With fossil fuels representing over 80% of global energy consumption currently, the transition to net zero will be complex and require changes in both energy supply and demand. (UBS)

The report outlines in detail over 400 milestones, leading to both intermediate (by 2030) as well as the long-term goal (by 2050). Key highlights include:

  • No funding for new fossil fuel projects as an immediate priority
  • Renewable capacity additions to increase 4x in the coming decade
  • Energy efficiency improvement at three times the average rate achieved over the past two decades
  • Carbon pricing across all regions in the immediate future; average price to reach USD 130/t by 2030 and USD 250/t by 2050. (Note that EU ETS carbon prices just reached EUR 50, or USD 61/t)
  • Investing in longer-term technologies such as hydrogen (implied growth of 5x), biofuels (2x) and carbon capture utilization and storage (which has to cover over a fifth of total emission reduction).

Perhaps the most important conclusion in the report is that intermediate 2030 goals can potentially be achieved through existing technologies and behavioral change. This is encouraging but includes some very challenging recommendations. Regardless, the report could sharpen government focus on policies to durably support the goal of net zero by 2050, especially ahead of the upcoming COP26. Current policies remain some way from net zero 2050 goals.

Responses to the report have so far been mixed. Japan and Australia have rejected the immediate policy suggestion to defund fossil fuels, citing energy security priorities. Meanwhile, Indonesia, despite natural coal resources, has committed to the cause, as well as guiding to renewable energy initiatives and a priority to introduce carbon taxes and a carbon emissions trading system. While the implementation pathway to these goals is unclear, the announcements were nonetheless noteworthy from an emerging market with accelerating energy needs.

With fossil fuels representing over 80% of global energy consumption currently, the transition to net zero will be complex and require changes in both energy supply and demand. Reducing fossil fuel demand will remain a critical focus. To that end, we note the landmark events over the past two weeks, in which we saw a climate-focused activist hedge fund gain three of the four nominated Board seats at ExxonMobil, shareholders approve a proposal to potentially set emission limits from Chevron’s sales of fossil fuels, and Royal Dutch Shell ordered by a Dutch court to accelerate emission reductions (although the decision will likely be appealed).

Such market developments are additional indications that stakeholders are not only increasingly focused on changing corporate goals and behaviors in the battle to contain climate change, but they are also becoming more adept at deploying all tools available to influence these goals and behaviors. With stakeholders making progress, we hope government policy development and implementation will accelerate to further encourage corporate behavior that could result in actionable and binding commitments towards net zero by 2050.

Investor takeaways:

  • The outlook for key existing green technologies, such as renewable energy and electric vehicles, remain promising, and we see opportunities aligned with Greentech.
  • Sweeping changes remain necessary to develop deeper and faster funding channels, underpinning further growth potential for sustainable finance development, including for example the issuance of green bonds.
  • Ongoing government policy initiatives need to accelerate, including the use of broad tools such as carbon pricing. Companies that are already managing environmental risks better compared with their peers (and are ESG leaders) should be well positioned for potential risks and reward. In addition to ESG leaders, we see opportunities within energy companies that are contributing to the climate transition.

Read the full report Sustainable Investing Perspectives, 6 June 2021, which also discusses how changing preferences create opportunities to rethink the food system and cybersecurity.

Main contributors: Amantia Muhedini, Stephanie Choi, and Michelle Laliberte

This content is a product of the UBS Chief Investment Office.