This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.

The Race to Net Zero: Challenges and Opportunities

PIMCO

Contributor:
PIMCO
Visit: PIMCO

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.

Learn more about ESG at PIMCO and read PIMCO’s annual ESG Investing Report for insights into sustainable bond markets, industry trends, and investing for a net-zero-carbon future.

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

Disclosures

Socially responsible investing is qualitative and subjective by nature, and there is no guarantee that the criteria utilized, or judgment exercised, by PIMCO will reflect the beliefs or values of any one particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and PIMCO is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful. Past performance is not a guarantee or reliable indicator of future results.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

Disclosure: PIMCO

All investments contain risk and may lose value. This material is intended for informational purposes only. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. THE NEW NEUTRAL is a trademark of Pacific Investment Management Company LLC in the United States and throughout the world. ©2021, PIMCO

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from PIMCO and is being posted with permission from PIMCO. The views expressed in this material are solely those of the author and/or PIMCO and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

trading top