Partner Insight: The road to net zero

clock • 3 min read

Newton’s Laura Sheehan on challenges in cutting emissions

The global energy system has undergone extreme changes as a result of the Covid-19 pandemic. With oil demand collapsing in the wake of travel bans, the International Energy Agency estimated that global emissions decreased by 5% over 2020, returning to levels last seen a decade ago.

As a research analyst specialising in the oil and gas sector, I have had the ear of management teams grappling with the difficulties of the energy transition. Following the 2015 Paris Climate Agreement, many still resisted calls to cut oil production, or to explore different segments of the energy chain. However, after lockdowns began in March 2020 and the industry went into crisis, the commitments we had sought from energy firms for years were manifesting themselves in the space of just a few months, and it was soon clear meaningful change was finally afoot. 

Most importantly, investment has been allocated to energy-transition solutions, which have progressively been increasing as a part of firms' overall spending. Bigger oil names are looking to adopt broader integrated energy models, while others are focusing on key end markets and product solutions, including renewable-power generation. We have even seen companies announce meaningful oil-production fade targets. 

There are striking parallels between the global pandemic and climate change, in that many of the warning signs from experts went unheeded, before the full magnitude became apparent. The slow response of many nations to the pandemic has only reinforced the need to act today on climate change; there is no vaccine for over-emitting. In Europe, emission-reduction targets are accelerating (from 40% to 55% by 2030). However, two recent additions to the net-zero pledge command the most excitement: the US and China, which, combined, account for over 40% of annual global emissions. 

Despite the chaos of 2020, demand for renewable energy has continued to grow. But to achieve net zero we believe a holistic approach is needed that also encompasses capture solutions, natural sinks, efficiency solutions and renewable fuels such as hydrogen. This year's Earth Day came with a stated focus on "natural processes, emerging green technologies and innovative thinking that can restore the world's ecosystems". This presents our energy system with challenges, but it can also be an exciting opportunity for investors. DC schemes may wish to review whether they have appropriate exposure to investment strategies that both integrate ESG considerations and seek to capture this opportunity set. 

Laura Sheehan is a global research analyst at Newton Investment Management

Important information: This is a financial promotion. This article is for professional investors only. These opinions should not be construed as investment or any other advice and are subject to change. This article is for information purposes only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management is authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. Newton Investment Management Limited is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton's investment business is described in Form ADV, Part 1 and 2, which can be obtained from the website or obtained upon request. ‘Newton' and/or ‘Newton Investment Management' brand refers to Newton Investment Management Limited.

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