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SPI Journal, Summer 2023
Transition finance

Net-zero progress: too little, not too late

A disorderly transition is still the most likely climate change pathway but there is still time to change this, writes Anna Stupnytska, global macro economist, solutions and multi-asset, Fidelity.


From extreme weather events to a war-induced energy crisis, 2022 brought climate urgency into sharp relief. The Russia-Ukraine war has also caused a tectonic shift in the geopolitics of energy security, which will influence the temperature outcomes in this century.

To gauge the likelihood of different climate change scenarios, we are tracking three key transition enablers: corporate action, technology and policy. These factors have the power to accelerate or slow progress towards net zero. However, our analysis found that recent developments have not been enough to change our base case: a disorderly transition is still the most likely climate change pathway. Such a scenario would limit temperature increases to less than 2 degrees Celsius above pre-industrial levels by 2100. This comes with high transition risks as required policies are delayed or diverge between countries and sectors.

Our latest climate ratings give an idea of the scale of change the corporate sector needs to undertake in the coming years. Our analysts report that, of over 2,080 companies given climate ratings, only 2% are currently ‘achieving or enabling net zero’ with another 5% ‘aligning to a net-zero pathway’. Over 90% of companies will need to fall into these two categories by 2050 to make net zero a reality. Given the low starting base, the speed needed to achieve this might be possible in the next decade but will become increasingly difficult over time and highly dependent on developments in the other two key enablers.

With technology, the focus is on four key areas: low-carbon energy, energy efficiency and storage, building efficiency and hydrogen. Our assessment concludes that only electric vehicles are on track for the net-zero transition by 2050, while low-carbon energy sources have the potential for either an orderly or disorderly pathway. Other technologies lag significantly, either in terms of adoption or development.

Assessing policy action across four pillars – carbon pricing, political environment, policy incentives and international co-operation – there has been some encouraging progress at the national level over the past year, with Europe and the US standing out. But there remains a disappointing lack of momentum on international co-operation.

Asset allocation decisions through a climate lens

Events of the past year have increased the range of possible outcomes as well as the influence of policy-makers over the direction and speed of the transition to net zero. As markets recognise the increasing climate risks due to regulation, industry trends, consumer preferences and market events, investors will have to adjust their expectations of the long-term risk-return profiles of asset classes. This poses serious challenges when making asset allocation decisions.

Our modelling shows that climate change is likely to negatively impact asset return assumptions in the next decade under a range of climate scenarios – from a hot house world (where average global temperatures rise by 3 degrees or more above pre-industrial levels by 2100) to an orderly net-zero transition by 2050 – with a magnitude that varies across different economies.

We find that equities exhibit greater sensitivity to climate change given that their valuation is typically based on discounted future cash flows. These are most under threat in disorderly transition and hot house world scenarios, while fixed income is less affected by climate change as negative price impacts are typically offset by higher income. However, the magnitude of each component can vary.

While we lack clarity on the exact outcome of climate change, we can prepare for specific eventualities. In our view, recalibrating strategic asset allocation decisions by using capital market assumptions that integrate climate risks in a forward-looking, transparent and consistent way can help reduce the risk of negative surprises – adding resilience to an investment portfolio.

Figure 1. Just under half of all companies show either low or no evidence of transition potential
Rating distribution of 2080 companies

Source: Fidelity International, May 2023.

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