Climate Transition: Industry disruption and opportunity


Climate Insight Series  

The urgency of addressing climate change has never been clearer. As the 2024 Paris Olympics put the global spotlight on France’s capital – the very city where landmark climate agreements were forged – global temperatures continue to rise and extreme weather events are becoming more frequent. The need for accelerated action in decarbonizing the global economy is paramount. This transition to a low-carbon future will not be linear and homogenous across sectors and presents both significant challenges and unique opportunities across industries.

 

In this climate insights series, we will examine how key sectors can navigate this transition and explore the risks and opportunities for investors.

 

Sector based pathways are a cornerstone of our own Climate Transition Strategies. We believe that taking a sector differentiated approach, based on a forward-looking assessment of a company’s alignment to Net Zero is better aligned to achieving real world reductions in the global economy.

 

Environmental and economic implications

The UN Environment Program’s (UNEP) 2023 Emissions Gap Report warns that global carbon emissions must decline by over 40% by 2030 to meet Paris Agreement goals – this is in sharp contrast to the record highs in greenhouse gas emissions reached in 2022. Although progress has been made since the Paris Agreement was ratified, based on current policies we are still on track for an estimated temperature rise of up to 3°C above pre-industrial levels. Clearly, we must accelerate the transition to a low carbon economy.



Total net anthropogenic GHG emissions, 1990-2022

Source: Emissions Gap Report 2023, UNEP

 

 

Industry disruption and opportunity

 

Risks for companies

The transition to zero- or low-carbon alternatives may devalue coal, oil and gas reserves, exposing corporate balance sheets. The International Energy Agency’s Net Zero Scenario estimates, under its Net Zero Scenario1, that natural gas demand needs to fall by 25-30% and oil demand by 20-25% to meet the goals of the Paris Agreement.

 

However, a recent report2 from Carbon Tracker, an independent think-tank, highlighted that 24 out of 25 of the world’s largest oil and gas companies have greenhouse gas (GHG) reduction targets that are not considered Paris Aligned and the one company that did have, what could be considered, Paris Aligned targets was heavily reliant on asset sales, offsets and carbon capture and storage (CCS). These stranded assets represent a financial risk to companies and consequently, investors.

 

Opportunities for growth

However, the transition also presents growth opportunities in emerging industries. For example, the market for key mass-manufactured energy technology is projected to be worth around $650bn a year by 20303, potentially increasing sector employment from 6 to 14 million people, with over half of these jobs related to electric vehicles, solar PV, wind and heat pumps. Therefore, the low carbon transitions will also clearly provide attractive opportunities for investment.

 

Key transition themes and investment considerations

The low carbon transition is expected to be driven by an array of existing and emerging technologies – from energy efficiency and renewable to storage, low-carbon fuels, and carbon capture. We have previously explored the opportunities and challenges related to the low carbon transition with a focus on these five key areas.

 

 

Implementation of these themes will vary across economic sectors, with differing decarbonization rates expected.

 

 

Sector decarbonisation rates under 1.5°C scenario

Source: Aegon Asset Management based on the International Energy Agency’s (IEA) Net Zero Emissions Scenario 2021. Chart reflects the rate of GHG emissions reduction for the electricity, industrial, transport and buildings sector under the IEAs Net Zero Emissions Scenario 2021. The NZE scenario models the emissions reductions required to meet a 1.5C pathway with little or no overshoot.

 

In this series, we will examine how these key sectors can transition and the unique set of opportunities and risks this can pose to investors.

 

 

Source: Climate Change and the Road to Net Zero

 

Companies that can adapt to these challenges are more likely to capitalize on the low carbon transition to drive revenue growth and lower operating costs, thus producing sustainable cash flows and build towards more resilient business models.

 

For bondholders, companies with more stable cash flows are more likely to repay their obligations, reducing downside risk and providing the potential for alpha generation for investors. For equity investors, companies disrupting the status quo and driving innovation within the low carbon transition may present attractive upside growth potential. Companies ignoring the transition and failing to pivot to a net zero carbon future may be at a higher risk of default and deteriorating market value as investors reallocate capital to better-aligned options.

 

Ultimately, we believe that taking a sector differentiated view of the transition, which allows investment in high emitting sectors today who are well positioned to transition, is more likely to result in real world emissions reductions in the global economy, improve portfolio diversification and offer our clients with more attractive long-term climate investments. 

 

Conclusion

While reducing emissions in investment portfolios alone will not solve the climate change challenges, the transition to a low-carbon economy requires committed action from companies across all stages.  By understanding the unique risks and opportunities, investors can play a vital role in supporting sustainable, long-term solutions.

 

Sources
1. www.iea.org/reports/world-energy-outlook-2022
2. www.carbontracker.org/reports/absolute-impact-2023/
3. www.iea.org/reports/energy-technology-perspectives-2023/executive-summary

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