Iran conflict exposes risks of fossil fuel dependence
The conflict in Iran has disrupted an estimated one‑fifth of global crude and natural gas supply, sending oil prices sharply higher and reminding investors how quickly geopolitical tensions can shake the foundations of the world’s energy system. Beyond the immediate headlines and market volatility, the crisis has exposed a deeper fragility: the global economy remains heavily dependent on centralised fossil-fuel infrastructure that is acutely exposed to geopolitical risk.
For sustainability‑focused investors, this reinforces a core conviction that reliance on fossil fuels creates material, systemic risks for economies, companies and portfolios. At Lombard Odier Investment Managers, we adopt a resilient and risk-controlled approach to climate mitigation. Our TargetNetZero equities strategies are designed to withstand short‑term market shocks while positioning investors for the long-term momentum behind the energy transition.
Read more: Oil prices and the Middle East conflict: the economic shock investors should watch
Short-term resilience through allocation and beta
Periods of market stress test an investor’s ability to stay aligned with long-term objectives. As a low-tracking error solution, our TargetNetZero strategies help maintain that alignment. By limiting deviations from benchmark risk, the strategy is built to absorb shocks such as today’s oil-driven volatility – particularly as oil price movements affect regions differently depending on their production, reserves and consumption profiles.
Our regional allocations in both developed and emerging markets mirror benchmark exposure . This includes North America, Europe and Asia in developed markets, and China, East Asia, India, EMEA and Latin America in emerging markets, helping maintain stability in periods of heightened dispersion.
“By limiting deviations from benchmark risk, the strategy
is built to absorb shocks such as today’s oil-driven volatility”.
Sector positioning also reflects the possibility that elevated inflation may prompt central banks to maintain or increase interest rates. Through both our internal risk model and portfolio optimisation, we carefully manage exposure to sectors most sensitive to rate changes. Our financials weighting remains in line with the benchmark, including a balanced insurance versus banks allocation. Across other sectors, we maintain tight control with active weights kept within +/- 2%.
Fig 1. Sector active weights of TargetNetZero equity strategies1
Finally, we ensure the strategy avoids amplifying market declines. With a beta of approximately 1, our TargetNetZero strategies remain neither more defensive nor more cyclical than the benchmark – a deliberate stance that supports robustness in uncertain conditions.
Modelling how an oil shock hits
To understand how today’s crisis could shape investor outcomes, we explore short‑, medium‑ and long‑term scenarios – each offering a different perspective on how resilience and transition dynamics may unfold.
Short-term scenario: oil shock and equity downturn. Over the next six-months in a scenario similar to 2022 – where Brent surges to around USD 130 per barrel from USD 932 – history suggests the energy sector could rally sharply. A typical beta relationship of the energy sector to Brent implies outperformance of as much as 22%3, before accounting for non-linear shifts in demand. For TargetNetZero strategies, which hold an underweight of around 1.5% in energy, this would contain any relative potential performance impact to an estimated 35bps across our range. In comparison, low-carbon approaches, such as Paris-Aligned Benchmarks, would have a far greater underweight in Energy, prompting greater underperformance4.
Beyond this, we do not anticipate wider repercussions. Regional risks remain largely neutralised through benchmark-aligned allocation, and the strategy’s beta sits close to one, limiting sensitivity to broader equity drawdowns.
Investment implications: modest and well‑defined performance drag but no structural vulnerability.
Read more: Race against the benchmark to decarbonise portfolios
Medium-term scenario: higher rates, slower growth and transition tailwinds. If elevated oil prices persist over the next two years, inflationary pressures are likely to remain, prompting central banks to maintain or even raise interest rates. In this environment, controlling exposure to global financials becomes essential. The safeguards introduced into our portfolio construction in early 2022 – particularly those balancing the insurance versus banks allocation – continue to buffer the strategy from the rate-driven rotations typical of tightening cycles.
Persistently high fossil‑fuel prices can also begin to reshape competitive dynamics. TargetNetZero favours companies that will decarbonise faster than their peers and avoid laggards. Such companies are already more energy efficient, less exposed to fossil-fuels and more connected to clean energy. Over a medium‑term horizon, these characteristics may increasingly translate into relative performance strength as the cost advantage of low‑carbon solutions becomes more pronounced in a high oil price environment.
Investment implications: if elevated oil prices persist, transition‑aligned companies could begin to outperform as the economics of clean energy improve.
Read more: Harvesting carry in equities by improving dividend tax efficiency
Long-term scenario: supporting the transition to net zero. Beyond the next two years, the Iran crisis highlights a fundamental truth: fossil-fuel systems are inherently exposed to geopolitical risk. They can be disrupted, blockaded or weaponised. Renewable energy, by contrast, is more decentralised, secure and resilient.
Over the long run, a persistently high fossil‑fuel price environment strengthens the economic case for accelerating the decarbonisation transition because it would increase the cost incentives for rapid adoption of low‑carbon technologies.
Economic growth and energy consumption are deeply linked. We expect future energy needs to rely more on renewable‑based utilities and less on fossil‑fuel energy. Accordingly, TargetNetZero typically maintains an overweight in utilities and an underweight in energy – positioning the strategy to benefit as the transition accelerates.
Investment implications: a more rapid shift toward a renewables-based energy system supports the potential for sustained outperformance from carbon‑efficient companies.
Resilience today, opportunity tomorrow
The crisis triggered by the Iran conflict underlines a simple truth: shocks expose vulnerabilities, but they also indicate where the future is heading. In the near term, the impact on our strategies is contained and well understood, with core risk controls helping to steady performance through volatility. Over the medium horizon, persistently high fossil‑fuel prices begin to tilt the economic balance toward companies aligned with the transition – firms that are more carbon and energy efficient, and better positioned for a changing system. And in the long run, the structural shift towards decentralised, low‑carbon and more resilient energy networks becomes increasingly evident.
TargetNetZero is built for precisely this trajectory. It is designed to remain robust in moments of stress while capturing the structural momentum of the transition as it accelerates. Today’s dislocation reinforces why that approach matters: resilience in the present, and the potential for stronger, more sustainable returns as the energy system of tomorrow takes shape.
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