On December 15, US bank Goldman Sachs announced what many believe to be the strongest restrictions on fossil-fuel activity by any major bank in the United States. Most notably, the bank has become the first big American lender to restrict financing on any part of the oil-and-gas sector, with a particular focus on protecting the Arctic National Wildlife Refuge.
Fossil fuels have been the mainstay of energy generation for decades, but the move away from carbon-based, nonrenewable fuels is being driven by concerned citizens and governments, although nations are falling short of targets. There will be winners and losers during the transition to a carbon-neutral world economy, and investment-portfolio managers want to be in the winners’ group. What are the climate-change, carbon-transition risks that portfolio managers need to consider?
The push to transition from fossil fuels to renewables for power generation has been motivated largely by environmental concerns. But today, dollars and cents are increasingly supporting the transformation drive, as renewable-energy sources become much more cost-effective, even outmatching fossil fuels in value per dollar. Forecasts predict that new power generation through renewables—especially solar, wind, hydroelectric—will soon outstrip fossil fuels, attracting growing interest from governments, banks and investors.
The Paris Agreement, signed by nearly 200 countries just a few months ago, marks a significant global shift away from investment in fossil fuels to renewable energy. 2015 was a banner year for the development of clean energy; although the pace has slackened somewhat in 2016, financial heavyweights continue to grow their “green” investments.