Why bold policy and smart investment are critical for a successful energy transition
The energy transition isn’t a distant goal — it’s a present-day financial imperative. We believe climate change is a significant financial risk which is increasingly reshaping the global investment landscape. Put simply, it could threaten long-term financial stability, and the returns needed to pay pensions for decades to come.
In a new paper authored by USS Investment Management Limited (USSIM), with support from Transition Risk Exeter (Trex), we make the case for stronger action from governments, improved management of climate risks and opportunities from asset owners, and a more collaborative approach to managing these challenges.
The financial risks of climate change
Small changes in environmental variables — such as temperature or sea level — can trigger disproportionately large impacts not only on communities and ecosystems, but also on financial economies. Traditional economic models often underestimate these risks by assuming minor effects on the economy. But the reality is that climate change could threaten the stability of entire systems, including the financial markets within which we operate.
While some companies are more exposed to climate risks than others, simply divesting from the companies that might be vulnerable to a fast transition isn’t a panacea — we believe that selling high-emission assets will not reduce real-world emissions and so we engage to support these companies through the transition.
But the transition to clean energy isn’t all about mitigating risks — it’s a big economic opportunity too. A fast transition to clean technologies, compared to no transition at all, could save global economies an estimated $12 trillion in energy costs by 2050. Countries like the UK that import fossil fuels could stand to benefit, while also boosting energy security, productivity, and job creation.
Our own progress — and why it’s not enough
We’ve previously reported on the progress we’re making towards our net zero ambition — the emissions intensity of our portfolio declined by 51% between 2019 and 2024 — but real-world emissions continue to rise.
While focusing on decarbonising investment portfolios or selling high-emission assets may reduce a portfolio’s own carbon footprint, as I’ve mentioned, it does very little to drive real-world decarbonisation. Moreover, operating alone and chasing our own individual targets will not drive the action we require, meaning collective action is key. Asset owners must work together to manage climate risks and opportunities in their portfolios and engage with policymakers and regulators across the globe to bring about change.
The actions we’re taking
We’re committed to enhancing our approach to climate risk management and we encourage other asset owners to do the same. We’re taking action by:
- Conducting bespoke climate scenario analysis, a vital tool to assess the financial risks associated with different future climate outcomes.
- Enhancing the resilience of our portfolio to a range of macroeconomic futures by embedding climate scenario analysis into our strategic asset allocation.
- Engaging with companies we invest in to support sector-specific transition strategies.
- Advocating for stronger government frameworks that accelerate the climate transition and unlock clean technology innovation.
Our bespoke climate scenario analysis
Working with the University of Exeter, we developed four climate scenarios that reflect real-world risks and opportunities. These scenarios strengthen our assessment of key economic factors such as GDP and inflation, as well as energy trends such as CO₂ emissions, fossil fuel demand, and electricity sector decarbonisation across different countries. They are actively used by our asset allocation team to inform our investment decisions. For example:
- Inflation driven by climate change has been our biggest concern, with higher average levels due to supply-driven risks. To tackle this, we've increased our exposure to inflation-linked assets.
- Building a diversified and resilient strategic portfolio to protect against a Meltdown scenario (the most pessimistic of our four climate scenarios, where policy failures compound weak economic growth) across risk factors.
- Improving our portfolio's flexibility to withstand boom and bust cycles and seize opportunities as they arise.
The four scenarios are now embedded in our strategic asset allocation process and physical risks are integrated into our country risk assessment. Looking ahead, we plan to fully embed both transition and physical risk assessments into bottom-up investment processes across public and private markets.
What governments could do
Ultimately, we believe only decisive action by governments can substantially reduce climate risks and accelerate the transition to clean energy.
The energy transition is not a one-size-fits-all process. Each sector of the economy is at a different stage of the transition and requires tailored policies. What is needed in the very early stages of the transition won’t be the same as at later stages, nor will it be the same across different sectors or countries. As the paper outlines, governments could provide clear frameworks to support progress at every stage of the transition. This is what will accelerate progress.
For example, in the early stage, policies are needed to support the first deployment of zero emission solutions in sectors such as steel, cement, chemicals, shipping and aviation. In the middle stage, the government could adopt a zero-emission vehicle mandate in heavy road transport, strengthen investment in charging infrastructure, and address bottlenecks preventing heat pump adoption. And in the late stage, we need to see a deeper restructuring of markets to make best use of new technologies.
What’s next?
The transition is already underway. With the right policies and investor leadership, we believe it can be accelerated — unlocking trillions in savings, boosting energy security, and creating a more resilient economy. We hope that, in turn, this can provide a more stable financial future to support the long-term returns needed to pay pensions for decades to come.
Read the full paper to see how this can be achieved and the types of policies we’d like to see from the UK Government.