Is your portfolio positioned for climate transition?  

Our State of Transition paper assesses current progress on the climate transition from an investor perspective.

The COP28 climate conference witnessed an important symbolic move towards a low-carbon future. Nearly 200 nations pledged to transition "away from fossil fuels," aiming for net-zero emissions by 2050. This marked the first time that countries had specifically mentioned fossil fuels in a climate agreement — a significant moment highlighting the growing political will to solve climate change. However, the key question we often hear from investors is: what is the current state of the climate transition, and how can I implement transition objectives within my investment portfolio?

This paper examines the state of progress made towards the climate transition, focusing on trends in the energy sector and evaluating specific transition themes. On top of this it presents some outputs from Mercer's Analytics for Climate Transition (ACT) assessment, which we use to help clients set climate objectives and align their investment portfolios with the sustainable transition. 

We find that while markets have been volatile in recent years due to geopolitical events, such as the Russian invasion of Ukraine and its implications for energy pricing, the climate transition continues to gather momentum. Acknowledging renewable energy’s recent underperformance relative to fossil fuel, we highlight three key emerging trends:

  1. The improving outlook within the renewables sector,
  2. The falling cost of clean energy technology, and
  3. The growth in the electric vehicles (EV) segment which is creating spillover effects.

On balance, we see evidence that progress towards the climate transition continues in the face of short-term volatility and political uncertainty. Further, our data suggests that despite its many challenges, the momentum that the transition has built to date remains robust. Download the report for further analysis and insights.

Spotlight on three transition trends for investors

Although performance over the next few years will depend on external factors, which are hard to predict — including geopolitical unrest but also policies to support the climate transition (see the section on COP28) — we believe the relative underperformance of the renewables sector versus fossil fuels is temporary. There are already signs that the market conditions responsible for headwinds in the clean energy sector are reversing.

The economics of renewable energy look compelling. If the clean energy production cost reductions continue, renewable energy could increasingly dominate the energy mix even without government support as energy producers and consumers switch to cheaper renewable sources. As oil and gas demand is expected to peak this decade, it will become important for the industry to meet the growing expectations of stakeholders, who may anticipate accelerated progress on emissions reductions, investment in renewables and carbon-capture technologies, and management of stranded asset risks.

The growth in EVs could accelerate the sustainable transition with spillover benefits beyond the transport sector. The rapid rise in EVs will require a significant expansion of the capacity of the electricity network, which should benefit not only car owners but also households and businesses.

Significant investment will be needed in electricity storage technologies as well as smart grids, which could help balance supply and demand within the electricity network. Finally, the cost advantages of using renewable energy sources in electricity production should enable the unit costs of electricity to continue to decline. This has the potential to create a virtuous cycle of a more environmentally friendly and affordable energy supply mainly from clean energy sources.

State of Transition

We evaluate climate transition progress from an investor perspective analyzing how markets have adapted to meet the ultimate objective of halting and reversing global temperature increases and increasing action on climate change.
About the author(s)
Lovey Sidhu

Sustainable Investment Specialist, Mercer Global Strategic Research

Andrew Lilley

Head of Sustainable Investment, Continental Europe

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