After COP28, many climate analysts think that was in 2023 the year of ‘peak oil’ prior to the final decline of a global economy powered by fossil fuels. In the assessment by the United NationsLast year marked the “beginning of the end” of the fossil fuel era.
Investors’ sustainability ambitions are only as viable as their investors’ progress on climate commitments. So what is business progress towards emissions targets – an essential part of? credible transition plans – say anything about the path investors might take from this alleged summit?
And once the downturn has begun, what will be the implications for investment strategies to generate sustainable long-term value for retirees, general partners, and for you and me?
The use of fossil fuels is responsible for this almost 90 percent of all CO2 emissions. In pursuing both returns and net-zero targets, investors must grapple with two key realities.
For starters, this isn’t the first “beginning of the end” prediction.
Royal Dutch Shell geologist M. King Hubbert predicted peak oil in the 1950spredicting the peak in 1970. A 1998 article in Scientific American said production would likely decline “within 10 years”, and BPs The annual energy forecasts for 2020 are accepted that demand for oil had already reached its peak.
Second, CDP, the global environmental information system, finds that about a third of companies that participate its commitment tracker are on or almost on track to meet their emissions targets – worryingly half of all disclosed emissions are off track.
“Long-term goals must be accompanied by interim progress, from both companies and financial institutions,” said Simon Fischweicher, head of business and supply chains for North America at CDP. “We have 4,466 companies with approved or validated science-based targets, but only 99 financial institutions that have set them… and only three from North America.”
CDP has also seen a decline in both the number and ambition of disclosures and commitments from oil and gas companies.
“That is a decline that is not necessarily correlated with a definitive decline in the industry, nor with investments the industry makes in fossil fuel expansion or future financing.”
Lack of data
None of this denies the reality that clean energy is booming. Forty percent of China’s GDP growth in 2023, for example came from clean energy investment.
Private investors like Apollo and Brookfield, as my colleague Nico McCrossan said last week, are jumping into the deep end of investing in clean energy and climate.
“What’s most interesting is not what’s in decline; people can speculate about that all day. I like to think about what’s accelerating, and we see huge opportunities for new ways to invest in the energy transition “, says Carletta Ooton, head of ESG at Apollo, which has invested $31 billion towards its goal Deploy $50 billion in clean energy and climate capital by 2027.
According to Ooton, much of the delay in the disclosure of company data stems from the continued lack of substantive expertise and experience among companies. That said, sustainability roles are also possible the top fastest growing positions in the United States, and the regulatory push for Making sustainability public is likely to further accelerate this trend.
In public markets, true involvement is regularly promoted recognized by the investment sector as the best instrument to improve the sustainability performance of companies, companies such as Legal & General Investment Management (LGIM) using red lines in their engagement strategies.
“If companies don’t make sufficient disclosures or can’t demonstrate progress toward those red lines, that will escalate the sentiment against a director and could further escalate into divestitures,” said Stephanie Lavallato, senior investment stewardship analyst at LGIM America.
The age of risk
As we (finally) enter the oil and gas downturn, investors of all stripes – “sustainable” or otherwise – will need to think carefully about the looming risks.
In private market funds, where limited partners cannot easily withdraw their investment, the risk of becoming incarcerated The ‘transition-induced value erosion’ is increasing. In the public markets dominated by highly diversified and long term universal ownersthe decade of underperformance of the energy sector and the increasing risk of stranded assets will become more urgent.
As 2024 becomes, as United Nations Secretary General António Guterres put it‘The Year of Exponential Climate Action’ will push investors to confront all these considerations and questions.