On the right path: Decarbonization trajectories

Climate mitigation will require deep emissions cuts across sectors, phasing out old carbon-intensive solutions while creating new low-carbon value chains. The PAB trajectory is a simple to understand decarbonization pathway that can serve as a benchmark for investors to meet or beat.

On the right path: Decarbonization trajectories

The Paris Agreement and the IPCC Special Report on Global Warming of 1.5°C (2018) highlights the importance of reaching net‐zero CO₂ emissions globally by mid‐century or sooner to avoid the worst impacts of climate change. Greater and more urgent climate ambitions are necessary to achieve the long-term temperature goals of the Paris Agreement.

Transition risks and opportunities
The TEG recommendation aims to limit financial risks and harness opportunities that may arise as companies adopt mitigation strategies in the transition to the low-carbon economy.

The chart on the next page demonstrates the pathways under various climate scenarios. The pathway under the business-as-usual scenario describes an economy with no policy intervention, and in which investments for the decarbonization technology are driven by supply and demand. This implies a 3.3°C warming.

If the broad economy achieves its net-zero goals, the broad benchmarks will too. However, the TEG suggests that climate-aligned benchmarks need to demonstrate decarbonization to net zero regardless of economy-

wide progress. TEG considers a benchmark to be aligned with the 1.5°C scenario provided the decarbonization pathway of the benchmark is in line with the temperature scenario.

The transition to the low-carbon economy is not just about risk but also about bringing opportunity to businesses focusing on green energy solutions such as hydrogen, wind, solar, carbon capture and storage. The hope is that shifts in consumer preferences will increase product competitiveness for greener corporations as well.

 

In summary, multiple pathways are consistent with the Paris Agreement. For investors, such a transition brings risks and opportunity. TEG recommends benchmark portfolios to align with the most ambitious 1.5°C scenario.