IEEFA: Institutional investors have a major role to play in carbon emissions reduction

The recently released International Energy Agency (IEA) roadmap to a net-zero economic transformation by 2050 not only lays out an energy-and-beyond vision, but also sets forth key steps needed to achieve it. 

The situation is dire, and the message for institutional investors, particularly public funds, is stark. Maintaining returns that meet financial targets—and protecting the fiscal solvency of nations, states and local governments—will require deliberate yet expeditious action. Staying on the sidelines is not a responsible fiduciary course.  

The roadmap for institutional investors contains three major elements. Investors must: 

1. Assess all energy companies in their current portfolios and use minimum transition readiness standards as a basis for potential action. The IEA predicts the traditional oil and gas business will decline at a steady, substantial rate through 2050. 
2. Engage across all industries to establish net-zero strategies. Companies in investment portfolios that are not energy producers or part of the fossil fuel industry need to assess their business strategies to capitalize on the emerging broad range of new investment opportunities in the residential, business and government sectors. Whole new industries are being conjured as investments shift. Companies that have no interest in the energy transition will soon learn that the energy transition has an interest in them.
   Companies also need to reduce their individual carbon footprints and set goals backed by investment plans. Recent history and innovation models in power, transport and end-use industries all point to a general decrease in the cost of energy. As energy efficiencies are translated into cost savings for consumers and businesses, both household budgets and business models will change.
3. Become more engaged with government policy. More private sector investment is required, so new policies are necessary. 

One government policy in particular must be addressed. During most of the last century, the coal, oil and gas industries have been treated as a politically protected class. This may have made sense last century, but it does not make sense now.

When the United States was hit in the 1970s by an energy security crisis, for example, one of its responses was to flood U.S. markets with cheap coal from the Powder River Basin in Wyoming and Montana. The U.S. Department of the Interior’s coal lease program supported decades of coal plant expansion. The nation consumed 320 million tons of coal in 1970, peaking at more than 1 billion tons by 2007. 

Today, however, the business model between government and private sector coal interests has unraveled. U.S. consumption of coal fell to 436 million tons in 2020. It is time for a shift in policy that favors new, less carbon-intensive industries.

New technologies and their applications are spurring those new industries, particularly in renewable energy and battery storage, electrification, and energy efficiency. Political leaders should change policies to give these industries the same kind of protected status that fossil fuels have  enjoyed. Leaders may also choose to incentivize hydrogen and carbon capture projects, to determine if and where they may be both appropriate and effective. Some projects may not succeed, but research and development will move the economy forward.

Workers and communities will undergo significant changes during the energy transition, and public policy can also ease the stress. Moody’s recently offered its view that government’s failure to address rising inequality can undermine and weaken the institutions that countries rely upon to sustain the stability needed to support economic activity. Institutional funds, particularly those closely aligned with national governments, are uniquely positioned to lead on fiscal, labor and development issues. 

The IEA’s roadmap underscores the importance of investors and the participation of national governments in global networks to set a proper framework for policy and investment. The Paris Agreement, for example, is a critical institutional tool for a new economic course. 

The path forward is clear. The report provides a “to-do” list for stakeholders—companies, governments, investment professionals, retirees, employees and elected officials. Over the next 30 years, the IEA report can be a good tool to measure change. If key leaders in government, industry and investment step up to the task, the change will be substantial.

Tom Sanzillo ([email protected]) is IEEFA’s director of financial analysis.

Related items:

Carbon Neutral Bonds: Has China Set the Bar Too Low? June 2021.

Should Santos’ Proposed Barossa Gas ‘Backfill’ for the Darwin LNG Facility Proceed to Development? March 2021.

When Net-Zero Means Not-Zero: Bringing Perspective to Snam’s 2040 Net-Zero and Sustainable Financing Claims, March 2021.

Running on Fumes: Oil and Gas Supermajor Cash Woes Worsened in 2020, March 2021.