Fossil-free by 2075.  That is the answer the International Energy Agency (IEA) found when it explored technology transition paths for the global energy sector consistent with stabilizing climate change. As an intergovernmental formation of industrialized nations, the IEA’s aim was the same target as the one repeatedly sought by in international negotiations – 2 degrees Celsius above pre-industrial global average temperatures, a level intended to avoid the most catastrophic effects of climate change. While investment analysts are often bound to performance horizons of just a few quarters, the IEA view to 2075 has implications for capital allocations today.

Investors with a multi-decade view on the value of their portfolios face critical decisions about navigating this transition – not so different than those who had to decide when to stop investing in whaling ships in favor of kerosene manufacturing. Investors in passenger ships lost their shirts to investors in aviation in the 20th century, and buggy whip manufacturers did not survive the challenge of the rising automotive industry. What disruptive technologies and business innovations can drive clean energy revolutions in the 21st century? And if investment levels in fossil-free solutions remain inadequate, what disruptive impacts of climate change could be wrought on holdings across the economy?

The energy sector accounts for more than $5 trillion in global GDP, and more than 80% of the world’s economy is dependent upon fossil fuel.  The opportunity space for clean energy solutions is enormous and immediate, yet investment levels in energy efficiency, renewable energy, energy storage, and other cost effective zero-carbon technologies are still too low to make the mark. The IEA calculated that global annual investments in fossil-free technologies would need to increase by about $1 trillion above business as usual – and maintain that elevated investment level every year for decades.

Any time we imagine transforming 80% of one of the largest sectors in the economy, there is tremendous opportunity. Nearly 80% of the U.S. companies in the S&P 500 are already reporting through the Carbon Disclosure Project that their return on investments in carbon-reduction is higher than on their main lines of business. Transparency about the performance of those investments has helped overturn long-held beliefs that investments in sustainability would take a toll on a firm’s financial performance. Instead, investors now have more cause for concern about the toll of climate change damages as the opportunity cost of failing to de-carbonize.

The U.S. Department of Defense doesn’t mince words about the hazards on the horizon: Climate change is a threat multiplier. After making this pronouncement in 2010 in its tenaciously vetted national defense strategy, the Armed Forces underscored its view in the latest edition published this year. “Sea levels are rising, average global temperatures are increasing, and severe weather patterns are accelerating,” the report noted. And it dryly concluded, “These changes, coupled with other global dynamics . . . will devastate homes, land, and infrastructure.”  It is no surprise, then, that the Defense Department is making multi-billion dollar investment commitments to deploy clean energy.

The Joint Chiefs of Staff are not the only ones putting CEOs on notice.  Top experts authoring a landmark National Climate Assessment (NCA) for the U.S. Global Change Research Program this year also captured key messages in plain language. After recounting projections for increased damages from droughts, downpours, fires, storms, and sea level rise, the Assessment presented findings for specific sectors.  For example, the NCA findings for transportation include:

  • Extreme weather events currently disrupt transportation networks in all areas of the country; projections indicate that such disruptions will increase.
  • Sea level rise, coupled with storm surge, will continue to increase the risk of major coastal impacts on transportation infrastructure, including both temporary and permanent flooding of airports, ports and harbors, roads, rail lines, tunnels, and bridges.

Looking toward solutions, the U.S. National Climate Assessment also reviewed scenarios for climate stabilization in studies like those undertaken by the IEA, and the bottom line it captured has stark implications for investors (with italics added for emphasis):

“In these studies, direct burning of coal without carbon capture is essentially excluded from the power system, and the same holds for natural gas toward the end of the century – to be replaced by some combination of coal or gas with carbon capture and storage, nuclear generation, and renewables.”

The writing is on the wall: “Disruption Ahead.” The good news for investors is that the disruptions caused by climate change to business as usual in both commerce and national security will also continue to motivate disruptive transformation in the energy sector. Managers of long-term investment portfolios have good reason to take those risks and opportunities into account – and like the S&P 500 companies that are already profitably exceeding their carbon reduction targets, the key is to get started.

Holmes Hummel, Ph.D is the Founder of Clean Energy Works, which connects champions of energy efficiency and renewable energy with resources that accelerate investment in clean energy solutions. Dr. Hummel was the Senior Policy Advisor in the U.S. Department of Energy’s Office of Policy & International Affairs.
International Energy Agency (IEA). Energy Technology Perspectives 2012: Pathways to a Clean Energy System, Paris: OECD/IEA, 2012.
U.S. Department of Defense.  Quadrennial Defense Review 2014. Washington, D.C.
U.S. Global Change Research Program.  National Climate Assessment 2014. Washington, D.C.
Carbon Disclosure Project and World Wildlife Federation. The 3% Solution 2013.