The Energy Transition and What It Means for Institutional Investors

Executive summary:

  • The global economy is still overwhelmingly powered by fossil fuels, with more than 80% of primary energy sourced from coal, oil, and gas, as of 2021.
  • Achieving net zero by 2050 would be a herculean task. This energy transition would need to be two times faster than the shifts towards coal, oil, and gas in the last 200 years.
  • A slow transition would expose investors to physical risks. The most pressing physical risk for investors is agriculture. A fast transition would expose investors to large transition risks.
  • How governments facilitate the energy transition will be critical for economies and markets.

On Oct. 24, Kris Nelson, Head of ESG Investment Management, Global Equity at Russell Investments, moderated a discussion on the complexities of the transition to new energy with two Russell Investments strategists: Paul Eitelman, Senior Director, Chief Investment Strategist, North America; and Pierre Dongo-Soria, Senior Asset Allocation Strategist. Nelson and Eitelman participated from the Russell Investments’ studio in Seattle, and Dongo-Soria contributed from London.

According to the panelists, the global economy runs overwhelmingly on fossil fuels—chiefly, oil, gas, and coal—but scientific literature has made it increasingly clear that if the planet is to avoid a significant warming, a transition to cleaner energy sources is critical.

During the one-hour long discussion, the panel pondered the following points: What are the short- and long-term implications of such a transition for investors? Should markets be bracing for persistent volatility? What role could private investing play in all of this, especially given the need for a significant increase in capital spending?

Following is a recap of key highlights from their conversation, which is based on the Russell Investments Energy Transition Report found here.