Climate change has become the defining issue of our time. The threat of global warming driven by fossil fuel use and the dangers of inaction to reduce greenhouse gas emissions are leading to a re-evaluation of how we generate and use energy.
Fulfilling the Paris Agreement goal to limit the global temperature rise to 2°C or less has been recognized by practically all countries and governments around the world are committing to decarbonization. Amid much progress, however, the US is pulling out of the Paris Agreement while China — the world’s largest carbon emitter — continues to build new coal plants.
Despite some setbacks, there has been a sea-change in how we view fossil fuels, driven by greater awareness of the threat of climate change and the increasingly favorable economics of renewable energy. As the paper highlights, we may be only four years away from peak fossil fuels, the moment when total consumption of coal, oil and gas starts to fall.
At State Street Global Advisors, we believe that mitigating climate risks should be a priority for all investors, and climate change has been a key engagement issue of ours since 2014. Investors have various ways to manage these risks, from simply screening out companies with high emissions and fossil fuel reserves to more sophisticated approaches that allow investors to mitigate risks but also benefit from climate change-relate opportunities. The choice of style will ultimately depend on investors’ investment objectives and risk tolerance.
Whichever approach investors take, they should not stand still. History shows that change can happen quicker than expected. As an example, cars started to replace horses as a mode of transport in the US in 1920, when there were only 100,000 cars, only 3% of the 4 million horses. And the peaking of global coal demand in 2014 was little anticipated by industries and investors who believed China and India would drive future demand.
The peaking and decline of oil and gas is likely to follow a similar pattern. Investors should therefore be fully prepared for the energy transition and the disruption it will likely cause to geopolitics, countries, sectors and companies.
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