Last year, a group of Conservatives MPs formed the Net Zero Scrutiny Group (NZSG), which has been campaigning against measures to tackle the climate emergency and attempting to link net zero plans to the cost-of-living crisis.
Whether these views are dismissed as extreme and fringe, the ‘net zero’ commitment is in focus in terms of what can be achieved, the costs and what any trade-off might be.
One immediate question is how could the transition to net zero play out on the global economic stage over the longer term – and how could that impact on investors’ portfolios?
Michel Wiskirski, fund manager at Carmignac, believes it will have global implications on all fronts, through economic growth, public spending changes and with social adjustments that need to be made – notably employment shift.
“Global supply chains will have to accommodate much larger quantities of output coupled with large metals demand. Building more capacity and manufacturing more locally will have long-term inflationary consequences.”
He adds: “Investors will also be impacted through their investments and with the help of EU Taxonomy, more and more money will be driven to green industry and renewable themes.”
Colossal investment required
This increased level of money may be welcomed but the transition to net zero will require unprecedented levels of investment globally. Where will the money actually come from?
Kate Elliot, head of ethical, sustainable and impact research at Rathbone Greenbank Investments, insists the low carbon transition will require capital flows from both public and private finance.
“As of December 2021, there were 236 signatories to the Net Zero Asset Managers Initiative, collectively representing $57.5trn in assets under management. While many of these are yet to publish detailed short and medium-term targets to back up longer-term net zero ambitions, the direction of travel is clear in terms of aligning investments to a pathway which supports net zero by 2050 or sooner.”
Elliot argues there is clearly a significant pool of capital ready to support the low carbon transition, though a key dependency for unlocking this capital is effective global policies that provide a stable environment which supports long-term, low-carbon investments.
Wiskirski insists governments have a crucial role to play but so far, they have not been up to the challenge, falling short to meet some environmental targets that were set up in the past.
“We believe we will see increased public spending and investments into these sectors. The increased spending and additional cost would be shared by all economic agents, public and private companies.”
See also: Asset managers signed up to ESG initiatives failing to vote accordingly
Stifling innovation?
Is there a danger that this net-zero transition might lead to less innovation and lower productivity growth as a result of capital being diverted from other areas?
Elliot thinks not. “One of the key drivers of the move to net zero emissions is a desire to manage and mitigate the systemic risks posed by unabated climate change and to ensure that capital is being allocated in a manner that delivers long term value creation.”
She adds: “It could be argued that diverting capital from high carbon businesses that are unable or unwilling to transition to a low carbon world is, in many situations, a simple question of investment managers delivering on their fiduciary duty to deliver long-term returns.”
See also: IPCC: New fossil fuel investments must be stranded for 1.5°C world
It’s also important to note, says Elliot, that while some industries will decline or disappear over time, others will grow and take their place.
At a relatively micro level, Greenbank published a report last year which looked at the impact of the move to net zero on jobs across UK, projected out to 2025, 2030 and 2050.
In the near term, in 2025, three regions experience a net loss: Scotland, Wales, and London. But extending out the analysis to 2050 shows an overwhelmingly positive outlook: over half a million new jobs arising as a result of the low carbon transition, with a net gain of 236,000 jobs, and every country and region across the UK experiencing a net gain in employment.
This view is backed up by a recent McKinsey report which found at a global level that about 200 million direct and indirect jobs would be gained to 185 million lost by 2050.
Another positive stance is that some of this investment is likely to be in public infrastructure, which encourages job creation and investment and raises productivity. Also, the fall in the cost of clean energy technology has exceeded expectations from 10 to 20 years ago.
Wiskirski suggests the positive trends we have seen in the past years will most likely continue. “As we progress and increase investments into clean energy technology or green enabling industries, we will see productivity gains and a further fall in the cost of clean energy.”
Worth the cost?
Is the multi-trillion price tag to achieve the net zero target something to be baulked at?
The tendency to focus on the cost of the low carbon transition misses the point, according to Elliot. “Yes, moving to net zero will undoubtedly involve significant disruption and rapid evolution and change across our economies and societies, but the cost of inaction is far greater and the longer we leave it to take action, the more disorderly and costly the transition will be – in economic, social and environmental terms.”
She insists there are far greater uncertainties around doing too little – for example, the difficulty of quantifying the economic cost of biodiversity loss or modelling the impact of climate tipping points such as deforestation in boreal and rainforest regions – than there are around doing too much on climate change.
“As such, it is difficult to make a convincing economic argument against combating climate change. If you were then to add in the social and environmental costs of inaction on climate change, from increased severe weather events to food and water shortages, then it is clear that action on climate change needs to be swift and bold.”
If this bold action is taken, is it too optimistic to hope for another industrial revolution powered by cheaper green energy?
Not according to Wiskirski. He is convinced the green tech revolution will be the next industrial revolution, where innovation and climate goals will go hand in hand to be the new growth driver for the foreseeable future.
