Net Zero 2050: More affordable than ever, if we act now

Few issues are as significant to our environment and society, and investment returns, as climate change. The challenge it presents is only becoming more pressing, as the energy transition progresses too slowly – and the geopolitical environment becomes more complex.

At LGIM, we look at the transition through the lens of scenario analysis. This helps us to mitigate the associated risks, and capture the opportunities, on behalf of our clients.

In 2022, we undertook a root-and-branch review of all the assumptions that underpin the scenarios we model, whose main findings we detail in this paper. These scenarios are neither forecasts nor predictions; they are potential pathways we have modelled for the world realising different climate outcomes.

Our research suggests the window to achieve a 1.5°C outcome, consistent with ‘net zero’ emissions by 2050, is closing fast. But it also highlights the surprisingly positive reductions in the cost to achieve such an outcome that we have already seen – and can also expect in the future.

In other words: we are more confident that the world could easily absorb the costs associated with realising the goals of the Paris climate agreement, while at the same time far less confident that we are on track to do so.

As a result, we conclude that the world, policymakers and investors need to embrace every legitimate tool in the decarbonisation toolkit. The pathways that remain to reach net zero by 2050 are those that use every lever.

In this context, we remain convinced that engagement with companies critical to the energy transition – with the threat of consequences should they fail to listen – is the best way to deliver the systemic change necessary to meet this challenge. Blanket divestment, in our view, usually means overlooking the problem.

We argue for a shift in focus by investors, to consider how much capital to allocate to those firms that may not yet be fully positioned for a net zero economy, but have the potential to be. These businesses can play a leading role in decoupling economic growth from carbon emissions. We can help them to realise this opportunity.

But we need to be realistic about the road ahead. As time passes, and our worst-case outcomes become more likely, we also think investors need to better prepare for the implications – both in terms of the potential impact on market returns, but also on inflation and volatility.

At LGIM, our purpose is to create a better future through responsible investing. On the generation-defining issue of climate change, we believe this requires the nuanced approach for which we advocate in this research.

This is the only way, in our view, to effect the sustainable, real-world outcomes that we so urgently need.

Read the full 2022 Climate Scenarios Whitepaper