Investment opportunities and trends in the ESG Universe

The world remains far from meeting the maximum global warming limit of 1.5 to 2.0 degrees Celsius established by the Paris Agreement adopted in 2016. Pledges and targets for decarbonization have notably increased, but the actions necessary to meet such ambitions remain insufficient. The significant capital (political, financial, and human) required to facilitate these objectives has the potential to be highly disruptive to the global economy.

Capital deployment by public and private actors will be meaningful given the commercial potential for scalable solutions, resulting in investment opportunities across a range of asset classes. Capital reallocation to cleaner sources of energy by governments and investors has long-term merits but also has the potential to cause short-term dislocations over the course of the transition.

The trajectory for fossil fuel demand peaking in parallel with tightening regulatory and ESG pressures on fuel exploration and production increases the risk of energy price volatility over the secular horizon and can translate to broader upward pressure to inflation. Furthermore, the concentrated sources for the underlying minerals and raw materials needed for clean energy technologies cause overreliance on certain countries and supply chains, resulting in a trade-off between diversifying supplies and achieving a cleaner energy future over the shortest possible time frame.

A concerted effort to reach the Opportunities and Trends in ESG well- below 2.0 degrees Celsius goal would mean a quadrupling of mineral requirements for clean energy technologies by 2040. How the world ensures supply and demand remain relatively balanced for both old and new energy will be of critical importance to maintaining stability in financial markets and confidence in policymakers. Climate disclosure requirements are expanding across geographies through a range of regulatory initiatives, while an increasing share of investors consider climate to be a material driver of performance.

Climate change adaptation and mitigation are likely to be a major focus of policymakers and regulators over the secular horizon. Carbon pricing, and concepts such as the Carbon Border Adjustment Mechanism, will continue to gain momentum in many economies. While a carbon pricing policy is a remote political possibility in the U.S. at the federal level, certain state governments will continue to move ahead with such efforts in their jurisdictions with considerable impact.

Overall, the energy transition represents a capital deployment event of historic proportions. Measuring the risks and opportunities for the transition directly, and indirect implications across asset classes, will be increasingly critical for investors.

PIMCO is committed to ongoing engagement with policymakers and international organizations to help develop the best frameworks, tools, and solutions to enable investors to analyze the risks and opportunities in this rapidly evolving space.