The role of energy transition in the battle against climate change

The introduction of coal ignited the first major energy transition and powered industry, cities and progress for hundreds of years. It was not until the 1970s that oil products took centre stage, and fossil fuels became the backbone of modern life. Natural gas gained prominence in more recent decades. The world stands at the brink of another energy transformation, but this time, the stakes are higher. Previous energy transitions were driven by economic growth and soaring consumption. Now, the challenge is to ensure everyone has access to energy, while urgently reducing emissions to protect our planet.

The issue

Earth’s atmosphere is like a greenhouse, with gases such as water vapour, carbon dioxide, and nitrous oxide acting as invisible walls. They let sunlight in and trap heat, keeping our planet warm enough for life. Without them, Earth would be a frozen wasteland. Yet, as we pump more greenhouse gases into the air, the planet is heating up.

Carbon dioxide is the most significant contributor to warming, far outpacing other gases. Five major sectors: energy, agriculture, industry, waste management and land use change are the main culprits. The energy sector alone is responsible for a staggering 76% of emissions, mostly from electricity and heating production, transportation, and manufacturing.

Since the dawn of the Industrial Revolution, atmospheric carbon dioxide has soared by more than a third, driven by human activity. Global warming reached new levels in 2024, becoming the hottest year ever recorded, surpassing 1.5°C above pre-industrial levels for the first time.

The consequences

The warming of the planet has consequences for many areas, including our oceans, weather, food sources and health.

• Melting ice sheets: Greenland and Antarctica are losing ice, releasing extra water once held in glaciers, causing sea levels to rise and threatening coastal communities.
• Extreme weather: Warmer temperatures are changing weather patterns and fuel more intense storms, floods, wildfires and droughts.
• Food systems: Crops struggle in thirsty soil, water grows scarce and plant and animal ecosystems need to migrate to survive.
• Urban health: Heat lingers in cities, thickening the air with smog and causing serious health problems.

Climate change risk is not just about environmental issues, whether preventing rising sea levels or protecting forests, it is also about businesses and communities navigating transition and adaptation risks.

• Transition risks include the impact of governments introducing carbon taxes or strict emissions limits. Companies could see profits shrink overnight. Advancements in technologies could make today’s energy systems obsolete, forcing companies to innovate or fall behind. As investors and consumers shift focus to greater sustainability, a company’s reputation – and stock price – could swing wildly if it is seen as lagging on climate action.
• Adaptation risks could imply even well-meaning solutions backfiring. Building sea walls might protect cities from rising seas but could also disrupt delicate ecosystems. Every action has the potential of unintended ripple effects.

Climate change action plan

Governments worldwide are stepping up. The Paris Agreement set ambitious goals for cutting greenhouse gases, and now countries are pushing for even tougher targets, with most aiming for “net zero” by 2050. Each nation must share its plan for the next decade, explaining how it will cut emissions, adapt to climate impacts and what help it needs.

Carbon pricing is gaining ground, with around 40 countries charging for carbon pollution to encourage cleaner energy and fund sustainable projects. The goal is to keep global temperatures from rising more than 2°C above pre-industrial levels, and ideally, limit the increase to just 1.5°C.

While 2024 was the first year global temperatures exceeded 1.5°C, climate science looks at long-term averages, not just single-year spikes. Staying below 1.5°C could help avoid irreversible tipping points, reduce extreme weather and protect food supplies.

Human factor

Another challenge with the climate action plan is that humans are not good at long-term planning. We tend to focus on what is right in front of us, making it tough to stick to long-term climate goals, as witnessed by the United States twice leaving the Paris Agreement, and the Canada Pension Plan quietly dropping its net zero 2050 goal when rules around environmental claims became stricter.

People tend to give more weight to short-term risks and rewards than those far in the future. The latest World Economic Forum Global Risks report shows this bias. When asked about the next 10 years, climate risks dominate the top five risks. But when asked about the next two years, only one climate risk makes the top five. If we keep thinking short-term, we risk missing the bigger picture and holding back real progress in the battle against climate change.

Role of investors

Institutional investors have a pivotal role to shape how the climate change story unfolds. By directing capital toward renewable energy and climate-friendly projects, these investors have the power to accelerate the world’s transition to a low-carbon future. Through shareholder engagement and proxy voting, they can push companies to cut emissions and be more transparent about climate risks.

Canadian regulators are sounding the alarm, highlighting that climate change is not just an environmental risk, it is a financial one too. The latest guidelines from the Canadian Association of Pension Supervisory Authorities (CAPSA) urge boards to take climate risks seriously, warning that both physical and transition risks will only grow over time. Effective risk management means looking to the future and preparing for what lies ahead.

Opportunity knocks

Energy transition is not just about responsibility; it is also about opportunity. Investing in renewables, electrified transport, power grids and energy storage has already attracted nearly USD2 trillion, with double-digit growth even in challenging times. Figure 1 highlights where the money is flowing, with electrified transport and power grids getting the lion’s share.

Figure 1 – Where investment is flowing

The path to renewable energy is not straightforward. For example, while battery storage is improving, many systems only last a few hours, so innovation is needed for longer battery storage. While technology is contributing to the climate change battle, it is also creating environmental and productivity challenges. Digital infrastructure and artificial intelligence (AI) are driving up electricity demand. For example, data centres powering AI models are energy-hungry, adding new pressure to the grid.

Emerging opportunities, such as geothermal and renewable fuels, are lagging the more mature sectors, drawing only 7% of total investment and seeing a material decline from previous years.

The scale of future infrastructure investment needed is staggering. Roads, airports, power plants, water utilities and telecom networks all need major upgrades. Without a surge in investment, the world could face a USD15 trillion infrastructure gap by 2040. For this reason, fossil fuels will remain part of the energy mix for years to come, despite the decline in use and rapid growth in renewables. Nuclear is also making a comeback as a cleaner option for large-scale power, although it is costly and slow to build so there are limitations to how much it can contribute.

Seize the moment

Climate change is a risk we cannot ignore, but it is also an opportunity for those ready to act. Whenever there is a discussion about risks and opportunities, they will typically be viewed as opposites. However, for climate change, they are not necessarily in conflict, since the opportunity, such as investment in renewable energy sources, can play a key role in managing climate-related risks.

The energy transition journey requires investment, innovation and leadership. Investors have a pivotal role to play, and those who step up stand to gain not just healthy returns, but a chance to make a lasting impact on the planet.