Energy transition: more than just talk?

The much-needed energy transition has been a topic of conversation for some time. But at what point does talk become irrelevant if action is too slow or insufficient? While governments worldwide have signalled their commitment to fighting climate change with net zero targets, it could be argued that these efforts have lacked consistency, collaboration and coherence.

As carbon emission reduction deadlines start to loom, there are signs that a longer-term transformation of how we produce, supply and consume energy is emerging, with public figures and bodies acknowledging more needs to be done. So, if the age of energy transformation is now truly upon us, how can investors best access these opportunities?

In the midst of the pandemic, much of the unprecedented fiscal support issued by governments to stimulate economic growth was ringfenced for green initiatives to ensure nations were built back better. However, recent research by the International Energy Agency (IEA) suggests that only about 2% of this spending has been allocated to clean energy measures¹.

More worryingly, the IEA warns that under governments’ current recovery spending plans, global carbon emissions are set to reach record levels in 2023 and will continue to rise. It warns that the world is ‘far from the pathway to net-zero emissions by 2050’².

While time may be running short, it is not too late to implement the necessary changes and the upcoming COP26 meeting is expected to be critical in raising the ambitions of all actors by increasing climate action, building resilience and lowering emissions. COP26 President Alok Sharma, says: “We must not lose sight of the huge challenges of climate change… we are working with our international partners on an ambitious roadmap for global climate action… and COP26 can be a moment where the world unites behind a clean resilient recovery.”³

If politicians needed a further catalyst to extend their climate change commitments, this summer has seen a high number of freak weather events across the globe. A record-shattering heatwave struck North America, floods in China, India, Germany, Austria and Belgium have left many people dead as well as causing billions of dollars in damage. Even climate scientists have been shocked by the severity and frequency of these events, with Chris Rapley, professor of climate science at University College London, warning “There is a dramatic change in the frequency with which extreme [weather] events occur.”⁴

One positive outcome from these tragic events is that politicians are now publicly acknowledging that more needs to be done to tackle the impact of climate change, as well as curbing its progress. German Chancellor Angela Merkel urged, “We have to up the pace in the fight against climate change”⁵ while US President Joe Biden conceded that “Climate change is driving the dangerous confluence of extreme heat and prolonged drought.” Adding that “Right now we have to act and act fast. We’re late in the game here.”⁶

Importantly, the reality of climate change has also been unequivocally confirmed by the UN’s Intergovernmental Panel on Climate Change’s latest report on global warming. The report cautions that global warming of 1.5°C will be exceeded this century unless deep reductions in greenhouse gas emissions occur⁷, prompting the UN secretary-general António Guterres to describe this scenario as “a code red for humanity”⁸.

If hearing powerful global figures recognise the importance and urgency of the climate challenge and pledging to do more is a critical step forward, so too is commitment from the IEA. The powerful energy body has historically been connected with the promotion of fossil fuels, but delighted climate change campaigners in May 2021 with the release of its path to achieving net zero by 2050.

This report represents the world’s first comprehensive study of how the energy transition can be accomplished and helps prioritise the required actions, as well as setting milestones to guide the ongoing journey. The IEA’s statement that there should be ‘no investment in new fossil fuel supply projects’⁹ was particularly impactful, as it threw its weight behind funding the further development of renewable energy supplies.

According to the IEA, total annual energy investment needs to reach $5 trillion by 2030 and this would add an extra 0.4% a year to global GDP growth¹⁰. Such significant spending underlines the view that the energy transition offers an exciting opportunity for investors. Not only does it represent a strong secular growth theme but it also appeals to those for whom sustainable outcomes matter.

The energy transition opportunity is not just about clean energy. No one is expecting the use of fossil fuels to be switched off immediately and these remain an essential part of the energy mix. However, the onus will be on moving the world’s dependence away from fossil fuels towards more renewable and sustainable energy sources over time.

Opportunities will encompass innovations across smart grids, alternative transportation, electric vehicles, industrial energy efficiency, green buildings, LED lighting, hydrogen fuel cells, solar and wind, and many utilities and the energy transition should be seen as a very broad thematic opportunity.

The search is on for greener solutions to power our planet and this may be one of the greatest investment opportunities of our lifetime. The investment community has an incredible chance to support companies trying to decarbonise and accelerate the much-needed energy transition. As well as the well-known incumbents, there will be small nimble, innovative companies aiming to make their name as part of this quickly evolving market. Any of these companies could become the superstars of tomorrow.

At BNP Paribas Asset Management we recognise the importance of being able to distinguish between short-lived fads and strong, progressive transformational trends. We focus on investigating and identifying what’s next for energy and renewables and their impact not only on the energy sector, but also on a wider range of sectors such as transportation and housing. We believe this involves a different set of questions. As it is only when you take an unbiased, open-minded and well researched approach to evaluating the impact and opportunities, can you make informed investment decisions.