GreenGrowth – The green wave of growth

Dr Hans-Jörg Naumer from Allianz Global Investors discusses how change has so far provided the clearest, most indisputable evidence that the environment itself is a scarce commodity and will play the central role in determining the future of mankind. Environmental technology will power the transformation process through digitisation. Things are going to get “smart”.

Smart logistics

If an online retailer fulfils an order in less than 24 hours, that represents logistics at its best. Customers’ ordering behaviour and stock levels will be optimised to ensure maximum efficiency. In a wider context, however, it is also about the flow of traffic. How can traffic jams be avoided, public transport optimised and transport capacity for people and goods better utilised so that the amount of idle capacity is kept to a minimum?

Smart cities

Cities exert an almost magical pull on people. Since 2017, more people have been living in urban centres than outside them. One of the resulting challenges is to manage traffic more intelligently; but there is more to it than that. It is also about supplying energy and goods of all kind.

The concept of the “smart city” does not just mean highly networked cities. It also encompasses the decentralised generation, distribution and consumption of energy within cities themselves, i.e. turning buildings into mini power stations for renewable energy. Ultimately, the aim is for cities to become green zones with food being grown on the roofs of buildings. Who says that everything has to be grown in fields outside the city? Develop and produce things where the demand is. Among other things, this reduces the need for transportation and, consequently, energy consumption.

Smart grids

These smart cities have the potential to become important hubs within smart grids, to supply
electricity for example. As renewable energy contributes more and more to meeting demand
for power, generating energy will also become more decentralised and more difficult to plan.
Wind energy is not necessarily generated when it is needed. The sun may not be shining, even if factories are operating at full steam.

Smart grids refer to power grids that, in addition to the conventional transmission of electricity, also enable the bidirectional feed-in of electricity and (electricity) data communication. This is because decentralised generation, especially of renewable energy, among a growing number of private households and companies will make the targeted management of the energy network increasingly important. In addition, more and more consumers are becoming electricity producers themselves by using solar, wind or geothermal energy systems.

Smart agriculture

Artificial intelligence is also making agriculture “smarter“, more productive and more economical in its use of resources. For example, drones are already being deployed that can fly over large fields. They are able to detect exactly what kind of pest has infested what fields. These infestations can then be combated with pinpoint accuracy, resulting in a 90% reduction in the use of pesticides. Satellite-aided irrigation enables water to be supplied where it is needed. Dry patches are identified from extremely high altitudes. In all of these examples, artificial intelligence is the driving force behind innovation. It is part of a web of basic innovations that will propel the new long wave.

Capital expenditure requirement: enormous

The capital required to finance the transition to a sustainable energy supply alone is enormous. The International Renewable Energy Agency (IRENA) estimates that its Transforming Energy Scenario (TES) will require total investment of 60 trillion US dollars by 2030 (see figure below). IRENA’s TES outlines the steps that will be needed in the development of energy generation and distribution in order to keep global heating below 2°C and close to 1.5°C over the course of this century. This would necessitate an almost complete switch to renewable energies, with simultaneous increases in efficiency. So much for the global transformation of energy generation and supply.

The European Union (EU) has ambitious plans as well. The European Investment Bank (EIB) estimates that it will cost 175 to 270 billion euros a year to achieve three climate and energy targets by 2030 in the EU alone: A 40% decline in CO2 emissions, measured on the basis of their 1990 level; a reduction in energy consumption of one third compared to today’s level in a “business as usual” scenario; a rise in the share of renewable energy sources as a proportion of total energy consumption to at least 32%.18 In September 2020, the EU Commission went even further in adopting its Climate Target Plan. The goal is now to reduce CO2 emissions by 55% by 2030 compared to 1990.

The United Nations expects that the total global investment required to meet the 17 “Sustainable Development Goals” by 2030 will amount to between 5 and 7 trillion US dollars annually.19 This includes both public and private capital investment requirements.

Recently, the European Union has upped the ante yet again in the shape of its recently announced “Green New Deal” to address the economic consequences of the Covid-19 pandemic. It proposes that there should be no further net greenhouse gas emissions in the EU by 2050, that economic growth be decoupled from resource consumption and that there must be a restoration of biodiversity. One trillion euros have been earmarked in the EU budget between now and 2030 to achieve these goals.

Capital required for the transition to IRENA’s “Transforming Energy Scenario”

Finance For Future

These are vast sums of money. Yet it is not beyond the realms of possibility that this level of investment can be achieved. By way of comparison, the 2,372 signatories (as of summer 2019) to the PRI initiative (“Principles for Responsible Investment”) together manage assets to the tune of 83 trillion US dollars. They have all pledged to apply ESG criteria in making investment decisions. The acronym ESG stands for “Environmental”, “Social” and “Governance” and can be regarded as the link between corporate sustainability criteria and investment decision-making.

Meanwhile, ESG is also permeating individual investment styles with a sustainability perspective
and has been integrated into “mainstream” criteria for investment decisions. These days, the question of how much return can be sacrificed to do “good” has long since become a moot point. It appears that, far from impairing performance20, integrating ESG criteria into investment decisions has even been shown to improve it – and can also contribute to reducing risk exposure.

In addition, financing mechanisms are being increasingly adapted to the shift towards an ecologically sustainable economy. An example are the still young but already successful instruments known as “green bonds”, which are issued with the specific aim of financing environmentally-friendly projects.

One of the most recent green bonds issued by the Federal Republic of Germany demonstrates the extent to which the capital markets are receptive to this new product. The German Finance Agency issued its first green bond in September 2020, following in the footsteps of other countries such as Sweden, France, Belgium, Ireland, the Netherlands and Poland. There was enormous interest from investors in the 10-year issue with a total volume of 6.5 billion euros: with bids of over 33 billion euros, it was several times oversubscribed.