In today’s extremely tough and uncertain economic environment, the battle against climate change is getting fewer inches of column space. Inevitably, the most immediate crises dominate headlines. However, this economic environment is providing momentum for an important trend within the climate change investment space: energy efficiency.
Energy efficiency should deliver returns through the cycle
The scientific evidence for climate change and its impact on the world are beyond reasonable doubt; governments around the world increasingly accept this. But with fiscal discipline the priority, governments are less able to subsidize green initiatives, and companies want investments that offer an immediate return on capital.
Energy efficiency as an investment theme covers a multitude of technologies from lighting to electricity networks to transport. What the business models have in common is that they dominate the cost curve for ways to reduce energy consumption and carbon emissions. And the payback is clear and quick.
McKinsey’s carbon abatement curve (see below) clearly shows the dominance of energy efficiency returns (left-hand side) over the costs of clean energy production (right-hand side). Technologies below the line have a positive payback, or negative overall cost.
Consequently, fearful consumers, cautious companies and cash-strapped governments are driving structural growth in these technologies. What’s more, while fearful markets dislike anything cyclical for investors seeking growth in a defensive environment, energy efficiency industrials, materials and consumer products should deliver good returns through the cycle.