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New report explores transition arbitrage as key in solving climate crisis

The climate crisis is without doubt the biggest challenge of our time. To solve it, vast amounts of capital need to be mobilised for investments in renewable energy and new technologies. In a new white paper, SEB presents the case for “transition arbitrage” and explores what this means for different sectors, investors and the global economy; how markets can help shift capital towards green investments; and where the capital is likely to be needed the most.

"The main premise of 'transition arbitrage' is that renewable energy is a disruptive technology that offers a chance to stop the climate crisis, but it requires that we replace almost all of our physical capital very fast," says Thomas Thygesen, head of Research, Climate & Sustainable Finance at SEB. "The result is a repricing of capital, which creates opportunities for arbitrage."

In the white paper, which has been produced by a virtual team of experts from SEB's Equity Strategy, Financial Strategy and Corporate Finance units, the authors identify the key opportunities arising from "transition arbitrage." They include green utilities, technology enablers and transition leaders. One example where transition arbitrage is already evident is the primary energy sector, which has already passed the tipping point in terms of the repricing of capital and where green pure-plays command higher valuations. Another opportunity can be found within technology enablers, where suppliers of Power-to-X technologies, zero-emission transportation and other types of capital equipment that replace fossil input are likely to command high valuations.

The report also explains how the climate crisis is interlinked with other pressing structural problems of our time, such as rising inequality and the concentration of market power. The authors make the case that an accelerated energy transition can help solve all these problems at the same time.

"We must make our economic model more sustainable and resilient," says Thomas Thygesen. "Renewable energy offers a technological way forward that could raise living standards, increase corporate investment and reduce CO2 emissions at the same time, but it will require that we break with decades of policy convention and invest heavily in new, untested technologies."

Read the full report