In brief

  • The ongoing low-carbon transition creates investment opportunities, but also poses material investment risks if not managed effectively. Preparing portfolios for a changing world requires investors to understand the transition potential of the companies in which they invest.
  • A crucial step for investors in climate risk analysis is to look at companies’ decarbonisation commitments. An increasing number of companies have set emission reduction targets. However, not all of the targets are equally ambitious, reflecting decarbonisation uncertainties and challenges across sectors and companies that investors need to be aware of.
  • Not all decarbonisation targets will be achievable. To predict how likely companies are to meet their decarbonisation commitments, investors should include in their analysis a range of broader transition indicators. Furthermore, public policy will remain a major external factor affecting the ability of companies to decarbonise within their chosen timescales.
  • Such comprehensive transition analytics can help investors to manage the decarbonisation rate of their portfolios in an investment landscape that is increasingly influenced by climate change.

The energy transition away from fossil fuels to renewables is well underway. Renewable energy capacity increased by a record 13% in 2022 and is forecast to grow by a further 85% in the following five years. However, the future pace of decarbonisation across sectors is subject to demand, policy and technology uncertainties, which all pose significant risks, as well as creating opportunities, for investors.

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