The Viewpoint: Transitioning the global energy sector to a low-carbon future

The global economy is being reshaped in real time. Climate change, resource constraints, ageing populations, and widening inequality are no longer distant risks, they are investment realities. The companies that transition fastest, or that help others to do so, are gaining a competitive edge.

Nowhere is this need to transition more acute than the energy sector. Achieving the goals of climate stability requires a pragmatic, forward-looking allocation of capital toward the companies undergoing the most significant transformation. The energy system will not decarbonise in a vacuum; it will do so through the redirection of capital, technology, and policy within the existing industrial framework. This is why, in the context of a transition focused equity fund, the inclusion of selected fossil fuel companies with credible, science-aligned decarbonisation plans is, in my view, not only defensible, but may be essential.

A robust transition strategy must prioritise areas where change is happening, not merely where emissions are already low. Investing in companies that are actively reallocating capital toward clean technologies, scaling renewables and carbon capture, and managing a deliberate phase-down of high-carbon operations is aligned with both fiduciary duty and climate impact. These firms are often priced for secular decline, but if they demonstrate credible strategic shifts, they could actually offer a strong potential return.  

A robust transition strategy must prioritise areas where change is happening, not merely where emissions are already low.

More importantly, excluding the sector outright risks turning a transition fund into a de facto low-carbon fund, biasing the portfolio toward growth stocks and missing the high-emitting sectors where engagement and capital can have the most catalytic impact. In our view, such an approach would fail to capture the full systemic scope of climate transition investing.

The decarbonisation of the global energy system is a multi-decade, non-linear process that will demand trillions of dollars of capital reallocation. Fossil fuel incumbents, despite their environmental legacy, have scale, engineering expertise, and access to capital that make them essential actors in delivering this transition. They are uniquely positioned to deploy carbon capture and storage at industrial scale, build out hydrogen value chains, and invest in the infrastructure required to balance intermittent renewable supply. Excluding these companies by design may result in underexposure to critical transition enablers, limiting the opportunity set and potentially forgoing the sectors where valuation re-rating could be most pronounced.

There are two ways in which companies can contribute to the transition, either as ‘improvers’ or ‘enablers’. The energy sector contains example of both.

Improvers contribute by improving their own operations over time e.g. reducing climate impact through progress against credible emissions reduction targets.

Enablers contribute by scaling products or services that enable others to improve their own operations or which generally contribute to positive societal outcomes. Within the energy sector, this could include carbon capture.

We believe the inclusion of both types of company can contribute to a better risk-reward trade-off for investors. This is because they play complementary functions in a diversified portfolio. Improvers are potential sources of value realisation as they re-rate in response to improved sustainability performance and reduced transition risk. Enablers provide access to structural growth as demand for their offerings becomes increasingly essential to the climate transition.

As can be seen in the case studies, it is important to impose well-defined metrics and rigorously assess our investee companies to ensure they are doing what they are supposed to. This is only possible via visible, sustained engagement. Where expectations are not being met, we liaise with management to understand the causes. And should this engagement fail to produce the required results, we will divest.

Aside from the close monitoring of transition progress, it is important to keep a focus on the financial benefits. Here, valuation plays a central role. In the case of fossil fuel companies, many currently trade at significant discounts to the broader market, supported by strong free cash flow yields and disciplined capital return policies. Those that are credibly repositioning their business models toward low-carbon revenue streams may rerate as they derisk. For a diversified transition strategy (which includes climate stability as one of its goals), exposure to select names in this space can also serve as a valuable hedge, offering protection against inflation, rising rates, and cyclical volatility.

Of course, this approach requires disciplined risk management. Not all fossil fuel companies are transitioning, and exposure must be highly selective. A credible inclusion framework would need to evaluate companies on forward-looking metrics. This enables a portfolio to limit exposure to only those companies that are actively addressing climate transition risks that are material to long-term enterprise value.

Moreover, stewardship is a vital lever for value creation. Active ownership of these companies can catalyse change from within by shaping strategy, improving disclosures, and influencing capital allocation.

Active ownership of these companies can catalyse change from within.

Shareholder engagement yielded meaningful results at firms like BP, Shell, and Exxon, where investor pressure has driven shifts in board composition, climate disclosure, and long-term strategic alignment. In this context, an investor’s role is not passive; it is to hold companies accountable and help drive the transition at the pace and scale required. In some of the cases, we have seen some of these commitments wound back and it is important to monitor and reflect on company commitment in this difficult and highly technical area.

A credible transition strategy that supports climate stability must invest in change, not just in endpoints. It is not about investing in the perfect, it is about investing in progress. There are fossil fuel companies are on demonstrable decarbonisation trajectories offer high-leverage opportunities to generate excess returns, enhance diversification, while accelerating real-world emissions reductions. With the right screening and stewardship frameworks in place, their inclusion can expand the opportunity set for investors and deepen a fund’s impact.

For professional investors only.  This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.