Globally co-ordinated action is required to ensure no more than 2 degrees of global warming - LGIM highlights the urgency of policy action to incentivise the rapid changes needed.
12 Apr 2019
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.
Sonja Laud, Deputy Chief Investment Officer at LGIM said: “This is an exciting step in our analysis of the energy transition. This modelling presents an even clearer economic rationale for coordinated policy action and presents a compelling case for long-term investors to act to prepare their portfolios today.”
Nick Stansbury, Head of Commodity Research at LGIM, commented: “Energy dominates our daily lives. Not just in the energy we consume driving our cars or heating our homes but also in the products we use. Our energy system is undergoing profound change and understanding that is of first-order importance for global investors. This model enables us to carry out ground-breaking analysis, helping us prepare investors for future energy transition risk.”
James Greenleaf, Climate Change Director at Baringa, says: “Providing a more robust evidence base for investors is vital to support their decision-making and help accelerate the pace of energy system transition to the level that is needed to meet our climate targets. We are delighted to have developed this critical tool with LGIM to understand the transition ahead and are looking forward to using this with clients across all our industries in addressing the challenges of climate change.”
Notes to editors
Established in 1836, Legal & General is one of the UK's leading financial services groups and a major global investor, with over £1.4 trillion in total assets under management* of which a third is international. We also provide powerful asset origination capabilities. Together, these underpin our leading retirement and protection solutions: we are a leading international player in pension risk transfer, in UK and US life insurance, and in UK workplace pensions and retirement income. Through inclusive capitalism, we aim to build a better society by investing in long-term assets that benefit everyone.
*at 31 Dec 2021