S&P Global Sustainable1 on taking a data-driven path to net zero

Investors need a granular understanding of approaches to net zero, says S&P Global Sustainable1’s Richard Mattison.

This article is sponsored by S&P Global Sustainable1.

Years of talk on climate change is yet to translate into action to put the world on a path towards limiting warming to 1.5C. Richard Mattison, vice-chair of S&P Global Sustainable1, discusses the pivotal role of data-driven strategies in achieving the goals of the Paris Agreement.

What’s the outlook for achieving the goals of the Paris Agreement?

Richard Mattison

The outlook is mixed, and I would say leaning towards negative. At S&P Global, we model a series of scenarios. S&P Global Commodity Insights analyses the energy transition trends globally, looking specifically at the transition from fossil fuels to renewable sources of energy, with a bottom-up approach. In our base case scenario, the share of global energy use coming from fossil fuels is projected to decrease from 80 percent today, to approximately 58 percent by 2050, with a 25 percent reduction in greenhouse gas emissions.

However, this falls far short of Paris Agreement goals. That scenario implies a warming of about 2.4C above pre-industrial levels by 2100. We’re well behind where we need to be, which means that net zero is out of reach except in our most speculative and optimistic outlooks.

Positively, we have found that renewables are poised to be the growth story of the coming decades. They are expected to multiply under all our scenarios, with renewable power surpassing 50 percent of global electricity generation by 2050 in our base case. This shift represents a significant transformation rather than a revolution, but renewables are clearly gaining momentum with supportive policies like the US Inflation Reduction Act.

What does this mean for financial stability?

If we don’t meet the Paris Agreement goals, we will face significantly greater levels of physical and geopolitical risks. We’re already starting to see wars linked to droughts and the lack of availability of food. These challenges will persist, and may worsen as risks escalate.

For investors and those assessing financial stability, working out how to fund a transition to a greener, cleaner, more sustainable future can be a daunting task. Implementing policies can be challenging during periods of high energy costs, when there’s resistance to the added expense of transitioning to renewables. However, this is just one side of the equation, and the hidden cost of inaction is far more significant.

It’s critical to have the right analytics and data for informed decision-making. At S&P, we analyse 700 billion data points on the physical impacts of climate change, mapping assets to companies in various locations globally. We then map those entities to portfolios for investors to help them understand what those risks look like. We’ve mapped more than three million assets owned by companies for various hazards, providing estimated loss figures based on their current portfolios.

This location-specific, detailed, bottom-up approach is essential for well-informed decision-making, as well as understanding the financial exposure. For a company striving for net zero, the critical balance is between the transition and investing in future technologies, versus the cost of inaction and preserving the current business model.

Are companies moving the needle?

Some of the leading companies are trying to figure out how to change their business models and figure out where the opportunity is. But out of the 13,000 companies we analyse across the world, we found that less than one-third provide the relevant information on the opportunities and risks associated with climate change. This highlights the need for further progress. Disclosure regimes will help in that context, and we welcome the International Sustainability Standards Board, but there is still a long way to go in terms of incentive structures.

We need a combination of supportive policies, blended finance and mainstream investment. I don’t think multilateral development banks can change everything by themselves. The world’s largest multilateral development bank, the World Bank, has assets of $333 billion. That is 8.5 percent of the assets of JPMorgan and just 3.5 percent of the assets under management of BlackRock. Therefore, placing all our hopes on blended finance is not going to get us there.

What progress has the investment community made?

Instead of governments, it will be the investment community that will finance this transition to net zero. I distinctly remember the moment when the Principals for Responsible Investment passed 1,000 signatories; and this year I attended the annual meeting in Tokyo, and they have passed 5,000 signatories.

The number of commitments, their tracking, and the transparency in capital markets is increasing all the time. But there is still a long way to go, and there is no point in having a 2050 net-zero target without a near-term detailed plan. Detailed scenario analysis will play a critical role, and it’s crucial that investors understand the technologies that will contribute to net zero.

The number one question right now for the investment community is how do you understand whether you are making progress in the near term? How do you understand whether you are financing a transition company or a transition asset or not?

What are some key elements investors need to consider?

Equity investors swapping companies in and out of portfolios for net-zero goals isn’t enough to transform the real economy. And if you’re not changing the real economy, you’re not changing the integrity of the market, therefore all your clients will crash in the future because of the physical risk of climate change. Fixing this issue isn’t solely the responsibility of the financial community, but it has a significant role. It’s crucial to grasp the concept of transition assets, companies, and portfolios, and determine if they’re effecting real-world change.

We’ve gathered multifaceted insights to aid investors and other institutions, including banks. We examine a company’s commitments and technology pathways, including assessing the costs of various technologies, such as solid-state batteries for electric cars and the future of green hydrogen globally. For some companies, emissions may continue to rise, while others, with the right strategies, can significantly reduce emissions by financing transition assets and companies.

What’s crucial is a multi-layered, detailed and actionable analysis that helps investors be at the forefront of current practices. The idea that net zero is just going to happen, leading to an overnight transformation of portfolios without considering the real economy, is outdated. We need to move to a situation where we are analysing what the net-zero transition looks like in the real world.