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Three things to watch in the race to net zero

Clean energy, electric vehicles and semiconductors may be the keys to a sustainable future.


Our Top Market Takeaways for October 29, 2021.


Market thoughts
Markets weren’t so scary in October

U.S. equity markets headed into Friday at fresh record highs. The S&P 500 (+1.1%), NASDAQ (+2.4%), and Dow Jones (+0.2%) were all up for the week. The busiest week of earnings was something of a mixed bag, as some of the megacap tech companies reported disappointing results stemming from - you guessed it - supply chain issues. Still, the broad index is on track to see earnings per share growth of +36% in Q3, the third best quarter since 2010. But the big story this week was the big moves in rates.

U.S. Treasuries, British gilts, and German bunds all priced in more imminent hikes in benchmark interest rates. Investors in the U.S. saw the yield curve flatten in a big way as the 2s10s curve dropped to its lowest level since August and the 2-year yield moved above 50 bps for the first time in the pandemic era. An announcement from the Bank of Canada seemed to follow one from the Bank of England by signaling an accelerated hiking cycle in response to inflationary pressures. Although the BoC and BoE did not actually hike rates, their tone and that of other central banks seems to have rather quickly shifted to a more hawkish stance. The Fed is up next. Surely, all eyes will be on Powell next week. We expect a taper announcement, but little incremental news about the timing of rate hikes.

Meanwhile, political leaders in Washington continued spending bill negotiations all week. President Biden unveiled a framework for a revised $1.75 trillion tax and spending plan on Thursday. House progressives appeared to largely support the new framework, but it remains unclear if they will support the separate $550 billion infrastructure bill that has already passed in the Senate. Now, the President is off to Scotland for COP26, which investors are watching closely as a catalyst for sustainable investing.  

3 things investors should know about sustainable investing

Still need a Halloween costume? How about a climate scientist? As political, business and scientific leaders all prepare to gather in Glasgow for COP26 (a massive climate summit hosted by the United Nations), many have high expectations for new emissions targets and climate goals.

With the summit top of mind, today’s Top Market Takeaways focuses on the benefits of sustainable investing. Here are three things we think investors should know:

1) The COP26 could be a major near-term catalyst for investment.

Running from October 31 to November 12, COP26 is the fifth conference since the adoption of the Paris Agreement (which, as a reminder, is a legally binding international treaty on climate change). Five years (excluding 2020 due to COVID) after the Paris Agreement, participating countries must now resubmit their goals for reducing emissions, which could trigger additional investment in climate change mitigation. The expectation is that the countries submit ambitious enough goals to limit global warming to around 1.5–2.0°C above pre–Industrial Revolution levels.

Cue clean energy. The good news: Technological advances in clean energy and cleaner emissions are allowing more and more industries and countries to work toward environmental goals. The cost of many clean energy sources used to be prohibitively high to adopt on a mass scale. That is all changing. Over the past 10 years, solar energy costs have declined 80%, onshore wind costs have declined 45%, and energy storage costs have declined by 88%. Given the technological innovation in the space, it is expected to be more cost-effective to build new energy capacity with solar PV (photovoltaic, or solar panels) or wind turbines than to continue using existing coal plants.

2) New industries and technological advances will enable the transition to net zero.

There are many ways the world could move toward a “net zero” future (where carbon sinks fully offset carbon emissions), including reducing dependency on fossil fuels, increasing use of carbon capture technologies and integrating cleaner energy sources.

First, the world needs to evaluate how we supply electricity to the energy grid. All industries that rely on fossil fuels (transport, buildings, heating, etc.) will need greener sources of power in order to reduce their emissions. The IEA estimates that almost 90% of global electricity generation in 2050 must come from renewable sources (up from 29% in 2020), and in the next eight years alone, wind and solar capacity will have to increase 4x to keep us on track to reach net zero. Governments are already pushing for adoption, largely thanks to falling costs that make clean energy sources economically viable.

Another way to reduce emissions is to electrify heavily polluting industries and make them more energy-efficient. Take the global transport sector, which accounts for almost 20% of annual greenhouse gas emissions. To reach net zero, emissions in this sector will need to decline…but mobility is expected to increase in the years ahead. As such, electric vehicles have a key role to play. To reach net zero by 2050, it is estimated that sales of electric vehicles need to increase from currently around 5% of new global sales to over 60% by 2030.

We will also need to develop carbon removal technologies to reach net zero, particularly in industries that will be more difficult to fully de-carbonize. There are two different carbon removal technologies. However, to date there are only ~20 commercial CCS (carbon capture and storage) operations worldwide. CCS projects are highly complex and require significant upfront investments, as well as large ongoing operational expenses. Nevertheless, the opportunity set is huge and as the technology matures, costs should come down and investment opportunities should become easier to access.

3) Semiconductors…HUH, what are they good for? Absolutely everything!

Semiconductors are just about ubiquitous when it comes to clean energy. Semiconductors play key roles in solar panels, wind turbines and other types of renewable energy, thanks to their abilities to conduct electricity while simultaneously acting as insulators to increase efficiency and prevent unwanted flows of electricity.

Semiconductors not only enable the generation of electricity through renewable energy sources, but they are also playing an increasingly large role in next-generation vehicles. Many new passenger vehicles today come equipped with back-up cameras, navigation screens and other relatively recent technology. All these new features have pushed up the amount of semiconductor content in vehicles. In fact, a Tesla has 4x the semiconductor content of a traditional automobile. 

Next-generation vehicles will not only be electric, but will also become more and more autonomous. Fully autonomous or semi-autonomous vehicles will require much larger—and more sophisticated—semiconductor content than traditional cars thanks to the army of cameras and sensors needed for the car to drive itself. The ADAS (advanced driver-assistance systems) features in a car will require more advanced and expensive semiconductors.

Semiconductors are set to play a key role in the future of clean energy and the overall shift toward a net zero economy. As many investors turn their focus toward COP26 beginning on Sunday, keep in mind the essential tools such as semiconductors that will be needed to achieve almost any environmental goal put forth by policymakers.

While investors have spent October debating the short-term risks of supply chain disruptions, inflation and rising short-term rates, the month will close with a milestone in the long-term transition toward a net zero future. We don’t think investors should ignore this trend.



All market and economic data as of October 2021 and sourced from Bloomberg and FactSet unless otherwise stated.

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