Transition risks of net zero

The transition to net zero is well underway, but it won’t be a smooth path and getting there will pose significant risks for investors. These are the conclusions of a new report by Pictet Asset Management and the Institute of International Finance. It will require higher levels of borrowing by the companies they invest in; the risk of transition-related “greenflation”, along with increases in unemployment; and the possibility of creating asset-price bubbles as a vast amount of capital chases a relatively constrained supply of assets.

To avoid these pitfalls and others, investors must take a measured approach to assessing opportunities as they arise, including assessing the extent to which markets have already priced-in the “greenness” of companies, and what implications that has for alpha generation. And that requires deep research and confidence in available data – which in some cases continues to be patchy.

Pictet Asset Management senior investment manager Yuko Takano, managing investment director, sustainable investments at CalPERS Peter Cashion and Institute of International Finance director Emre Tiftik discuss the opportunities and risks investors need to understand to maximise returns as the energy transition progresses.

In conversation with Top1000funds.com editor Amanda White, they discuss how it’s possible to generate outperformance by investing in climate solutions; and how investors should think about the associated risk and alpha opportunities.