Building Resilience Through Transparency

In nature, adaptation is the key for survival. Humans, like most living organisms on the planet, have this lesson imprinted in their DNA. When the circumstances become challenging, ingenuity and adaptability pay off. Of course, these characteristics are not only reserved for living organisms. Firms also face the same evolutionary dilemma: adapt or become obsolete and die.  

In the case of companies, the key for adaptation is foresight. The cornerstone for taking sound strategic decisions is to have clear, comprehensive, high-quality information on the potential exposure to risks and opportunities. Understanding the importance of this challenge, Dr Salas has been working with a number of collaborators in the UK and abroad in two main areas:  

• Development of highly disaggregated energy transition scenarios These scenarios are used for the analysis of potential risks and opportunities associated with different climate policy portfolios. They are the basis for the creation of a long-term strategy to accelerate the transition towards a net-zero economy.  

• Development of portfolio alignment metrics This area of research is focused on the creation of simple, transparent and robust metrics that can help financial institutions to measure the alignment of their portfolios with the Paris Agreement targets, supporting climate-related financial disclosures.  

Both areas of research have something in common; namely, they aim to provide transparency on how the low-carbon transition may unfold and the potential implications for governments, companies and the financial sector. Only by understanding the different drivers behind energy transitions can we enable a rapid and orderly departure from fossil fuels.

Delaying the phase out of hydrocarbons from the global economy may increase exposure to climate-related physical risks, driven by both extreme weather events and progressive climate shifts (such as ocean acidification and rising sea levels and temperature). At the same time, a disorderly low-carbon transition may increase exposure to climate-related transition risks, leading to a sudden devaluation of assets with strong macroeconomic and financial implications.

Finding a strategy that can minimise both of these risks is fundamental to the implementation of a just transition, one that safeguards the wellbeing of the most vulnerable groups in society.  

The Energy Transition and the Upcoming Disruption

As the low-carbon transition unfolds, countries will have different incentives to embrace climate action. In the case of fossil fuel importers (such as Europe, China and India), the low-carbon transition will bring massive benefits, especially in areas such as energy security and trade balances. As energy expenditure shifts from imports to local trade, investments in infrastructure and new jobs are expected to generate positive impacts on the economy. Unsurprisingly, these are the countries that are taking the lead on the development of low-carbon technology, as they try to capture the benefits of being leaders in a multi trillion-dollar market.  

For fossil fuel exporters, the incentives for climate action depend on the competitiveness of their fossil fuel endowment. In a world with decreasing demand for hydrocarbons—driven by the electrification of the transport sector—low-cost producers of fossil fuels have the upper hand. In the face of decreasing oil demand, it is highly unlikely that producers like the USA, Canada and Russia will be able to compete with OPEC on international fossil fuel markets. Under these conditions, high-cost producers have strong incentives to follow an orderly transition to a low-carbon economy, aiming to minimise their exposure to stranded fossil fuel assets and other transition risks.  

Understanding these complex dynamics is the key to successfully navigating the low-carbon transition. But the risks can only be estimated if companies and governments provide transparent information about their exposure to fossil fuels. Climate-related disclosures are essential for understanding and estimating climate-related risks. As more companies and governments start to disclose their information, the market will be able to adjust, thereby allowing the creation of measures for building resilience. Such an approach will be the only way that we can ensure a just and orderly transition, one which protects the most vulnerable while the economy is decarbonised at a speed that is compatible with the goals of the Paris Agreement.  

Dr Pablo Salas is The Prince of Wales Global Sustainability Fellow in radical innovation and disruption, supported by program donors Paul and Michelle Gilding. He is also the Deputy Director of the Cambridge Centre for Environment, Energy and Natural Resource Governance.

His research focuses on the low-carbon transition, as he aims to find ways to accelerate the decarbonisation of the global economy while addressing broader sustainable development challenges.

He is an Economist and Electrical Engineer by training, with degrees from the University of Cambridge (PhD in Land Economy), the University of Hamburg (MSc in Economics) and the University of Chile (Electrical Engineering).

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