Policy risk is a key – but surmountable – challenge for the net zero transition, according to Günther Thallinger, Member of the Board at Allianz.
Major companies and financial institutions are under increasing pressure to demonstrate their ability to transition to business models which can build – and thrive in – a net zero economy. Investors and regulators increasingly expect them to do so. And more granular and sector-specific guidance is becoming available.
But the pace of this transition remains worryingly slow, with few firms’ transition plans aligned with the ambition of the Paris Agreement to keep global warming to well below 2°C, according to the recent State of the Corporate Transition 2025 report.
A frequently cited barrier to progress in the private sector is the state of transition planning at the government level. This can be variable even for core areas of the net zero transition, such as strategies for the deployment of renewable energy. But it can be downright unpredictable elsewhere – notably the phasing out of internal combustion engines in the automobile sector.
As governments prepare for COP30, many are issuing their latest emissions reduction targets, with China aiming for a 7-10% cut by 2035, and Australia also upping its ambition, by proposing a 62% reduction over the next decade compared with 2005 levels.
One expert with a strong track record in the field suggests governments need to look well beyond the headline numbers. As well as targets, they need a fully imagined vision, or “target picture”, says Günther Thallinger, Member of the Board of Management at Allianz, the Munich-based global insurance and asset management group, and the Founding Chair of the Net Zero Asset Owner Alliance (NZAOA).
By the time they arrive in Belem in November, signatory countries should have published new nationally determined contributions (NDCs) to the Paris Agreement, essentially their commitments and plans for cutting greenhouse gas emissions. Too often, these NDCs have been short on detail and subject to revision: few of those presented in Glasgow at COP26 even included agricultural emissions in their targets.
Thallinger says “much more strategic planning” needs to be in evidence at the COP in the Amazon. “For Belem, it’s great to raise the ambition, but it’s only great if behind these NDCs there are clear plans for how they are going to be achieved,” he says.
For Thallinger, the framing of countries’ climate commitments has been sub-optimal to date. He argues that NDCs should be viewed by governments as an opportunity to map out a common vision for their societies and economies.
“It obviously is a race in terms of climate protection. But it is also very much a race in terms of being economically competitive. If other countries or regions have very cheap energy sources, because they speedily develop their supply from renewables, they will be so competitive that other regions will have no chance to compete anymore,” he says.
From this perspective, COP30 is not just an opportunity to discuss protection against climate change and nature loss, essential though that is. “For governments, it’s a major strategic discussion about how they develop a basis for the economies they govern to be competitive compared to others,” says Thallinger.
NDCs, properly outlined with supporting detail, should be used by governments to secure critical buy-in – from private investors, but also voters – without which their headline-grabbing emissions reductions may elude them.
“The financing of the transition can only work if the private and public sectors really work together,” says Thallinger. “Investors need to understand: where are we heading? And how can we invest into this? This will allow them to assess whether that’s an attractive investment or not.”
Greater transparency on the transition in the interests of all parties, he suggests. “If there is more political risk, return needs to be higher.”
Further, it also “takes away lots of political volatility” if a government can convince its electorate to accept a coherent and credible transition plan. “It doesn’t need to be rigid, but the target picture is something that society at large can start to own,” says Thallinger.
Politics vs economics
Despite being rooted in forward-looking rationality, Thallinger’s take might seem optimistic in today’s political context. While he sees faster, economy-wide adoption of renewable energy sources as key to Europe’s competitiveness, many politicians see the cost of net zero transition as unduly burdening the industries that drive its habitually sluggish economy.
Former European Central Bank President Mario Draghi’s 2024 report on boosting the continent’s competitiveness – initially billed as a blueprint for economic and environmental sustainability – has been seized upon to justify rolling back regulation, including ‘green tape’. Worse still, the Trump administration has sought to reverse Biden-era progress in the US’s race to adopt renewable energy, eliminating tax breaks and stalling green energy infrastructure projects.
Asset owners are having to adjust to a new era of policy volatility, he concedes. “We as investors have had to learn over recent months that political risk needs to be considered very differently than one would have assumed earlier,” Thallinger notes.
“But you need to distinguish what’s really happening in the economy from what is to be heard in political discussions. It’s very important to emphasise that the overall trend of transformation is not going to change.”
In the US, for example, California and Texas are leading the charge among states to increase their reliance on renewables. Further, Denmark’s Orsted has used the courts to reverse a ‘work-stop order’ on an offshore wind project issued by the US Bureau of Ocean Energy Management .
In Europe, Thallinger points to significant progress at the country level, including Germany achieving its biggest build-out of balcony solar production last year. But he also urges greater policy coordination across Europe, particularly where needed to bolster the security and reliability of renewable energy supply.
“If we don’t start to talk about interconnectors between these countries, their grids will miss a massive source of resilience. But the discussion can only happen if the countries have a target picture for the electricity market,” he says.
Beyond these mature economies, the wider global situation supports Thallinger’s optimism, with investment in grids and battery capacity cementing the energy market transformation initiated by the explosion of wind and solar generation.
According to the International Energy Agency, investment in clean energy technologies is on course to outstrip that in fossil fuels by two to one in 2025, reflecting “not only efforts to reduce emissions but also the growing influence of industrial policy, energy security concerns and the cost competitiveness of electricity-based solutions”.
