Increasing geoeconomic risk is leading to a stuttering net-zero transition
Weaker climate policy commitments, trade tariffs and geopolitical security concerns are reshaping the transition to net-zero emissions and immediate risks are taking precedence over long-term sustainability goals, according to S&P Global Ratings’ latest report.
Net-Zero Transition Stutters As Geoeconomic Risks Increase looks into the net-zero transition and factors that are shaping this landscape, finding that rising geopolitical risks and the end of the Washington Consensus have led to sustainability taking a backseat. Policy uncertainty and a decline in public funding have also reduced investment returns of clean technologies and trade tariffs could increase the cost of transition further.
The report also found that clean technology has been deployed too slowly to prevent greenhouse gas (GHG) emissions from rising further. Robust demand in emerging markets still exceeds production capacity, and energy-intensive technologies, such as AI, could weigh on the progress.
Despite this, clean technologies are gaining momentum. In 2024, investments in low-carbon energy sources accounted for 80% of total energy investments in Europe and 55% in Asia. Meanwhile, clean technology trade doubled to 2% of global trade in 2023, from 0.9% in 2019.
Additionally, China, APAC and the EU are at the forefront, with China accounting for about 37% of global clean technology exports in 2023. China’s success in the clean technology space is not the norm, however, and its pioneering role is partly a result of economic fundamentals, including its extensive industrial know-how, the large domestic market and its ability to innovate.
Active management
Economic uncertainty and market volatility is also the focus of Schroders’ flagship Global Investor Insights Survey, with investors increasingly turning to active management to strengthen portfolio resilience and capture specific investment opportunities.
The survey, which spans nearly 1000 institutional investors and wealth managers globally, encompassing $67trn in assets, revealed that four in five investors (80%) are somewhat or significantly more likely to increase their use of actively managed investment strategies in the year ahead.
These findings follow significant market volatility earlier this year, largely triggered by the US Government’s decision to introduce wide-ranging trade tariffs.
These tariffs were selected by nearly two-thirds of respondents (63%) as the biggest macroeconomic concern, more than six times the next highest perceived risk. This is likely to have fuelled investors’ strong focus on ‘portfolio resilience’ over the next 18 months, which was the overwhelming top priority for portfolios, having been selected by more than half of all surveyed (55%).
Johanna Kyrklund, group chief investment officer at Schroders, said: “Active management is indispensable amid today’s fragmented markets. With four in five investors set to increase their allocation to actively managed strategies this year, it’s clear they value a selective and adaptable approach.
“The wider backdrop is that financial markets are still adjusting back to structurally higher interest rates, made painful in many cases by high levels of debt. This is raising questions about future market trends and the value of passive approaches in a period of greater uncertainty.
“Resilience now tops the investment agenda, as the rising tide no longer lifts all boats. In this environment, active strategies provide the control investors need to manage complexity, create portfolio resilience and seize opportunities.”