LGIM research into the energy transition reveals trillion dollar investment opportunity

LGIM has concluded a year-long review of the global energy system and the opportunities for decarbonisation in partnership with leading management consultancy Baringa Partners. LGIM and Baringa have created a bespoke, detailed and investor-focused model to facilitate construction of fully independent energy scenarios. The model ‘Destination’ will inform subsequent, long-term investment decisions and develop dynamic pathways for the energy system. As a result, the energy scenarios we now will use to assess climate and transition risk for our clients are now substantially independent from those produced by third-party agencies.

Recognising the significant risks posed by the energy transition to long-term investors, LGIM used this model to construct a deeply decarbonised scenario for the energy system that is consistent with global warming of well within two degrees, and approaching an emissions profile consistent with less than 1.5 degrees. However, with global temperature levels increasing at an alarming rate, the research also confirms that it is imperative for policy makers to legislate for policies which are necessary to keep climate change to well within two degrees; LGIM’s research has concluded that without such policy intervention the current energy system is progressing towards up to four degrees of global warming.

The modelling has focused on calculating the lowest cost route to a rapidly decarbonising energy system and demonstrates that the cost of an accelerated transition can be moderate if it is well-managed. The transition will create trillions of dollars of investment opportunities and will have profound macro-economic and geopolitical implications. Initial conclusions also intimate that the energy transition will bring substantial and previously underestimated benefits to many emerging economies currently dependent upon imported energy and who are vulnerable to energy price shocks.

LGIM’s research asserts that the future world of energy will look radically different from today. The modelling implies that the future energy system will evolve rapidly, with clear, transformational change occurring over the next ten years. Estimates are that the additional gross energy system costs may be less than half a per cent of 2018’s global GDP. The cost of inaction will substantially raise the later costs of transition, reinforcing the urgent need for policy action.