Bank of Singapore (BOS) foresees the rise of “climate pragmatism” in the next five years — a “get-real phase” where the climate agenda comes to the fore for the world’s governments.
The disparity between countries’ climate plans will become more pronounced, according to BOS, owing to the uneven nature of transition pathways, government finances and geopolitical friction.
“We expect energy transition pathways to be asynchronous, depending on political will, availability of public and private funding [and] global policy alignment,” reads BOS’s 2024 Supertrends: World In Transition report, released at the private bank’s inaugural CIO Summit on July 17.
In the lead up to the US Presidential election in November, BOS notes “rising anxiety” that the climate agenda has intertwined with party politics. President Joe Biden’s 2022 Inflation Reduction Act (IRA), for one, has been a “key limb” of his administration’s green policy agenda, says BOS.
Biden also supported the Green Climate Fund (GCF) with a US$1 billion ($1.34 billion) contribution in April 2023. He has also led coalitions, such as the Forest and Climate Leaders’ Partnership (FCLP), which was launched in November 2022.
On the other hand, the US exited the 2015 Paris Climate Agreement under Trump’s administration, and “over 100” environmental rules were rolled back from 2016 to 2020, says BOS. “These rollbacks were estimated to contribute a third of US 2019 greenhouse gas emissions to the atmosphere by 2035.”
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Hence, investors are focused on the impact of a potential Trump presidency on the IRA. A potential Trump administration may also have varying impact depending on whether the Republican party can gain control of the Senate and maintain a majority in the House of Representatives.
The green agenda also pertains to “strategic sectors crucial to the future”, says BOS, such as electric vehicles (EVs).
In May, Biden announced tariff increases across strategic sectors, such as EVs, batteries, critical minerals, solar cells and semiconductors. This was followed by the EU imposing additional tariffs on China EV markets, which could reach 48%.
See also: A US$12 bil climate fund is readying a rare bond issuance
BOS notes that about 20% of EVs sold in the EU are made in China. Based on International Energy Agency (IEA) data, China contributed to 76.4% of global lithium-ion battery manufacturing capacity in 2022, compared to the US’s 7%. “Given rising risks of retaliation from China, the pace of the global energy transition may be at stake,” says BOS.
The momentum of policy shifts may open the door for the oil and gas industry to be seen as part of decarbonisation efforts, says BOS. The private bank says it continues to favour companies that “demonstrate growth of a profitable transition business” alongside a “resilent oil and gas business”.
These firms could leverage technology, such as carbon capture, utilisation and storage (CCUS), and their expertise in managing complex energy systems, says Jean Chia, BOS’s global chief investment officer.
Chia believes the fossil fuel and oil and gas industries have been “unnecessarily accused of being the culprit” of climate change. “We think that, in fact, they are the opportunities.”
According to Chia, these players can use the “hydrocarbon resources that they’re enjoying right now” to invest in emission-reducing tech. “We think that there’s still an opportunity but we have to be very selective [within] the industry.”
‘Stay the course’ on sustainable investing
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That said, sustainable investing remains a structural theme as there remains a “significant funding gap” for the climate transition, says BOS. The United Nations’ Conference on Trade and Development estimates a shortfall of around US$4 trillion each year.
BOS favours “established, profitable companies” with exposure to clean energy and EVs; “enablers of the transition”, such as companies focused on energy efficiency and smart grid infrastructure; and firms producing metals and minerals required for the energy transition.
Photo: Bank of Singapore
