What’s The Story: Should investors flip the script regarding the energy transition?

This is a summary of three articles under the same title (Part 1, Part 2 and Part 3) that were published December 2025 – January 2026 by illuminem.

“Sometimes reality is too complex. Stories give it form.” Jean-Luc Godard

“The value of challenging narratives is not simply to find the best explanation of what is going on. It is to test the weakness of proposed plans of action, and to secure robustness and resilience.” John Kay and Mervyn King, Radical Uncertainty

This is an article about climate change and the energy transition. And about ‘reference narratives’ –  the stories that we, often unwittingly, have in the back of our mind as we try to work out how to assess the impacts of climate change, or what we can do about it. 

Below I’ll explain what a ‘reference narrative’ is; I’ll discuss two common narratives: the market-led transition narrative and the policy-led transition narrative; and I’ll contrast the two narratives to determine which one is most aligned with ‘the facts’.

The facts, as I see them, are taken from a set of books about climate change – about solutions to climate change in particular – by experts on public policy, economics and energy systems. The books that I would most recommend from this larger collection are listed further below.

Reference narratives

Over the past ten years in my work with institutional investors on the issue of climate change I was often confronted with the many uncertainties they face, which makes it difficult to know what the best course of action is. I also noticed that people often draw very different conclusions about climate-related investment risks or solutions to climate change, even when looking at the same set of facts and circumstances. 

Then I picked up a copy of the book Radical Uncertainty by John Kay and Mervyn King. The book is about decision-making under uncertainty and they introduce the concept of the ‘reference narrative’:

“We believe the best way to understand attitudes to risk is through the concept of a reference narrative, a story which is an expression of our realistic expectations. (…) Since different people start with different reference narratives, the same risk may be assessed by different people in different ways.” 

This immediately struck me as highly applicable to my climate-investment work. In my own words: when investors make decisions about climate-related investment risk or how to contribute to solutions, their starting point is often a certain expectation as to how we as society will fix the climate problem, or a certain story about how this will unfold, the actions we need to undertake. And more importantly, which actors need to be leading in taking these actions. 

And this story that investors have in mind, typically subconsciously, determines how they assess risk and which actions they take to manage these risks or contribute to solutions.

Even if the story is wrong.

Because while Kay and King point out that we should continuously test our reference narratives as we learn new facts, they say this is something we’re not very good at: “We change the reference narrative in response to disconfirming events, but infrequently and discontinuously.”

The main purpose of this article therefore is to make readers aware of the energy transition reference narrative they have in mind, and give them an opportunity to test if it’s the correct one.

Market-led narrative

Effectively, there are two reference narratives around climate change and the energy transition: the market-led narrative and the policy-led narrative. They both tell a story about the ‘why’ of the transition: we must address climate change and will do this by engineering an energy transition – switching the global economy from fossil-based energy sources (coal, oil, gas) to renewable sources (wind, solar, nuclear, hydro). In simple terms – problem: climate change. Solution: energy transition.

But that’s where the similarities end. These narratives differ on the what, how and, most notably, who of the energy transition. In the first narrative, market forces, consumer preferences and voluntary corporate and investor action are decisive. In the second narrative, policymakers, public investments and rules and regulations are decisive.

Market-led transition 

This is the market-led transition narrative in a nutshell:

