Clean Energy for Sustainable Investment Returns

The seventh of the United Nations’ 17 Sustainable Development Goals closely correlates to our ESG-related investment themes. It sets out to “ensure access to affordable, reliable, sustainable and modern energy” for all people, and is at the heart of many of the investment opportunities arising from the race to cut greenhouse gas (GHG) emissions to net zero by 2050.

This is because the production of energy – both for generating electricity and providing power for transport and industry – still relies on burning fossil fuels which are particularly carbon-intensive. The International Energy Association (IEA) recorded 31.5 gigatons (Gt) of energy-related carbon dioxide (CO2) emissions and the highest-ever concentration of CO2 in the atmosphere in 2020, even though the pandemic drove a decline in energy consumption.[1] These emissions underlie the atmospheric warming that is fuelling increasingly frequent and severe weather events such as hurricanes, floods, droughts and wildfires.

The IPCC Sixth Assessment Report released on 9 August 2021 not only confirms previous science-based conclusions about mankind’s impact on the environment but also redoubled calls for governments to step up their policy support for decarbonisation. It stresses that cumulative atmospheric GHG concentrations are already high: 2019 levels of CO2 were the highest for two million years, while methane (CH4) and nitrous oxide (NO2) were the highest for 800,000 years. The window for action is closing: the report is a prompt for ministers attending the United Nations Climate Change Conference to be held at Glasgow in November 2021 (COP26) to raise their decarbonisation game.[2]

Eliminating CO2 will require enormous investment: to reach net zero emissions by 2050 and limit the impact of global warming, the IEA estimates global spending on clean energy will need to more than triple to around US$4 trillion a year by 2030.[3]

Coal is the culprit

Perhaps the most urgent challenge is that many countries still rely on coal-fired power stations for their electricity. 40% of energy-related CO2 emissions come from burning fossil fuels for electricity.[4] While wealthy nations are transitioning to alternative power resources, those that are still developing cannot be required to stop rolling out electricity to underserved communities. For developing countries, decarbonisation must be accompanied by ways of distributing electricity to a greater proportion of the population at the same time.

Fortunately, the cost of renewable energy continues to fall as technologies improve and economies of scale increase. The International Renewable Energy Agency (IRENA) notes that prior to the Covid-19 pandemic, 56% of new utility-scale renewable power projects produced electricity more cheaply than the cheapest new coal plant. Replacing the most expensive 500 GW of current coal-fired capacity with renewables would save USD 23 billion of electricity costs and eliminate 1.8 Gt of CO2 emissions every year – equivalent to 5% of total CO2 emissions in 2019.[5]

BNP Paribas acknowledged the need to reduce reliance on coal-fired power in November 2019 when we decided to cease all its financing in the thermal coal sector by 2030 in the European Union, and worldwide by 2040. We also strengthened our support for renewable energies development with a financing target of € 18 billion by 2021.[6]

The economic case for renewable energy speaks for itself – so what are the implications for investment? We see the rapid uptake of renewables as a ‘megatrend’ that presents numerous opportunities for investors looking for long-term, sustainable themes. The broad structural shift from centralised, fossil fuel-based production toward clean, renewable and decentralised energy will create opportunities for years to come: the world’s current centralised power generation and distribution infrastructure is complex, expensive and ‘hard-to-abate’, requiring multiple rounds of investment over several phases.

Catch the trend

Perhaps the most straightforward and efficient method of capturing renewable energy’s growth is to rebalance equity portfolios to obtain greater exposure to companies directly involved in green power and those benefiting from early renewables adoption. Companies fitting these criteria include those involved in technological innovation and equipment in solar, wind, geothermal energy, hydroelectricity and hydrogen. Because renewable energy depends on natural processes like weather, its peaks and troughs must be normalised – requiring storage and new decentralised distribution models. Power and grid equipment makers, batteries and related chemicals/materials should also respond positively to growing renewables demand.

New battery technologies promise to mature in the coming years, including thermal energy storage, gravity storage, liquid air and hydrogen. Research is ongoing into developments such as vanadium redox-flow batteries, liquid metal batteries and low-cost batteries that use cheap raw materials. A focus on technological breakthroughs suggests a pipeline of new growth sectors over the next few years.

Growing demand for battery storage is also driving a rapid uptick in demand for their raw materials. For example, lithium – critical for rechargeable batteries – has doubled in price since November 2020 as a result of policy support for electric vehicles combined with supply constraints.[7] The value of mining companies developing lithium resources should also rise on these stimuli, as will others producing metals involved in renewable energy, such as copper, cobalt, nickel, silver and rare earths.

It is clear that no single technology will meet global demand for new green energy before 2050. Instead, solar, wind, hydro and geothermal generation will coexist as they are installed in locations best suited to their merits. The renewable energy rollout will be broad-based, creating clusters of new manufacturers and developers. Investors looking to diversify their exposure across this spectrum can use actively managed funds or thematic exchange-traded funds (ETFs), including commodities funds, which could also spread risk effectively. 

Consider carbon

A development to watch is the EU carbon credit trading scheme which has been on the rise as the EU moves to create a stricter emissions trading regime. The European Union’s Emissions Trading System (EU ETS), launched in 2005, has established a robust trade in carbon certificates. California, the US Northeast and Quebec also have carbon credit markets, while China launched a carbon market this year which covers 3.3 billion tonnes of CO2. A robust carbon price further incentivises industry to adopt low-carbon energy sources and promotes carbon capture systems and carbon offset schemes.[8] New vehicles, including ETFs, are now available for investors seeking to participate in these markets.

With interest rates likely to remain low for some time to come, we see long-term megatrends as a way for investors to capture attractive, above-market returns. While this is a positive result for investors in itself, it has the added bonus that these investments are aligned with the global sustainable development agenda and critical to breaking the link between power generation and damaging GHG emissions.