The energy transition and the 'green deal‘: long-term opportunities
There is a growing awareness that human society and the global economy are both closely related to the ecosystem, CO2 emissions and energy sources.
The energy transition is about structural shifts from centralised, fossil fuel-based production that did not have to pay for negative externalities, towards a clean/renewable and decentralised energy model.
We see huge demand for products and services in this area driven by innovations, government policies, CO2 targets and changing consumer and investor preferences towards sustainability.
We focus on two sub-themes:
We will focus our attention on equities of companies that are key players in these areas by also using actively-managed funds or thematic ETFs.
We expect the energy transition to make a major breakthrough over the coming years. By 'energy transition' we mean structural shifts from traditional centralised, fossil-based production that did not have to pay for negative externalities, towards a clean/renewable energy and decentralised model where technological innovation and the pricing of externalities will be the key drivers. The speed of transition will be driven by i) technological innovations reducing the cost of producing and storing renewable energy; ii) government policies (carbon tax, subsidies for clean energies and infrastructure investments) and iii) changing consumer and investor preferences (for ESG/SRI-friendly investments).
The most important game changer of late emanates from governments and their expenditure programmes which focus on the energy transition and the reduction of CO2 emissions: i) Europe continues to be a leader with the 'Green Deal' and the related Resilience and Recovery Fund; ii) China is also very ambitious with targets in the 2018 'three-year plan' that aim to accelerate the deployment of sustainable transport systems. We expect more measures to be announced in March when the Chinese Communist Party details its 14th China 5-year plan. Finally, the election of Joe Biden as US president opens the door for infrastructure investment in the US linked to electricity grids, electric vehicles, battery storage and renewable hydrogen.
We focus on two areas in particular:
- Innovation and equipment in Solar, Wind, Geothermal energy, Hydroelectricity and fuel cells (hydrogen)
We do not expect one single renewable energy source to be the leader in all sources of production, for the following reasons. First, there are multiple sources of renewable energies, and the cost efficiency of producing these energies can be quite different from one country to the next. Second, recent studies conclude that electric cars will probably first rely on battery technologies while the new generation of buses and trucks is more likely to use fuel cell (hydrogen)-related technologies. It is thus important for investors to use a diversified approach when investing in this theme.
2.Storage, power and grid equipment-makers including batteries and related chemicals and materials
The International Energy Agency forecasts that as much as 80% of global growth in electricity generation could come from renewable energy sources by the end of the decade. But it is not only about more cost-effective and environment-friendly batteries. It is also about thermal energy storage, gravity storage, liquid air and hydrogen. Lithium-ion batteries enjoy a very big market share. There are, however, new areas of innovation such as vanadium redox-flow batteries, liquid metal batteries and low-cost batteries that use cheap raw materials. The focus is on lifespan, storage, fast charging, availability of commodities and environmentally-friendly batteries. Energy recycling in industries, such as steel, is also a hot topic.
Many technologies will likely co-exist and it is essential to diversify one’s electricity storage-related investments.
A factor that should limit the risk relative to global equity markets is that companies related to this theme should often benefit from a high rating for Environmental, Social and Governance (ESG) criteria. Some studies suggest a lower volatility of returns for such strategies. A global recession could severely limit governments' ability to support the necessary transitions. A sharp drop in oil and natural gas prices could slow the energy transition.