• Companies will reduce emissions, e.g. by switching to less carbon-intensive energy sources. Anticipating the transition, they will invest in technologies that will also accelerate it. Companies must have transition plans outlining how they will do this, with a view to aligning with Paris goals.
• Investors play a key role through the allocation of capital and the demands they make of companies. By diverting funds away from dirty industries to clean ones they cause the former to shrink and the latter to grow. Investors must decarbonize portfolios and engage with companies to encourage them to adopt and implement transition plans.
• Companies and investors should set targets for these actions.
• This is a win-win for companies, investors, and broader society: it will result not only in reduced emissions but also in new profitable business activities for corporations and attractive investment opportunities for investors.
• Over time this will add up to an energy transition and will make the global economy net zero. Apart from energy sources, not much needs to change in the make-up of the global economy.
• There is significant focus on suppliers of fossil fuels – they caused the problem of climate change so they will also have to steward us out of it. They are winners in today’s energy sources and can choose to be winners in tomorrow’s sources, and therefore switch to low-carbon technologies; as they change the type of energy supplied, the demand for these types of energy will also adapt. If they refuse, investors should starve these companies of capital – this will limit the supply of fossil fuels and force energy users to switch to renewables.
• Investment risk is determined by carbon intensity of companies, which requires understanding scope 1, 2 and 3 emissions. This can also be translated into ‘temperature alignment’ or ‘Paris alignment’. Risk mitigation is then achieved through portfolio decarbonization – removing or underweighting carbon-intensive or ‘high temperature’ companies.
• The key constraint in this narrative is transparency: investors need to know which companies are responsible for which emissions; they also need to see their transition plans (and progress against plans), so that they can be targeted with engagement to keep the transition on track. Lack of information is a critical issue that is holding back progress. This is why disclosures and disclosure-based approaches are central in this narrative.
• In sum, in this narrative the dynamism and innovation of the market can substantially solve the problem without government intervention. Indeed, government intervention could even get in the way because of the inability of governments to “pick winners” or direct economic activity through industrial strategy.

Policy-led transition

So then, in contrast, consider the policy-led transition narrative:

• The speed and nature of the transition depend mostly on government policy, political will and collective action. This is because the transition requires a substantial transformation of most industries, which involves switching to technologies that are not yet economically viable, and which goes against the interests of many incumbents.
• Recognizing that commercial actors will not make these (uneconomic) investments, this transformation requires laws, regulations, taxes, subsidies and government-sponsored investment and R&D: to create the right economic incentives to switch technologies; to stimulate innovation in emerging low-carbon technologies; and to change the nature of energy demand. Once the incentives are correctly set, markets can help to organize resources in a way that enables the transition.
• The key constraint in this narrative is the political power of carbon-dependent interests who have proven able to weaken or even block climate policies in virtually all developed economies. This goes far beyond corporate lobbying – carbon interests are well-organized, wealthy and firmly embedded in political processes, on both sides of the political spectrum, e.g. through unions in carbon-dependent industries or representatives from coal-dependent regions. Whereas low-carbon actors are nascent, fragmented and politically weak. 
• Investment risk and opportunity are mainly driven by (likelihood of) government action: how will companies and industries be affected by emissions caps, laws, (carbon) taxes or subsidies? The most carbon intensive companies may not be the riskiest, in financial terms, in the absence of (clarity on) policy measures; therefore, to assess risks and opportunities, investors require clear policy signals from governments. Also, whether the economy as a whole is Paris-aligned is more important than whether individual companies are Paris-aligned.
• Governments are also crucial in developing new technologies and markets. The innovations required to address climate change will not emerge without governments actively nurturing markets through R&D support, subsidies, and mandates for technology transition. 
• Voluntary corporate and investor action doesn’t play an important role in this narrative – they cannot meaningfully influence the desired climate outcomes at a systemic level. Indeed, voluntary corporate action can distract from or even stymie public policy, if governments get the impression a lot of heavy lifting is done by the private sector and public policy is not that necessary. 

What’s the story

In comparing the two narratives, it should first be noted that they are highly binary – they offer two completely different scripts on how we as society will tackle the climate problem. And while these narratives probably don’t exist in a ‘pure’ form, in my experience many do subscribe for 80-90% to the narratives as outlined here. For example, many climate-related investor policies and industry initiatives revolve around commitments to assessing company transition plans, disclosures, divesting or portfolio decarbonization, and do not reference the role of governments, regulations and policy (or these are only mentioned as afterthoughts or in footnotes). As such, the market-led narrative seems to be preferred in investor and sustainable finance circles, underpinning investor policies, risk management and engagement approaches, collaborative initiatives, and marketing. 

