Harold's Herald: the transition to Net Zero

10 Mar 2021

Energy Transition – sleepwalking to the precipice, lilting a last lullaby

Harold Hutchinson | Head of UK Research

We know that the transition to Net Zero is going to be a bumpy road. But a necessary one. Harold gives his view on how we can make it a smoother journey.

I dislike the phrase "energy transition", interpreted these days as the route to Net Zero. Why? Put simply, because it has come to imply an easy linear track from old to new and a destination at which we can pack up our environmental troubles to live happily ever after. As such, it ignores important aspects of sustainability. For investors, it has become a mantra of hyperbole not distilled wisdom. That may mean uncompensated risk rather than super-normal returns.

To start with, it is misleading to see current changes in our energy infrastructure as marking a step from old to new. Indeed, in some ways, it is the opposite, with the rediscovery of centuries-old mechanics and ideas. As long ago as 1086, the Doomsday book listed over 5000 water mills south of the River Trent. Windmills in Britain are documented a century later. Both wind and water are power sources driven by our longest energy friend, the sun itself.

A less distant energy epoch saw the dominance of fossil fuels, burgeoning energy demand, geopolitical tensions and a nuclear arms race. More recently still, we have seen Chinese dominance in the manufacture of silicon solar panels. The world to which we are being propelled is based on mega-factories, continuing strong growth in global energy demand, the thirst to mine minerals and, right now, a global battery arms race. Is it my imagination, or have we been down this road before?

Will the journey to a Net Zero world be sustainable? That is the real question. Several of the proposed lines could wipe us off the planet long before we get there. Arms races of whatever type imply complex politics that have brought us to the brink in the past. Even if we reach the carbon-neutral buffers in the coming decades, our accumulated CO2 emissions in the atmosphere by that date will drive climate effects for centuries thereafter. Meanwhile, we ignore other growing environmental and societal threats based on unsustainable economics. 

The inconvenient truth is that various global tragedies might lie beyond the immediate horizon. We require an unprecedented rebalancing of developed economies away from consumption towards more savings and environment-enhancing investment. 

In short, Net Zero is necessary, not sufficient to ensure the economic possibilities for our grandchildren. The inconvenient truth is that various global tragedies might lie beyond the immediate horizon. We require an unprecedented rebalancing of developed economies away from consumption towards more savings and environment-enhancing investment. The pandemic gives us more than a nudge about the need to renew an ancient relationship with nature as an anchor for sustainable living and of the sort of changes to lifestyles consistent with a durable recovery.  

For that reason, I prefer a different metaphor when thinking about energy and investment – an energy awakening. With one eye slowly opening after a deep slumber, we are starting to rediscover the enormous power in nature – our sun, soils, forests, wind, waves and tides.  

Our ancestors conceived of the earth as an organism of which we were an integral part. Leonardo Da Vinci captured it well when he talked of the earth breathing through the ebb and flow of the tides. By the time of Descartes, we had rewritten the metaphor, demoting the earth and everything in it from organism to machine. Humanity is at risk of paying a terrible price for this false promotion to the deus ex machina who drives the train.  

It is time to wake up if we want a benign future. An "energy transition" that does not come to grips with our relationship with nature is no train journey on comfortable sleepers. It amounts to nothing more than sleep-walking over the precipice, lilting a final lullaby as we go.

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Disclaimer: The blog does not aim to give investment advice, but is designed to afford relevant longer-term context to investors, encouraging a broad perspective where uncertainty is high and a spirit of learning is important. The views expressed are those of the author, not those of Investec.