While climate-related disasters and record temperatures intensify around the world, commitments to decarbonization initiatives from governments and businesses seek to address the most pressing challenges.
But the transition to a net-zero future is no small undertaking. BloombergNEF Energy Outlook estimates it will take a staggering $194 trillion—or nearly $7 trillion a year—to decarbonize the global economy by 2050. This presents a significant multitrillion-dollar investment opportunity and is leading to an increased focus on transition investing.
A rapidly growing sector
In the simplest terms, transition investing provides financing to support progress toward net zero. It is essential to understand that the 2050 net-zero goal is not an end point but a midpoint in a century-long effort to stabilize emissions.
The energy sector—the source of approximately three-quarters of greenhouse gas emissions—is integral to the global net zero transition, with demand for traditional sources of energy expected to continue to grow over the next decade, before ebbing slightly by mid-century. The sector will need to continue pursuing decarbonization pathways and meaningfully reduce operational emissions to achieve net zero targets.
Businesses working to transition to net zero are preparing and adapting for future policy, legal and regulatory regimes, evolving consumer preferences, all while navigating the evolving global landscape. In turn, propelling the sector forward at a rapid pace.
What role can investors play?
Investors—both institutional and retail—are increasingly aware of the role they can play in net zero transition. The inclusion of environmental, social and governance (ESG) factors in portfolios, often with a focus on emerging energy technology, is now commonplace.
I have seen consistent investor interest in responsible investing. Clients want to talk about—and invest in—sustainable technologies and have conversations with their advisors about this growing space. As new innovations in the energy transition space arise, we shouldn't lose sight of engaging with all sectors. When we as investors work with companies across many industries and geographies, that is when we can make a big impact, leading us closer to our end goal of lower emissions.
Transition investing focuses on the financial impacts on a client's portfolio in response to a shift toward a low-carbon economy. Providing capital to high-emitting companies so they can decarbonize and transition toward net-zero targets is vital in reducing emissions in absolute terms. The point is not to place blame or point fingers; rather, to understand what data is actually showing versus what we think it's showing.
How to invest in the transition to net zero
Interest in investing in the energy-transition and decarbonization efforts is reflected in the range of financial products available to investors. Some options include the many climate- or energy-transition funds, bonds or alternative strategies.
Transition investing can also help diversify an investment portfolio, not only in terms of asset allocation but widening the investable sectors and industries. This is particularly true for investors who want to consider ESG factors but have previously invested only in companies dubbed "green" or are low emitters. However, it's essential these investments fit with your appetite for risk.
Net zero is more than an endgame
Commitments to decarbonization and net zero are now becoming a corporate norm. According to Oxford's Net Zero Stocktake 2023 report, 65 percent of the annual revenue of the world's 2,000 largest companies is now covered by a net-zero target. Of course, there are companies with aggressive decarbonization targets that are doing more than their peers, but it is the implementation at an operational level against which everyone is going to be judging them.
Investors will also be questioning what returns might be realized. RBC Capital Markets analysis suggests that from December 2011 to April 2023, companies in emissions-intensive sectors (energy, industrials, and utilities) that have reduced their emissions intensity the most have outperformed peers that reduced emissions the least. As with any investment, performance must be reviewed as part of your overall, ongoing portfolio planning.
The transition to net zero will affect us all
The relevance of transition investing is an all-encompassing and ongoing effort. It's not just an energy transition, but an economic transition—the implications of moving to net zero are broad across all sectors and in our everyday lives. High emitters are fundamental to a functioning society, we can't just turn them off; the logical way forward that will make a big impact is for them to reduce their emissions. And investors can help.
Forward-looking companies aim to identify these risks and opportunities and introduce new products and services to reduce their own emissions as well as those of their customers. Investors who utilize an ESG-integrated strategy can invest in these companies’ long term and participate in the transition.
Due diligence processes do not assure a profit or protect against loss. Like any type of investing, ESG and responsible investing involve risks, including possible loss of principal.
RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.
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