Then, I promised to test the narratives against the ‘facts’, as taken from the set of books from experts on public policy, economics and energy systems, that I’ve listed below. 

My conclusion from this test can be quite simple: the policy-led narrative wins the day. 

Based on my reading of these experts, the policy-led narrative offers the most realistic set of expectations and assumptions around delivering the energy transition. Indeed, I could find hardly any indication that they see an important role for voluntary private sector action. There are virtually no recommendations for more or better transition plans; for more or better disclosures of emissions; for target-setting by companies or investors; for the pursuit of Paris-aligned operations or portfolios; or for divestment of carbon intensive companies.

The detailed narratives that I’ve written up above already provide lots of hints as to why the policy-led narrative is the more ‘correct’ one. But the key factor to zoom in on is the constraints listed in both narratives: (1) the key constraint in the market-led narrative is the lack of data and disclosures that will allow us to see where risks and win-win opportunities lie and act on them; (2) the key constraint in the policy-led narrative is that an energy transition goes against the interests of many incumbents, who also have substantial political power and have proven able to influence or block climate action.

Think about the first constraint: the history of entrepreneurship, innovation and financial markets shows that if there are in fact profitable win-win investment opportunities to be found, investors will not be held back by the lack of data, or sit on the sidelines for twenty years while we come up with the right disclosure frameworks. 

In contrast, regarding the second constraint, it is easy to observe that there are many sectors that have a financial stake in the way that we have organized our entire economy around fossil energy sources, and are reluctant to see changes to the status quo that will impact profits, returns, careers, jobs or (political) power. Pretending this constraint does not exist means expecting large parts of the global economy to voluntarily give up profits, returns or jobs in exchange for the energy transition. This seems wishful thinking.

Of the two narratives, only the policy-led narrative acknowledges this constraint and proposes a way to deal with it: collective action on behalf of all of society, based on trade-offs made through democratic processes, and using the legislative, regulatory, policy and fiscal toolboxes we’ve given to our elected representatives.

Implications for investors

Does any of this matter for day-to-day investor practices? I think it does, in a number of areas.

• Risk management. If you subscribe to the market-led narrative, you’d look at a company’s carbon intensity, at its emissions metrics, and at how credible its transition plan is, to assess investment risk. Whereas policy-led narrative subscribers would look at the likelihood of policy impacting that company’s competitive environment or business model: are (carbon) taxes on the way? Or subsidies, or government-led investments in new technologies? 

• Engagement. If investors subscribe to the policy-led narrative, does that mean they can stop engaging? Of course not. Stewardship is a core responsibility that comes with being an investor and is shown by research to be most effective way to contribute to real world outcomes. But it does mean engaging differently – recognizing the limitations of what a single company can do to influence economic systems; recognizing that it will be exceedingly challenging to persuade a company to undertake activities that are not (yet) economically viable, or to give up profitable business lines; and recognizing that the more achievable the engagement ‘ask’, the more likely the engagement is to be successful. And while we’re on engagement: investors should also consider policy advocacy – engaging with governments. Policymakers want to hear from investors which measures they should implement that would in fact change economic incentives and change the competitive environment in ways that enable the transition.

• Lobbying. In his book Carbon Captured (see also the list below), Matto Mildenberger argues we need to first disrupt the political power of carbon polluters before we can effectively reshape economic incentive structures. And, in fact, it is more common now for investors to ask companies to be transparent on lobbying, or even ask to stop lobbying on climate policies altogether. This is welcome, but investors should not underestimate what is needed to disrupt the power of incumbents, or the strong commercial incentives that drive companies to influence policy. Mildenberger believes that this political power can only be disrupted by shaping broad, inclusive political coalitions – investors should ask themselves to what extent they might be able to contribute to this.