Released in June, the agency’s latest global energy investment report said spending on low-emission power generation had almost doubled in the past five years. But it pointed out that investment in grids is currently “failing to keep pace with spending on generation and electrification”.
Despite the gathering momentum, Thallinger acknowledges that the pace of the transition from fossil fuels is not yet at a sufficient pace to achieve net zero by 2050. In a widely-noted Linked In post in March, he outlined the consequences of “climate-driven market failure” in stark terms, inviting feedback on ways to further accelerate global transformation.
“The financial sector as we know it ceases to function. And with it, capitalism as we know it ceases to be viable,” he wrote of the likely consequences of the current trajectory.
Thallinger says the only pushback he received in response was from academics suggesting that conditions induced by three degrees of warming would be harsher. Ultimately, he suggests, the political volatility that might appear to threaten the net zero transition could be its catalyst.
“Energy markets and economies have noticed that fossil fuel is coming from three regions, Russia, Middle East and North America, and they want to make themselves independent of that,” he says.
Common challenges
In a number of respects, the transition challenges facing financial institutions and large corporates are similar to those that governments must grappling with: developing a plan that integrates financial and sustainability objectives; setting targets to achieve these objective; working out the trade-offs and the operational challenges; and securing the stakeholder buy-in needed to sustain the project over the long term.
While the Paris Agreement obliges countries to set at least broad targets and plans for transitioning to net zero, private sector organisations are not yet required to, in most major jurisdictions. The UK is currently consulting on whether and how to mandate transition plans for listed firms, while transition planning obligations for European firms under the Corporate Sustainability Due Diligence Directive are uncertain, subject to the current omnibus reform process.
For some, transition planning is a prime example of the bureaucratic burdens facing European firms in the name of sustainability. But this narrative is being countered by mounting evidence that many derive significant value from sustainability reporting, including in a recent global PwC survey. For Thallinger, planning is a critical step.
“The moment you start to have a plan for a certain form of action, you start to align behind it and discuss how the implementation can work. You have a chance to discuss trade-offs in terms of cost and speed. You can also start to discuss what is the impact on business,” he says.
Allianz was one of the first major financial institutions to publish a net zero transition plan. Released in September 2023, it included 2030 targets for reduced emissions across its insurance businesses and investment portfolios, as well as revenue targets for transition solutions in commercial insurance.The plan also included operational actions to reduce emissions, such as ensuring net zero commitments across its global supply chain, and a commitment to drive decarbonisation by seeking to influence and engage with customers, partners and policymakers.
Thallinger sees this outward-facing element of transition plans as crucial. “If you communicate your plan openly, you start to be very honest that there are certain implications with its implementation. You then have engagement with your partners and clients,” he says, noting that sharing transition plans with external parties not only improves them but leads to greater levels of cooperation to achieve them.
Adaptation + mitigation = resilience
Overall, the insurance sector has had a mixed record in adjusting its business models to the need to mitigate and adapt to the risks of climate change. While Allianz’s record is stronger than most, ranking second to Generali in the latest annual scorecard from Insure Our Future, others have been slower to move away from the underwriting of fossil fuel exploration and production. Last month, civil society groups staged protests against Lloyd’s of London, after new CEO Patrick Tiernan said he would no longer discourage firms from taking on business.
Thallinger’s Linked In post did shy away from the mounting challenges facing the sector as the physical risks of climate change continue to manifest in damage to property and other concrete assets. (“The math breaks down: the premiums required exceed what people or companies can pay.”)
As professional risk managers, insurance firms have unusually strong financial incentives to avoid making climate change worse, thus avoiding higher pay-outs, but also to develop the tools and capabilities to help clients handle the consequences of extreme weather.
“Insurers play a major role in supporting adaptation by assessing and offering information about the development of risks, and then by answering this with products such as parametric insurance,” says Thallinger.
But while insurers can help their customers adapt to climate change, he is clear that this is just one part of their role. “Adaptation plus mitigation gives resilience. We can adapt to the situation that we have, but we need to really make sure that this situation is not worsening ever more.”
According to Allianz’s 2024 sustainability report, the firm has achieved a 50.7% reduction in the emissions generated by proprietary investments in listed corporates, an 11.7% reduction in the emissions intensity of its commercial insurance portfolio, and a 62.4% annual increase in revenues from sustainable solutions (€4.8 billion).
Thallinger made a particularly significant contribution to Allianz’s reduction in portfolio emissions, and those of other large asset owners, through his work with the NZAOA. The alliance developed a methodology for driving down financed emissions across different asset classes, relying in no small part on engagement with portfolio companies to ensure those reductions had real-world impact.
The NZAOA has received less attention from US politicians seeking to paint climate-focused collaboration as anti-competitive than other finance sector alliances, which have suffered member defections and are now reassessing their future activities. Thallinger characterises NZAOA as a group of technical experts who came together to create an open-source protocol to the benefit of the wider investment community, rather than a grouping that imposed rules and expectations on its membership, an accusation thrown at other alliances.
“Even if people have decided that their institution [should remain] no longer within the NZAOA – and there are a few – they can continue to use these technical means to enhance their own decision-making,” he explains.
“Investors can then decide their target levels, measures and overall transformation plans for themselves. While they work together on the technical means, [the application to] their portfolio is done individually.”
