This is a highly important report as the IEA is switching gears, but perhaps first I should give some background. The International Energy Agency, or IEA, is an intergovernmental organisation that provides data, analysis and training to governments and companies on energy security, energy efficiency and the energy transition. In its report entitled “Net Zero by 2050: A Roadmap for the Global Energy Sector”, the IEA provides insights on how to reach the goal of net zero by 2050, a target embodied in the Paris Agreement.
The IEA argues for an end to fossil fuel expansion and a significant boost to investment in renewable energy sources, particularly solar and wind, in order to meet the Paris Agreement goal. While we have heard these arguments before, the report is important because it comes from the IEA, which has a significant influence on the energy policy of governments and companies.
We hope that the report will not be a huge surprise for investors. At State Street, we have long advocated for investors to address climate risks and prepare for the energy transition.
Can you summarise the IEA’s key findings?
Some of the most significant points are:
Demise of fossil fuels The IEA states: “There is no need for investment in new fossil fuel supply in our net zero pathway”.
Clean energy investment must be ramped up Between now and 2030, we require a massive deployment of all available clean energy technologies – renewables, electric vehicles and energy efficient building retrofits.
Clean energy infrastructure can boost jobs and growth To reach net zero emissions by 2050, annual clean energy investment worldwide will need to more than triple by 2030 to around $4 trillion, which will generate new jobs in necessary fields.
Huge leaps in clean energy innovation are required A lot of the reductions in carbon emissions through 2030 come from technologies already on the market. However, to meet 2050 goals innovation must take place this decade to bring needed technologies to market in time.
Clean electrification is key Electrification of areas previously dominated by fossil fuels emerges as a crucial economy-wide tool for reducing emissions.
Bioenergy will be increasingly important Sustainable bioenergy can deliver emissions reductions across many areas, including transport and heating.
Hydrogen and hydrogen-based fuels could fill gaps Hydrogen and hydrogen-based fuels will need to fill the gaps where electricity cannot easily or economically replace fossil fuels.
Opportunities in carbon capture Carbon capture, utilisation and storage (CCUS) will play a role in tackling emissions from existing energy assets, particularly in sectors where emissions are hardest to reduce.
What are the implications for investors?
The IEA report confirms what we have flagged for some time – that the world requires a significant and rapid transition away from fossil fuels. This is something that State Street has argued for consistently (for example in COVID-19 and Energy in the New World).
Investors should be aware of the risks associated with the current fossil fuel system, given the changes required to meet the Paris Agreement Goals. In particular, trillions of dollars in assets are at risk of being stranded. Banks are also exposed to stranded asset risk, potentially creating systemic risks in the global economy, which will need to be addressed and evaluated carefully.
The IEA’s volte-face on fossil fuels adds further weight to the argument that investors and asset owners must act now to reduce carbon emissions in their portfolios, both as a way to mitigate climate risks and to adhere to current and likely future regulations.
As the IEA highlights, the energy transition will also create a multitude of investment opportunities across sectors and industries. Those companies that proactively disclose climate risks, display the needed vision and adapt their strategy and operations to thrive in the low-carbon future, are also likely to have a competitive advantage.
As investors and stewards, what role can State Street play in tackling climate change?
We have long argued for incorporation and integration climate considerations in long-term investing to address climate risks and build long-term resiliency. Consequently, we have expanded the integration of climate considerations into our investment processes across asset classes and investment styles, including launching climate funds and frameworks in the equity and fixed income space, which allow investors to mitigate and adapt to climate change risks, while benefitting from green investment opportunities.
As long-term holders of capital, climate risk and reporting has been a core, multi-year campaign for our Stewardship team since 2014. We have joined Climate Action 100+ and the Net Zero Asset Manager Initiative to signify our support for investing that is aligned with net zero emissions by 2050 or sooner. In addition, the UN PRI invited SSGA to be a member of its “PRI Leaders Group”, acknowledging our breadth of responsible investment excellence.
State Street’s Stewardship team continually engages with energy companies on shareholder proposals relating to net zero scenarios. We believe that greenhouse gas emissions targets should be long-term and meaningful. Climate change is not a short-term risk that can be effectively addressed by setting 1-3-year emissions reduction targets. As we transition to a low-carbon world, there will be greater scope for engagement to drive the necessary changes in strategy and risk management that investors demand from company leadership.
Specifically, for the oil and gas, mining and utilities sectors, we believe mandatory uniform carbon pricing is urgently need. Boards must also focus on adapting to climate change, not just mitigating climate risks, which requires investment in green technologies.
Any final thoughts?
The IEA’s report represents a step change in how the influential organisation views the role of the energy sector in addressing the climate threat. We hope that governments, fossil fuel companies and the financial sector take on board the recommendations in the report. This could be yet another catalyst we need to push the energy transition past the tipping point, ensuring we avoid the worst impacts of climate change.
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