Horizon 1: the 2020s

4.2 Horizon 1: the 2020s

The key technologies required in this decade are already available; mainstream capital must focus on the rapid scale up of renewable energy, whilst the more risk/innovation focused investors can invest in the burgeoning market in cleantech/ climate-tech, as well as innovation in the energy industry across hydrogen, batteries/storage, efficiency and CCUS. Key opportunities, challenges and actions for firms to consider during the 2020s include:

Key transition opportunities

Developed markets

Rapid scale-up of renewables to displace/ repurpose fossil fuel infrastructure

Build more nuclear capacity; invest in R&D and trials to test business models for Hydrogen & CCUS

Electrify light vehicles and promote customer adoption

Invest in T&D networks and grid reinforcements

Encourage electrification and energy efficiency measures where applicable Emerging markets

Roll-out decentralised, distributed renewables in remote areas e.g. Sub-Saharan Africa

Major push on scaling up renewable infrastructure and established technologies to electrify transport and improve mobility

Identify options for nuclear, geothermal and other low-carbon sources where financially viable

Key transition challenges

Global price inflation, in particular energy price rise linked to Russia-Ukraine conflict, driving global economic instability and affordability or “cost of living” crisis

Political upheaval relating to economic challenge stalling momentum around net zero commitments

Lobbying/resistance in regions with higher dependence on fossil fuels, and concerns around impacts on local economy and jobs

High upfront capital investment required to build up infrastructure and increase renewable generation capacity

Establishing secure/robust supply chains around new business models in emerging markets with higher risk ratings

Financial risks around “green bubble” and crowding new technology investment into ESG/net zero aligned technologies, due rapid growth in investor demand in developed markets (green premium)

Key actions and mitigations

For governments and regulators

Develop new public-private partnerships and blended finance models to promote risk-sharing and drive additional investment into renewables and emerging markets to address funding gaps

Adapt public funding models and policies to remove any fossil fuel subsidies, encourage phase-out fossils and ensure any imports from emerging markets are from existing not new plants

Harmonise ESG risk management and disclosures regulation to improve consistency, quality and availability of data, and encourage/incentivise integration into financial markets and valuations, including development of proposals for natural capital

Collaborate with government, central banks and development banks to promote risk-sharing through blended financial models

Work with regulators and industry associations to combat shared challenges, and develop common standards around ESG and climate investing (e.g. taxonomies, metrics, data, etc) Integrate holistic ESG and net zero principles into investment objectives to promote sustainable investing in line with net zero and UN SDGs

Proactively engage with and promote sustainable investing to clients, including any innovation in green funds/solutions Encourage further investments into emerging markets and credible carbon removals, biodiversity and natural capital

Assets: As institutional investors, commit to Net Zero Asset Owners initiatives and targets to align investment portfolios to net zero, via committed fund managers; incorporate holistic ESG and net zero objectives into investment mandates

Liabilities: Understand transition pathways for relevant product lines to build a forward-looking view of how your underwriting portfolio will need to adapt to take advantage of opportunities whilst balancing target loss ratios; Consider product development opportunities presented by development and scale-up of both emerging markets and natural capital focused solutions e.g. protections for coral reefs34; Consider policies around underwriting of fossil fuel infrastructure/production activities, particularly in developed markets35; communicate clear timeline for emerging markets; start to develop/refine pricing models around wider ESG and natural capital assets

Clients: Proactively engage with client base to inform them of their forward-looking risk profile and likely changes to key policy terms and exclusions over time, including physical, transition and wider ESG risks, innovate to support and facilitate new business models associated with the transition, for example collective insurance products supporting new transport models and ride-sharing solutions.36

For investors

For insurers

34 International Coral Reef Initiative, New Parametric Insurance for Endangered Mesoamerican Coral Reef | ICRI (icriforum.org)

35 Reported by the Financial Times, Australian mine contractor fails to obtain insurance on ESG concerns | Financial Times (ft.com)