An important conclusion of climate scenario analysis is that a slower initial transition should not be interpreted to mean that it will not take place, but rather that it will be more intense once it takes place. Fossil assets and the value chains that deliver into fossil energy production will be affected first and foremost. The transition will also entail extensive shifts in value within all sectors that are large energy consumers through production processes, in transportation, steel and metal production, agriculture and food, and construction and real estate. AP4 believes that the climate transition on the whole constitutes an asymmetric force that will have a varying impact between and within various sectors. Some existing companies within a given sector will be negatively affected while others may be part of the solution at the same time that new companies and technologies will take market shares. AP4 is therefore working actively with a combination of quantitative and fundamental analyses at the portfolio and sector levels to identify potential winners and losers.
AP4’s conclusion is that the risks of being late in the transition are assumed to outweigh the risks of being too early. The upside for resource-intensive assets is limited by the emergence of climate-friendlier alternatives – which are gradually winning support through technology, policies and reputation – at the same time that the risk in these investments is great, as assets could become stranded due to regulatory and technical risks combined with market and reputation risks. Short-term market movements, such as changes in oil prices, can hit in both directions, but over time the market is expected to move in this direction given the strong focus on sustainability