Investors can help accelerate energy system transition

The global energy system is undergoing a transition away from fossil fuels toward a new energy model, a transition that will continue and accelerate over the coming decades.

“This has implications for all areas of society and will impact your day-to-day life”, notes John Streur, President and CEO, Calvert Research and Management, a leading voice in responsible investing.

“Investors must have an understanding of the energy transition to fully understand how climate change may impact their portfolios, what risks they may currently have exposure to and which opportunities are worth further research and investment.

“In pursuit of this transparency, DNV GL releases an annual energy transition outlook that forecasts trends ahead to 2050. We have collaborated with DNV GL on this and other projects since 2015 because we believe that it is essential for investors to understand this transition.”

Rapid response expected - but not rapid enough!

The DNV GL analysis projects that the transition away from fossil fuels will take place within the span of a single generation, between now and 2050. It anticipates that half of all passenger vehicles sold worldwide will be electric by 2032, and the demand for oil will decline steeply after 2030.

However, this transition will not be fast enough to deliver the Paris Agreement's target to limit the increase in global warming to 1.5 degrees Celsius or below. It projects the two-degree budget to be reached in 2049, and a total of 2.4 degree Celsius warming of the planet by 2100.

To speed this process, we must make progress in three areas simultaneously
• Generate much more energy from renewable sources
• Increase energy efficiency
• Capture carbon emissions on an industrial scale

Taken alone, none of these three approaches would be enough to prevent global temperatures from crossing the 1.5 degree Celsius threshold. Only by making significant progress in all three areas can we hope to stem the tide.

Keys to short-term progress

The report also cites three accelerators for more rapid positive change in the next five years. One of these is the increasing voice and power of the youth movement speaking up about its concerns surrounding the environment. Another is the possibility that countries will invest in domestic renewable energy because of energy security concerns.

The third group is investors. DNV GL notes that large corporations could continue to set internal targets on clean energy use thanks to investor demand, adding that "the investor community is increasingly funding clean energy projects as good business, and not just for corporate responsibility greenwashing."

As investment firms withdraw from fossil fuel-related investments because of the perceived risk, the increase in the cost of capital for companies with significant fossil fuel exposure will increase. The faster this cost of capital increases and companies seek alternative energy sources instead, the better the chances that the transition to a low-carbon energy future will be faster than expected.

Mr Streur notes “We believe investors should understand the impacts of an acceleration to a new energy model on their investments. DNV GL's forecast of the most likely path ahead for this transition is a helpful resource for anyone interested in examining the future of energy.”

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