Energy transition: more than just talk?
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?
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
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.
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.
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.
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.