What does the risk landscape look like today?
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TRANSITION RISK
At the same time, some oil majors are writing off assets and capping oil wells early despite the significant costs involved. Though it may be too soon to call “peak oil”, the direction of travel is clear, particularly as sales of electric vehicles increase, as some countries such as the UK and Norway propose bans on the sale of new petrol and diesel cars (in the UK’s case by 2030 and 2025 for Norway 23 ).
According to a recent survey 25 , almost 70% of US and UK consumers would or might boycott a brand because of poor or misleading corporate social responsibility (CSR) information, of which environmental concerns are a key part.
Investor interest in climate change issues is not merely predicated on managing risk: it’s becoming clear that environmentally responsible investment strategies can also deliver financial rewards by backing businesses with sustainable models in growth markets. The impressive performance of environmental, social and governance (ESG) investing 30 has pushed it into the mainstream.
Transition risk comes frommany potential sources: market movements, commercial and consumer trends, investor pressure, or political and regulatory drive.
THE INVESTMENT LANDSCAPE
THE MARKET LANDSCAPE
Investor pressure for action on climate- related risks and resilience is intensifying. There are now many groups of investment managers and asset owners subscribing to sustainability and tackling climate change. Principles for Responsible Investment (PRI), has over 3,000 signatories, representing over USD 100 trillion of assets under management 26 . Investment managers behind Climate Action 100+, an initiative to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change, represent over half of all global assetsundermanagement 27 . Moreover, 2020 saw the launch of the net zero Asset Managers initiative which brings together 30 of the world’s largest asset managers in a commitment to achieving net zero across their portfolios by 2050 28 . The list of sustainable finance initiatives in which investors can participate goes on, including the United Nations-convened net zero Asset Owner Alliance 29 and the Institutional Investor Group on Climate Change.
Renewable energy has become increasingly affordable. For projects with low-cost financing, solar power “is now the cheapest source of electricity in history”, according to the International Energy Agency 19 . New solar electricity costs have decreased by as much as 80% in the last ten years and new wind costs by around 60% 20 , beating even themost optimistic estimates of a decade ago – and both continue to fall. Shares in renewables businesses have outperformed the market overall, and the energy sector specifically; for example, solar companies had doubled in value in less than a year by October 2020 21 . Could this be a tipping point? In some countries, companies themselves are now increasingly setting the pace on the green transition – putting pressure on governments to legislate and on rivals to keep up. For example, Australia’s major energy companies have been calling on their government to be more ambitious with the country’s net zero commitments 22 .
THE COMMERCIAL LANDSCAPE
THE POLITICAL LANDSCAPE
Many consumers are keen to make green choices in what they buy, to the extent that product lines and even entire business models may need to adapt. For example, a survey by Accenture found that more than half of consumers say they would be willing to pay more for sustainable products 24 . Alongside risks, this presents a major commercial opportunity for new products or new markets, which will require foresight and agility from businesses that wish to harness them. Reputational risks cannot be ignored. Activists, the media, regulators, shareholders, employees and the public are increasingly scrutinising what companies are saying about their green credentials, asking if it is credible and who is accountable.
Increasingly, governments around the world want to be seen as leaders in the battle against climate change, and not just for political purposes. Other factors at play include a recognition of the longer- term economic benefits of developing new energy technologies domestically, and (in some regions) a rise in high-profile litigation for failing to take sufficient action. Examples of this include cases such as the Urgenda litigation in the Netherlands (which we examine in more detail later in this report). China (the largest emitter) has committed tonet zero 31 , the EUhas set out anambitious “Green Deal” plan towards the same goal 32 , and the new US administration has re- entered the Paris Agreement 33 . Taken in combination, this could be the catalyst for real progress.
19 Carbon Brief https://www.carbonbrief.org/solar-is-now-cheapest-electricity-in-history-confirms-iea 20 Financial Times https://www.ft.com/content/33bb3714-93cf-4af5-9897-e5bf3b013cb7 21 International Energy Agency https://www.iea.org/reports/renewables-2020 22 The Guardian https://www.theguardian.com/environment/2020/jun/25/major-energy-companies-call-on- coalition-to-set-target-of-net-zero-emissions-by-2050 23 Gov.uk https://www.gov.uk/government/news/government-takes-historic-step-towards-net-zero-with-end- of-sale-of-new-petrol-and-diesel-cars-by-2030 24 Accenture https://newsroom.accenture.com/news/more-than-half-of-consumers-would-pay-more-for- sustainable-products-designed-to-be-reused-or-recycled-accenture-survey-finds.htm
GWI https://blog.globalwebindex.com/marketing/csr-trends-2020/
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26 Bloomberg NEF https://about.bnef.com/blog/liebreich-climate-and-finance-lessons-from-a-time-machine/ 27 Climate Action 100+ https://www.climateaction100.org/about/ 28 Net Zero Asset Managers https://www.netzeroassetmanagers.org/#:~:text=The%20Net%20Zero%20Asset%20 Managers%20initiative%20launched%20in%20December%202020,goal%20of%20net%20zero%20emissions 29 United Nations-convened Net Zero Asset Owner Alliance https://www.unepfi.org/net-zero-alliance/ 30 Financial Times https://www.ft.com/content/733ee6ff-446e-4f8b-86b2-19ef42da3824 31 Nature https://www.nature.com/articles/d41586-020-02927-9
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