AXA IM: Investors should use a range of energy transition scenarios

AXA IM: Investors should use a range of energy transition scenarios

7 juni 2024

Energietransitie
Klimaat (23) CO2 ESG Duurzaam

AXA IM Head of Climate Research, Olivier Eugèneanalyses some of the International Energy Agency’s (IEA) energy transition scenarios and outlines what they mean for society and investors.

'We believe the key challenge is to bridge the gap between the real world – where clearly not enough is being done - and scenarios that are sufficiently ambitious and achievable. Public policies are essential to do so, but all stakeholders – public and private, companies and people – must participate to achieve an ambitious but reachable outcome.'

Eugène distinguishes three scenarios:

  • NZE: Net Zero Energy scenario, aligned with 1.5°C warming above pre-industrial levels - a normative scenario as it works backwards from a defined outcome
  • APS: Announced Pledges Scenario, aligned with 1.7°C of warming – implements countries’ mid-term action plans to cut emissions (their Nationally Determined Contributions) and long-term net zero targets
  • STEPS: Stated Policies Scenario, aligned with 2.4°C of warming – Implements only current policies and actions

'The outcome of the first global stock take - the final document published at the end of COP28 - states that we 'are not yet collectively on track towards achieving the purpose of the Paris Agreement and its long-term goals', Indeed, this analysis and many others, including by the IPCC, conclude that the world is on track for a temperature increase of 2.5°C or above.'

Potential rewards for investors

'We believe it is more relevant for investors to use a range of scenarios than just one to inform their investment strategies. The scenarios also ought to be ambitious, because the transition is an ambitious endeavour.

Exclusively focusing on scenarios which - at least for now - look out of reach can be misleading because it could lead to disconnecting portfolios from real economic conditions, with potentially an impact on risk-return profiles. In addition, using such scenarios to exclude entire sectors to make portfolios look greener while the world is unchanged is in our view a form of greenwashing.

We believe that combining robust demands for companies with a large environmental footprint and engaging with them is a better approach that in the long-term could reap rewards for companies, investors – and the wider world.'

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