Fossil fuels have been a mainstay of the global economy since the Industrial Revolution, powering economic growth and rising living standards. But growing fears around the threat of man-made climate change combined with the increasing attractiveness of renewable energy have led to a paradigm shift that is driving a steady transition towards renewables. With policy support, this trend will continue over the coming decades with profound effects on geopolitics, economies and society.
Globally, we calculate society stands to reap a massive $1 trillion windfall from the energy transition, and potentially much more once all positive externalities are included.
The shift towards renewable energy cannot come soon enough. Scientific data provides evidence of significant unprecedented warming of the climate system, impacting the severity of weather events and cascading to economic systems and global corporations. Based on current policies in place, we are on course for 3–3.4°C of warming above pre-industrial levels by the end of this century according to Climate Action Tracker, far above the 1.5°C recommended by the UN IPCC.
At State Street Global Advisors, we use our influence as a large global asset manager to encourage corporate boards and management teams to proactively address climate-based issues that could impact on long-term performance. Our investment capabilities include climate-specific reporting so that clients can align their portfolios with the evolving science, regulatory landscape and investment risks and opportunities related to climate change.
Encouragingly, we see growing investor awareness of the importance of factoring in climate change scenarios in their portfolios. In a recent survey we conducted of 300 institutional investors and world-leading institutions, among the most significant factors driving adoption of ESG principles were risk mitigation and meeting or getting ahead of regulation. Climate change is the central ESG issue that is driving these results, as long-term investors understand that the systemic risks associated with climate change — and the policy response to it — can no longer be ignored.
As our paper shows, renewable energy will play an increasingly important role in tackling climate change as technological developments result in ever cheaper, more efficient and flexible renewables solutions that will drive down demand for fossil fuels. While investors will face climate-related risks in the coming years, there will also be opportunities for those who can mitigate risks and adapt their portfolios for the coming energy transition.
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