LGIM research into the energy transition reveals trillion dollar investment opportunity

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.

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.”

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Notes to editors

About Legal & General Investment Management

Legal & General Investment Management: Legal & General Investment Management is the investment manager for the Legal & General Mastertrust, one of Europe’s largest asset managers and a major global investor, with total assets under management of £1 trillion (as at 31st December 2018). We work with a wide range of global clients, including pension schemes, sovereign wealth funds, fund distributors and retail investors.

Throughout the past 40 years we have built our business through understanding what matters most to our clients and transforming this insight into valuable, accessible investment products and solutions. We provide investment expertise across the full spectrum of asset classes including fixed income, equities, commercial property and cash. Our capabilities range from index-tracking and active strategies to liquidity management and liability-based risk management solutions.

Past performance is not a guide to future returns. The value of your investment and any income taken from it is not guaranteed and may go up and down.

About Baringa Partners

For more information or to arrange an interview please contact: climatechange@baringa.com. Baringa Partners is an independent business and technology consultancy. We help businesses run more effectively, navigate industry shifts and reach new markets. We use our industry insights, ideas and pragmatism to help each client improve their business. Collaboration is central to our strategy and culture, ensuring we attract the brightest and the best. And it's why clients love working with us.

Baringa launched in 2000 and now has over 600 members of staff and more than 60 partners across our five practice areas of Energy and Resources, Financial Services, Products and Services, and Government and Public Sector. These practices are supported by cross-sector teams focused on Customer and Digital; Finance, Risk and Compliance; People Excellence; Supply Chain and Procurement; Data, Analytics and AI; Intelligent Automation and Operations Excellence; and Technology Transformation. We operate globally and have offices in the UK, Germany, Australia, US, and the Middle East.

Baringa Partners has been voted as the leading management consulting firm for the second year in the Financial Times' UK Leading Management Consultants in the category energy, utilities and the environment. We have been in the Top 10 for the last 10 years in the small, medium, as well as large category in the UK Best Workplaces™ list by Great Place to Work®. We are a Top 50 for Women employer, and are recognised by Best Employers for Race. 

Baringa. Brighter Together.