17 Feb 2022 5 min read

Climate change: the disruptor

By John Daly

Could innovation help the world avoid catastrophic climate change?


The world has already warmed by circa 1.1 degrees above pre-industrial levels, and by circa 1.6 degrees over land (warming over land has occurred at a faster rate than the global mean), according to the IPPC. The climate clock is fast approaching midnight.

Part of the problem is how we think. Generally, people think of climate change as gradual and linear – someone else’s problem, decades away. It’s difficult for people to think about future events in a non-linear way; an innate part of our make-up is that we extrapolate past events in a linear fashion.

However, the effect of climate change is non-linear. For example, melting Arctic glaciers cause sea levels to rise slowly; four millimetres per year is arguably someone else’s problem. But extreme weather events and the effects of the collapse of ecosystems are near term and non-linear. And large numbers of climate refugees on the move could have seismic geopolitical ramifications.

So, if the effects of climate change are non-linear, could the solutions that we all so desperately need also be non-linear?

Innovation adoption is non-linear

Historically, the adoption of innovations follows an S-curve. Once a new technology or process is established, the perceived value in comparison to existing ways of doing things is small. However, over time, the technology is refined and made more efficient through small iterative improvements. There comes a point when customers begin to recognise the value from the innovation; they quickly adopt the new and shift away from the legacy way things were done.

The S-curve is clearly visible in some examples of the speed of innovation adoption in the chart below.

Carbon blog 3 chart 1.png

For all of us concerned about the devastating effects of climate change, this offers hope. The S-curve adoption of innovations in energy, transportation, food production and construction could help solve many of the climate-related problems we face today.

For investors, it offers both opportunity and risk. For those backing a successful disruptor’s innovation, the rewards can be plentiful. For those invested in the incumbent, there are huge potential downfalls as legacy operators are on the other side of the S-curve effect and are typically slow to adapt. We are all familiar with the fortunes of the likes of Blockbuster.

Bond investors are acutely aware of disruption risk. Lending over decades, we are continually examining industry barriers to entry and future cashflow protection. And if companies can’t adapt, can we as investors recognise the threats early enough to leave while the music is still playing?

What strikes me as an investor is that businesses and industries will be disrupted by climate change in ways that are difficult to comprehend today. As we move through the S-curve of innovations in the years ahead, new industries will emerge and some industries and companies will fall by the wayside. Creative destruction at work.

The falling cost of renewables

One example of this is the falling cost of renewables. Over the past decade, ‘new’ renewables have become cheaper than fossil fuels. Fossil fuels historically dominated the world’s energy supply because they were the cheapest source of energy. However, renewables have surpassed this by virtue of their operating costs being comparatively lower (i.e. the fuel – sunshine and wind – is free).

Solar and wind innovations follow a learning curve: manufacturing efficiencies, R&D, and technological improvements have driven the year-on-year price declines. Fossil fuels, in comparison, do not enjoy the same learning effect. There is little room for improving the efficiency of coal power plants substantially; they are already at the top of their S-curve.

Carbon blog 3 chart 2.png

The chart above illustrates the significant improvement in silicon solar panel manufacturing and installation costs. The levelised costs of energy for solar photovoltaics have fallen by a huge 85% since 2010.[1] Future innovations also present the opportunity to increase the efficiency of solar cells further. Traditional silicon cells have up to a 22% conversion efficiency, but perovskite solar cells (a relatively new innovation) offer a conversion efficiency of up to 30% and are potentially cheaper to manufacture, which would further enhance the S-curve adoption of solar.

Electricity generation mix

Thermal coal is still a significant part of the world’s energy mix. However, when we look at Europe’s adoption of renewables, perhaps we are beginning to see the beginnings of S-curves.

Europe is a leading region in addressing climate risk and has ambitions to be the world’s first net-zero continent. If this happens, and the world follows suit, then fossil fuels will be on the other side of the S-curve – the incumbents being disrupted, finding it difficult to adapt.

Carbon blog 3 chart 3.png

Carbon blog 3 chart 4.png

So how do these innovations and adoption rates affect us as investors, and how do we incorporate them into portfolio construction?

As investors, we need to recognise and acknowledge that the speed of disruption can be very fast. Arguments can be made that the S-curve for renewables may be slower than for other innovations by virtue of construction lead times and the need for battery storage innovations to establish their own S-curves. However, having an objective to decarbonise a portfolio is one way to build in a degree of risk mitigation from the disruption and stranded assets.

We also need to recognise that climate-change disruption risk will not end at energy generation and transmission. Its effects are likely to go far beyond this into other sectors such as transportation, food production and construction.

An important question to ask is: do we have a mechanism to recognise these risks and act? One prudent risk-mitigation tool, in our view, is to have a forward-looking temperature-alignment metric, scoring companies in all sectors on their pathway alignment to net zero. This tool helps us to identify potential disruption risk earlier so that remedial action can be taken.


[1] To make comparisons on a consistent basis, energy prices are expressed in ‘levelised costs of energy’ (LCOE). LCOE captures the cost of building the power plant itself as well as the ongoing costs for fuel and operating the power plant over its lifetime.

John Daly

Senior Solutions Strategy Manager

John is a Senior Solutions Strategy Manager within the Solutions Group and has over 20 years of industry experience working in asset-management companies. He focuses on long-term global investment-grade credit and active liability investment strategies. His role encompasses designing developing and servicing investment strategies for DB pension schemes and other financial clients. John has been with LGIM since 2009 and has previously held institutional distribution roles at PIMCO and Fidelity. John holds a BSc in Business Economics from Cardiff University and is a CFA charterholder.

John Daly