Western European nations are bracing for record-breaking temperatures for the second time in a month, with new highs forecast for Belgium, the Netherlands, the UK, and Germany, where low water levels in the Rhine are affecting cargo transportation. While no single weather event can be linked directly to global climate change, the heatwave may contribute to political pressure on governments and companies to reduce greenhouse gas emissions. The UK's Met Office has said that global warming makes heatwaves 30 times more likely compared to 1750.
Investment in renewable energy has been relatively muted thus far this year, with a global decline of 14% in the first half in US dollar terms, according to Bloomberg New Energy Finance. But we believe the long-term outlook for investments in renewable energy—both equities and green bonds—remains positive.
* Firms with high carbon emissions are facing increasing financial headwinds. The price of European Union carbon permits hit a record high yesterday at EUR29.76, 260% higher than at the start of 2018. Insurance premiums could also rise for coal producers. North American insurer, Chubb, announced on July 1 that it would follow the lead of European insurers, such as Axa and Allianz, and stop offering coverage to utilities that generate more than 30% of their output from coal-fired plants.
* The commercial appeal of renewable energy is increasing. Between 2009 and 2017, prices of solar panels dropped 76% and wind turbines 34%, making them competitive with, or cheaper than, fossil fuels in most major markets.
* Falling costs also explain why the growth of installed capacity for renewables has continued to rise, even though the dollar value of investment in green energy has been falling. Meanwhile, we expect renewable investment in China to pick up in the second half, following a successful renewable power auction this month.
* The range of investment options has been increasing. Issuance of bonds used to finance clean energy projects—green bonds—has reached a record USD 85bn so far this year. Green bonds as an asset class have grown from nonexistent to a USD 600bn market in just over a decade, and issuance of higher yielding green bonds from emerging markets has also been rising. Liquidity has been improving as well. Over half of the emerging markets' green bond issuance last year was benchmark-sized, at USD 500m or more.
We believe clean energy offers potential for long-term investors. For more details, see our long-term themes on renewable energy and energy efficiency. Green bonds, meanwhile, are becoming an established asset class and have so far been offering comparable returns to conventional bonds, while allowing investors to align their portfolios with their ethical values.