Fidelity: Tracking net zero progress: Too little, not too late

Key points

• The energy crisis has highlighted the medium-term trade-off between pursuing energy security and pursuing the green transition.
• To gauge the likelihood of different climate change scenarios from here, we are tracking three key transition enablers - corporate action, technology, and policy - that have the power to accelerate or slow progress.
• A disorderly transition is still most likely, but the influence of policymakers is more acute. Tracking transition enablers with the aid of analyst research will help monitor shifts in probabilities.

This article is an excerpt from a longer race to net zero white paper from Fidelity Multi Asset. You can access the full version by clicking here.

2022 was extraordinary in many ways. From record temperatures to a war-induced energy crisis, it brought both climate urgency and energy security into sharp relief. The war in Europe pushed many countries across the world to prioritise fossil energy as a short-term solution to the problem of energy supply. As a result, last year saw a rebound in consumption of coal and an estimated 1% rise in CO2 emissions globally, according to the Global Carbon Project.

The energy crisis has highlighted the medium-term trade-off between pursuing energy security and pursuing the green transition. While these objectives should, in theory, be compatible in the long-term, the path there is fraught with challenges. The war has caused a tectonic shift in the geopolitics of energy security that that will shape the path towards a different world order to that which we have known for the past few decades and influence the temperature outcomes in this century.

Still on course for a disorderly transition

To gauge the likelihood of different climate change scenarios, we are tracking three key transition enablers - corporate action, technology, and policy - that have the power to accelerate or slow progress towards net zero. The events of 2022 have not been enough to change our base case that a disorderly transition is the most likely climate change pathway. Such a scenario would still limit temperature increases to less than 2°C above pre-industrial levels but comes with high transition risks because required policies would be delayed or divergent across countries and sectors.

Tracking the three key transition enablers - corporate action, technology and policy

Our latest climate ratings give an idea of the scale of change the corporate sector needs to go through in the coming years. Our analysts report that of over 2,080 companies given climate ratings, only 2% are currently ‘achieving or enabling net zero’ with another 5% ‘aligning to a net zero pathway’. We believe that over 90% of companies will need to fall into these two categories by 2050 in order to make net zero a reality. Given the low starting base, the speed needed to achieve this might be possible in the next decade but will become increasingly difficult to achieve over time and highly depend on developments in the other two key enablers.

Chart 1: Just under half of all companies show either low or no evidence of transition potential

Source: Fidelity International, December 2023.

On technology, we narrow down our focus on four key groups, including low-carbon energy, energy efficiency and storage, building efficiency and hydrogen. Our assessment concludes that only electric vehicles (EVs) are on track for the net zero transition by 2050 while low-carbon energy sources have the potential for either an orderly or disorderly pathway. Other technologies lag significantly, either in terms of adoption or development.

Assessing policy action across the four pillars - carbon pricing, political environment, policy incentives and international cooperation - over the past year, we note some encouraging progress on a country level, with Europe and the US standing out, but a disappointing lack of momentum on international cooperation.

Disorderly transition, new world order

While a disorderly transition is still the most likely scenario, the range of possible outcomes is now wider than before and the influence of policymakers over the direction and speed of the transition to net zero is more acute. Tracking transition enablers with the aid of analyst research will help investors navigate the tremendous uncertainty associated with climate change and its impact on economies, allowing them to monitor shifts in probabilities of different climate scenarios in real time.

We believe carbon pricing and technological advances are among those policy factors that are most likely to move the dial towards net zero compliance in the near term. In the long term, the geopolitics of energy security and the fundamental shifts catalysed by the Russian invasion of Ukraine will be a key driver of the net zero transition.

This crisis can be turned into a game-changing opportunity. More policy support and coordination across countries is essential to achieving a sustainable, secure, and affordable energy system, which would in turn pave the way to a more orderly net zero transition and a temperature increase below 2°C.

This article is an excerpt from a longer race to net zero white paper from Fidelity Multi Asset. You can access the full version by clicking here.

Important information

This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only.