Feasible energy transitions and responsibilities

Sometimes it happens that (a lot of) the things you read are starting to add up. What became clearer for me last week is (1) that the energy transition is doable but also messy, with first the problems already showing, and (2) it will be a long way before companies, governments, let alone asset managers, take their responsibility.

Net zero scenarios

Let's start with the first point. For some reason I was digging into the Shell scenarios published last year. Only the 'Sky 1.5' scenario will bring us a global economy within 1.5 degrees,. and is therefore the preferred scenario. It is quite interesting that they used different social orientations for the three scenarios: material wealth, security or health. What still seems impossible to consider, as in most energy or climate scenarios, is that economic growth (at least in the wealthiest part of the world) could also decline, and thus also demand for energy.

As a red thread in these scenarios: the shift to renewable energy will definitely continue, but the speed may diverge. And also clear in these scenarios: we also need fossil fuels in the mix (and hence Carbon Capture and Storage). But this is, as said before, also caused by assumptions about demand.

Another interesting exercise was done by McKinsey Global Institute: The net-zero transition: What it would cost, what it could bring. What struck me most in this report, was the explicit recognition that a transition is definitely not only about technology: it is also very much about winners and losers, within and between sectors, countries and generations. And the uncomfortable truth: the necessary transition requires large-scale investments ($9.2 trillion annually!). And it will probably at first also lead to volatility and higher prices, and in the end result in lower energy prices. But how to get there? Three categories of actions stand out: catalyzing effective capital reallocation, managing demand shifts and near-term unit cost increases, and establishing compensating mechanisms to address socioeconomic impacts. The economic transformation required to achieve net-zero emissions by 2050 will be massive in scale and complex in execution, yet the costs and dislocations that would arise from a more disorderly transition would likely be far greater, and the transition would prevent the further buildup of physical risks.

So, the positive news: net-zero is possible if we start today. But it is a massive agenda.

(Un-)commitments and, markets and vested interests

So, on the one hand I was reading these 'can-do' scenarios. On the other hand, there’s the reality in the newspapers. For example the Blackrock-Larry Fink- CEO Letter, in which he said "We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients." Yes, sure. But you might also want to say something about your own responsibility. What’s that worth if you invest for a client not in line with 1.5 degrees? See here also some nice markups on the letter, showing essentially that Blackrock keeps all options open and with a lot of blabla does not take any responsibility and leaves it to the markets. Didn’t bring the markets us where we are now, in a very unsustainable position? How on earth will markets in themselves bring us a more sustainable future?

In line with this, we see investors claiming that their investments are aligned with net-zero but still allow new fossil investments, We see 'activist' investors putting pressure on companies like Unilever, known for its sustainability policies to become more efficient: which will probably lead to squeezing the supply chain further and to less attention for social and environmental factors. And, of course, we have the big European debate on the climate taxonomy, with the French pushing for nuclear and Eastern European countries wanting natural gas to be labeled as green. And although probably needed in transitions (see also scenarios above) it.is.not.green. As also the expert group rightfully published on Monday.

And this was only the news of the last few days. Should we be optimistic on a transition? I don't know. But it is the only option we have in the end...