Introducing the Net Zero Series

The consumption of fossil fuels has resulted in vastly improved standards of living over the past 150 years, yet there is no denying that it has also contributed to global warming which, left unchecked, will likely result in devastating consequences. As portfolio managers, we must consider the long-term ramifications of responding to the challenges climate change poses to our industries and our holdings. The answer is not as simple as “divesting or not divesting” from oil stocks. This is a complicated global dilemma. We are devoting more time and research effort to exploring likely pathways to net zero emissions and the impact it may have on our portfolio decisions. We intend to share with you our findings in a series of upcoming research reports.

While governments and corporations are vested in finding solutions, each industry has its own unique set of challenges. According to the International Energy Agency (IEA), electricity and heat generation is responsible for 32% of global CO2 emissions. The reduced cost of renewable power, including solar and wind, creates viable alternatives to coal and natural gas power generation. However, renewable energy requires baseload power or grid-scale battery storage to ensure consistent and dependable energy supply. Battery technology is still in the early stages of full-scale application, and baseload power will continue to be supplied from fossil fuels. Nuclear power could serve as a primary or baseload energy source, but waste disposal remains a key question and public perception is a deterrent. The move towards natural gas, a lower-emission fossil fuel, can help bridge the transition towards net zero.

In the transportation sector, responsible for 14% of global CO₂ emissions, the increasing adoption of electric vehicles (EVs) works to reduce our use of gasoline and diesel to power our cars and trucks. As explained in our comprehensive report “The climate is changing. Electric vehicles are coming. Should we still invest in oil?”, oil is a fossil fuel that accounts for around one-third of global CO₂ emissions annually. Reducing our consumption is key to limiting global warming to 1.5°C. While the world’s largest asset managers are pledging to reduce their portfolios’ carbon footprint by divesting away from fossil fuels, we believe the solution is more nuanced than some may be prepared to acknowledge. We cannot ignore the fact that fossil fuels remain intricately engrained in our daily lives. Undoing our dependence will inflict tremendous costs and hardship, particularly in the developing world, where energy needs are great and resources are scarce.

Industrial processes are responsible for 19% of global CO₂ emissions. New and alternative methods of production help to reduce CO₂ from emission-heavy products, such as cement and steel. However, this will involve significant financial investment and reconfiguration of industrial infrastructure and retrofitting of plants. In the case of steel, it will likely require the rebuilding of a significant portion of the global production base. In addition, not all emissions can be reduced with current technologies. Net-zero targets are reliant on carbon capture and storage to mitigate the balance. While promising progress is being made on this front, the technology is in the very early stages of commercialization and will require significant capital for global applications.

Our role as an investment manager is multilayered. On the one hand, we want to participate in efforts to limit global warming through company engagement, and be at the forefront of socially responsible investments. On the other hand, it is important that we remain clear-eyed and fully understand the economic, scientific, social and political implications of the transition to a lower-carbon economy, all while fulfilling our fiduciary duty to earn a sustainable return on your investments. We invite you to join us as we unpack these complex issues in our upcoming Net Zero series.