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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.
This information is for informational purposes only, not to be construed as investment advice or a recommendation or offer to buy or sell any security. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. There are no guarantees regarding the achievement of investment objectives, target returns, portfolio construction, allocations or measurements such as alpha, tracking error, stock weightings and other information ratios. The views and strategies described may not be suitable for all investors. SSGA does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision. Investing entails risks and there can be no assurance that SSGA will achieve profits or avoid incurring losses.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted.
Images of NYSE Group, Inc. are used with permission of NYSE Group, Inc. Neither NYSE Group, Inc. nor its affiliated companies sponsor, approve of or endorse the contents of this program. Neither NYSE Group, Inc. nor its affiliated companies recommend or make any representation as to possible benefits from any securities or investments.