs” – the need to reduce, re-use and recycle materials to mitigate environmental damage – it is putting inefficient companies under the spotlight and creating opportunities for leaner disruptors.
The “three Rs” are putting inefficient companies under the spotlight and creating opportunities for leaner disruptors
Take the textiles industry, which faces pressure to change amid rising awareness of the wastefulness of “fast fashion”. Switching to a circular economy would not only reduce the industry’s emissions and impacts on nature – notably its vast water usage – but also bring down companies’ costs and reduce their exposure to price volatility.
Reducing or re-using materials is preferable from a natural capital standpoint, but more recycling will also be required if a circular economy is to become the norm across industries. Recycling facilities are due to see greater demand and alternatives to plastic, such as aluminium, may become the preferred option among businesses and consumers.15
Investable themes related to resource scarcity
Sustainable land
- Growth of nature-friendly and precision agriculture:
- Opportunities: Drone technology, geospatial data solutions, vertical farming, feed additives to reduce methane emissions from livestock, hazardous waste management
- Growth in demand for sustainability information:
- Opportunities: Providers of sustainability traceability, monitoring and verification
- Growth in demand for alternative proteins
- Opportunities: Plant-based proteins and lab-grown meat
Sustainable oceans
- Growth in demand for sustainable seafood
- Opportunities: Mariculture, sustainable fish feed, fish health
- Increased regulatory and consumer pressure to reduce water pollution
- Opportunities: Water treatment, smart sensors to reduce water leakage
- Increased regulatory and consumer pressure to reduce plastic pollution
- Opportunities: Recycling/biodegradable materials
Circular economy
- Increased regulatory and consumer pressure to re-use materials
- Opportunities: Sustainable packaging, waste treatment, durable consumer products, eco-design, aluminium
How megatrends connect
Megatrends are not linear; they intersect in various ways. For example, global warming contributes to the erosion of natural capital and threatens the social wellbeing of communities least responsible for the problem, even as social objectives in advanced economies are achieved at the cost of transgressing environmental boundaries (see Figure 6).
Investors must be careful to ensure they are not aligning their portfolios with one megatrend while ignoring others
Trade-offs abound and investors must be careful to ensure they are not aligning their portfolios with one megatrend while ignoring others. By keeping track of the connections between the megatrends, investors can tap into a range of opportunities and identify companies that deliver solutions across climate, nature and society.
Megatrends could play out in unexpected ways or catalyse new, as-yet-unforeseen shifts. But a growing body of evidence points to the material salience of climate change, resource scarcity and demographic and social dynamics. Investors who can grasp the implications should be best placed to navigate the challenges and opportunities today and create resilient portfolios for tomorrow.
Figure 6: Developed economies (and some fast-growing emerging economies) have achieved social goals by transgressing ecological boundaries
Malawi
China
US
LS = Life Satisfaction; IN = Income Poverty; DQ = Democratic Quality; LE = Healthy life Expectancy; EN = Access to Energy; EQ = Equality; NU = Nutrition; ED = Education; EM = Employment; SA = Sanitation; SS = Social support.
Note: Green wedges show resource use relative to a biophysical boundary associated with sustainability. Red wedges show shortfalls below the social threshold (in the middle of each circle) or overshoots beyond the biophysical boundary (on the outer edge).
Source: Nature Sustainability, 201863