• Transition plans. Does it make sense for companies to have a transition plan? Of course; every company, in its strategy setting process, should consider how well it is positioned to confront key challenges and opportunities arising from relevant external factors, which in many industries will include climate change and the energy transition. That said, investors should approach transition plans with a dose of skepticism: plans suggesting the company will become net zero simply by pursuing profitable opportunities and without the need for enabling policy should be taken with a grain of salt. In addition, credible transition plans will identify key policy drivers relevant to the industry as well as long-term policy scenarios and how the company would respond in those environments. 

• Contributing to solutions. Investors who buy into the policy-led narrative and who also want to contribute to the transition will see that the most powerful contribution they can make is to facilitate public policy interventions. This starts by publicly endorsing the policy-led narrative, by not overstating what they can do on their own and by managing clients’ and other stakeholders’ expectations. Other ways to contribute are to engage with companies and governments, as detailed above, or through impact investing though, in line with the policy-led narrative, in many cases this will require investing in technologies and activities that cannot yet be deployed on a commercial basis and are therefore unlikely to satisfy institutional investor requirements. In other words, they will need to consider compromising on their risk and return requirements or contributing proactively to these investments through public-private partnerships (e.g. with government agencies or development finance institutions), or by contributing to or investing in blended finance solutions.

In conclusion 

Above I’ve discussed the importance of reference narratives and outlined two common transition narratives. I’ve also observed that – judging by investor policy statements, investor actions and industry initiatives – many investors appear to subscribe to the market-led narrative whereas, judging by what experts in technology, economics and policy are telling us, the policy-led narrative is more aligned with reality.

It’s interesting to note that, in private conversations, investors do often emphasize the crucial role of governments and policy, and observe that we should not overstate the contribution investors can make, which seems more in line with the policy-led narrative. It is my impression that many investors personally subscribe to the policy-led narrative, but the investor policy and industry initiative language ends up being largely aligned to the market-led narrative.

I feel it’s time to clear up this confusion – investors need a reasonably accurate, fact-based and realistic narrative, not only about what causes climate change, but about how society may solve climate change, and how likely this is. Similarly, stakeholders – clients, policymakers, investee companies – deserve to know what they can expect in terms of investor behavior and what thinking it relies on. I have argued here that the policy-led narrative is the ‘correct’ one, judging by what technology, economic and policy experts have written. 

I believe that an honest appraisal of these two narratives would result in investors both doing things differently and doing different things, compared with the portfolio of activities that arise from the market-led narrative. 

This should lead to investment and other decisions that are most likely to result in the best possible outcomes, for investors, for their clients and beneficiaries, and for broader society alike.

Sources

Of the various books I’ve read about climate change and the energy transition I’ve found these to be most accessible and insightful and together I feel they offer a fact- and science-based narrative on how we as society should engineer the energy transition:

• Climate Matters, John Broome (University of Oxford)
• Making Climate Policy Work, Danny Cullenward (University of Pennsylvania, American University) and David G. Victor (UC San Diego)
• How to Avoid a Climate Disaster, Bill Gates
• The Entrepreneurial State, Mariana Mazzucato (University College London)
• Carbon Captured, Matto Mildenberger (UC Santa Barbara)
• More and More and More, Jean-Baptiste Fressoz (Imperial College, Centre National de la Recherche Scientifique)
• Short Circuiting Policy, Leah Stokes (UC Santa Barbara)
• Sustainable Energy – without the hot air, David JC MacKay (Cambridge University, Fellow of the Royal Society, Chief Scientific Advisor to the Department of Energy and Climate Change, UK)

Acknowledgements

I’d like to thank Tom Gosling at the London School of Economics and Political Science (LSE) who was a valuable sparring partner in fleshing out the ideas set out here. Also I’d like to thank Royal London who made it possible for me to do the thinking and allocate the time needed to write this article.

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Harald Walkate is a Founding Partner of Route17, Senior Advisor to the Blended Finance Lab at the London School of Economics and Political Science (LSE), and a Senior Fellow at the Center for Sustainable Finance and Private Wealth (CSP).

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