Written by Kay Byrne from Investment, Product and Services at LGT Crestone
Today’s climate crisis is one of the greatest challenges facing our world. Our planet’s average temperature is already around 1°C warmer than pre-industrial levels, and already we are seeing the consequences of global warming through more extreme weather, rising sea levels, and diminishing Arctic sea ice. If climate change continues unabated, extreme weather events will cause risks to human health, livelihoods, food security and water supply. Climate change could also wipe as much as 18% of global output off the world economy by 2050.¹
While momentum for global climate action has been building in recent years, much more needs to be done. The 26th United Nations’ Climate Change Conference, held in Glasgow in late 2021, was a pivotal moment. It accelerated actions by focusing on 2030 in contrast to net zero by 2050. It recognised that long-term goals are not enough and that the 2020s will be the crucial decade for climate change action.
While fossil fuels are the number one source of greenhouse gas emissions, the world will need to see deep emission cuts across all areas of society if we are to combat the climate crisis. According to the Intergovernmental Panel on Climate Change (IPCC), power generation, buildings, industry, and transport are responsible for nearly 80% of global emissions, while agriculture, forestry, and other land uses account for the remainder. In its Sixth Assessment Report, published in 2023, the IPCC set out 10 key solutions that will be needed to mitigate climate change2
The next decade will be decisive, and speed will be of the essence if we are to avoid the most devastating effects of climate change. The scale required to reach net zero is also immense and will require a whole economy transition.
In June 2022, the Australian Government updated its 2030 emission reduction target. The previous government, led by Scott Morrison, had committed to a 26% reduction target versus 2005 levels. This was increased under the new Labor government to 43%.
While this is a significant improvement on the earlier target, it still falls short on what is required, and it still lags the targets set by many of Australia’s allies and trading partners. With Australia acutely vulnerable to climate impacts, calls have been growing louder for Australia to go further and faster. The Business Council of Australia is calling for a 46-50% national target by 2030 and the Australian Industry Group wants to see a 50% cut by 2030.3
As nations around the world navigate the path to net zero, many businesses have also been putting forward ambitious net-zero targets—in some cases considerably earlier than 2050. While this provides the opportunity to drive corporate climate action, it has also propelled the need for a common understanding of the true meaning of ‘net zero’. Work compiled by Net Zero Tracker found that many of the net-zero policies adopted by organisations do not incorporate emissions produced by their supply chains, which often form the greatest part of their overall emissions. In other cases, it found that companies have relied upon unproven strategies to offset carbon production.
In 2021, the Science Based Targets initiative (SBTi) published its guidance, setting out the world’s first science-based definition of net zero. The standard provides businesses with a clear pathway to reduce greenhouse gas emissions, and covers a company’s entire value chain emissions, including those produced by their own processes (scope 1); those produced by purchased energy and power (scope 2); and those generated by suppliers and end users (scope 3). SBTi's standard does not allow carbon offsetting to achieve targets, but instead focuses on rapid, deep emission cuts and setting near and long-term targets. Under the standard, most companies will need to achieve deep decarbonisation of 90-95% before 2050 to align with science.4
With the race to net zero becoming more urgent, most of the reductions in global CO2 emissions between now and 2030 are expected to be driven by replacing fossil fuels with renewable energy. According to BloombergNEF, the transition to net zero will require investment of almost USD 200 trillion by 2050. Clean power deployment needs to quadruple by 2030, and major investment will be needed in carbon capture and storage, advanced nuclear technologies, and hydrogen.5
As high-emission assets are ramped down and low-emissions assets are ramped up, there will be risks that need to be navigated. This includes rising energy prices, energy supply volatility, and asset impairment. A 2021 study found that to maintain a 50% chance that global warming will not exceed 1.5°C, 90% of coal and nearly 60% of oil and natural gas will need to remain untapped.6 According to McKinsey, the value in power assets alone that could be stranded by 2050 is $2.1 trillion.7 It is also likely that developing countries and fossil fuel-rich regions will be more exposed to risks in the net-zero transition compared with other geographies.
Other risks include the impact of an abrupt and disruptive policy response. The United Nations Principles for Responsible Investment anticipates that policymakers will be pushed to make sweeping policy changes over the coming years. It sees the main policy levers as carbon pricing, coal phase-out, 100% clean power, zero-emission vehicles, low-carbon buildings, clean industry, low-emissions agriculture, and forestry.8
The drive to net zero will demand transformation across huge swaths of the global economy. As trillions of dollars of investments linked to decarbonisation initiatives are bought and sold, and as new regulations and policies are introduced, this is expected to influence the pricing of all assets.
Electric vehicles and low-carbon power are expected to be the biggest markets for investors, followed by power grids.9 However, investment opportunities are expected to appear across a range of vertical markets. Companies that can provide solutions to the climate crisis are expected to benefit, while those that are slow to adapt may experience a loss of competitiveness.
As actions and ambitions towards net zero increase, this has driven an unprecedented interest in sustainable investing, with the global sustainable investing market now reaching nearly USD 3 trillion, according to Morningstar.10 And in Australia, the responsible investment market reached AUD 1.54 trillion in 2021, up from AUD 1.28 trillion in 2020. This now positions responsible investment with a 43% share of the total market.11
As Larry Fink wrote in his 2022 annual letter to CEOs, “This is just the beginning—the tectonic shift towards sustainable investing is still accelerating. Whether it is capital being deployed into new ventures focused on energy innovation, or capital transferring from traditional indexes into more customized portfolios and products, we will see more money in motion”.
¹ Swiss Re Group, 2021, Annual Report 2021.
2 IPCC, 2023, Sixth Assessment Report.
3 Climate Council, 2022, Labor’s 2030 emissions targets must aim higher and go faster
4 Science Based Targets initiative, 2021, SBTi launches world-first netzero corporate standard.
5, 9 BloombergNEF, 2022, The $7 trillion a year needed to hit net-zero goal.
6 Welsby et al, 2021, Unextractable fossil fuels in a 1.5°C world, Nature.
7 McKinsey, 2022, Playing offense to create value in the net-zero transition.
8 United Nations Principles for Responsible Investment, 2021, The inevitable policy response 2021: Forecast policy scenario and 1.5C required policy scenario.
10 Morningstar, 2023, Global sustainable fund flows: Q2 2023 in review.
11 Responsible Investment Association Australasia, 2022, Responsible Investment Benchmark Report, Australia 2022
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