Transitioning to a new world

BUILDING NEW MARKETS

Transitioning to a new world 

May 2023 | 3 minute read | Marketing Communication   

How will The Paris Agreement affect the world in it's transitions away from fossil fuels? Fossil fuel-dominated sectors like oil companies or utilities are already facing deterioration of their credit rating.

Key takeaways:

The Paris Agreement aims to limit global warming to well below 2C. But as things stand, the world is not on track for this target: according to the Intergovernmental Panel on Climate Change (IPCC) [1], global warming of 2 degrees will be exceeded during this century unless deep reductions in Co2 and other greenhouse gas emissions occur in the coming decades.

It is clear that to get back on a sub-2 degree pathway, enormous changes will have to take place. For companies, we believe that this will mean restructuring to more carbon neutral products and attitudes. And like any new era, it may bring opportunities and pitfalls.

Some sectors will be more obviously affected than others. Energy companies and car manufacturers are obvious examples of those that we believe will have to make great changes as they shift towards renewables and electric vehicles. But the reality is that very few sectors will be unaffected over the medium term: banks, for example, while relatively low emitters, might have exposure and risk via the companies they lend to.

But at the same time we believe that there will be considerable opportunities, de Faÿ points out. ‘Take, for example, the automotive sector. If a company is taking the lead in the development of electric vehicles, with the aim of making them available to a wider segment of the public rather than the wealthiest, we believe that they should be well positioned to capture market share in the future.’

Another vital element to consider, and one that is often overlooked, is the social repercussions as companies restructure. ‘We have to be sure that the transition to a low carbon economy is also socially acceptable, by which I mean that it doesn’t trigger negative consequences for some categories of the population, increasing inequality and social unrest,’ de Faÿ notes [2].

‘Taking the example of cars again, if Tesla were to be the only vehicle on the market, it would mean the energy transition is effectively only for the rich,’ he says [2].

On top of that it’s important to consider the fallout from the transition: a shift to manufacturing electric vehicles rather than traditional engines, for example, could mean some existing workers are put out of their jobs. 

The combination of these factors, along with a clear engagement policy that allows ongoing dialogue with companies, helping them to move in the right direction in terms of ensuring a just transition is fundamental.

Sources:

[1] https://www.ipcc.ch/report/ar6/wg1/downloads/report/IPCC_AR6_WGI_SPM.pdf
[2] Interview with Alban de Faÿ, Portfolio Manager, Fixed Income, Amundi France,10 May, 2021.