Scenario planning for a net-zero future

IT IS impossible to predict the future without some level of uncertainty. When we make investment decisions about assets with multi-decade horizons, our forecasts will ultimately break down. But while we do not know what the 2050s will bring, we can envision pathways that provide reasonable variations of what that future may look like. For investment managers, prioritizing one scenario over all others can have far-reaching consequences. This is especially true when it comes to the net-zero energy transition.

There are multiple, equally valid pathways through the transition, all with different technology mixes and varied time horizons. Hence, a simple discounting of cash flows in a somewhat predictable “economic” scenario — with rational actors reacting to techno-economic considerations and the policies that are likely to be enacted — is not necessarily viable. Energy investors must consider various outcomes since the outcomes are, well, so various.

Research providers, think tanks, sell-side analysts, and industry groups all compete for investors’ attention. Their goal is to either win our business or influence our decision making. Their base case often depends on their background.