In 2019, the world released over 59 billion metric tons of carbon dioxide equivalent into the atmosphere, adding to the high and rising levels of CO2 already present.1 These emissions are changing the world’s climate and elevating average temperatures globally, according to a scientific consensus accepted by the 190 states that signed the 2015 Paris Agreement.2 The Agreement set a deadline to achieve net zero carbon emissions in the second half of the century, in order to limit global warming to 2.0 degrees Celsius above the pre-industrial average (while pursuing efforts to limit the increase to 1.5 degrees). In 2018, a report by the Intergovernmental Panel on Climate Change concluded that countries must bring carbon dioxide emissions to “net zero” by 2050 to keep global warming to within 1.5 degrees of pre-industrial levels.
The effects of rising global temperatures pose huge risks to communities and the ecosystems on which their livelihoods depend. Limiting the damage and financial toll is now a central policy goal for many companies as well as countries. More and more investment is being channelled toward achieving net zero carbon emissions. To understand the scale of the task, consider what net zero means in this context: Net zero means that for each carbon dioxide molecule emitted by human activities, another molecule is taken out.3 Making that happen is likely to require a re-engineering of much more than just energy systems.
Rewiring for net zero
Already, an estimated three million U.S. workers are employed in the clean energy economy, or nearly half of new jobs in the energy sector.4 In fact, the fastest-growing occupation in the U.S. today is wind turbine service technician.5 Some observers say the shift in the energy matrix could be a change as profound as electrification in the 19th century or the rise of the internal combustion engine in the 20th. But much more remains to be done.
Many businesses are making huge commitments to green technology – planning, transitioning, and even relocating in an effort to withstand the net zero trend. Financial systems must also be rewired to meet the net zero goal. The Institutional Investors Group on Climate Change (IIGCC), which represents 35 major global investors (PIMCO among them) with $11 trillion USD in combined assets under management6, recently supported the publication of the Net Zero Investment Framework. In April 2021, as part of the IIGCC called on the banking sector to be even more ambitious in setting targets, given the estimated investment of $3.8 trillion a year needed to implement the low-carbon transition for supply-side energy system investments.7
Investors’ toolkit for a net zero portfolio
With governments, businesses, and asset managers buying and selling trillions of dollars of investments linked to clean energy and broader environmental, social, and governance (ESG) initiatives, the drive to net zero will increasingly influence the market pricing of assets, both green and otherwise. Regulation, carbon taxes, and other public policies, as well as shifts in consumer sentiment and business models, will also affect market pricing.
Investors should consider how well their portfolios are prepared for these kind of pricing movements, because, in our view, the transition to net zero is becoming a matter of when, not if. Some industries will be more affected by transition risks than others, most obviously those in the energy industry – not only oil majors but utilities too. This doesn’t necessarily mean investors should divest fossil fuels – that decision rests with each investor (or institution) – but rather they should be thoughtful and take an active approach in an effort to spot the winners and avoid the losers in this energy transition. It will be important to identify the companies leading the way in the transition from a high carbon-intensive global economy to a low carbon one. An evolving array of regulatory and disclosure requirements being enacted by major governments will help accelerate greater transparency with decision-useful data from issuers.
Credit markets are pivotal to the net zero transformation. The global bond market is significantly larger than the global equity market, and bond issuers tend to come to market more often. The market for green, social, and sustainable bonds is large and growing with $1.5 trillion in outstanding bonds from a diverse set of issuers from corporates to sovereigns, local governments to structured products.8 This has created opportunities for fixed income investors, but it also increases the complexity of identifying winners in this massive transition.
The good news is that the size of the green asset market continues to grow across all segments. Ultimately, as we see more companies add net zero to their own ambitions, then we as investors can continue to build solutions that seek to deliver on that ambition, and engage with issuers to help them track and monitor their progress.
The run-up to the 26th UN Climate Change Conference of the Parties (COP26) in November 2021 is likely to see a rash of new, even more ambitious commitments by governments and the corporate sector.9 As investors, we can help support companies and policymakers to move toward a more sustainable growth model, for the benefit of all.
1 Source: UN Emissions Gap Report 2020
2 Source: Paris Agreement, UNFCCC agreement. https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement
3 Source: Intergovernmental Panel on Climate Change (IPCC)
4 Source: https://e2.org/wp-content/uploads/2021/04/E2-2021-Clean-Jobs-America-Report-04-19-2021.pdf
5 Source: U.S. Bureau of Labor Statistics
6 As of April 20, 2021
7 Source: The Institutional Investors Group on Climate Change (IIGCC) https://www.iigcc.org/news/leading-investors-representing-11-trillion-call-on-banks-to-set-enhanced-net-zero-targets
8 Source: PIMCO, Bloomberg New Energy Finance (BNEF) as of 31 March 2021
9 Source: IPCC report. ipcc.ch/sr15/chapter/spm/
Originally Posted on July 13, 2021 – The Race to Net Zero: Challenges and Opportunities
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