An Investor’s Playbook to the Energy Transition

Author: Martin Grosskopf

November 8, 2023

Rising interest rates and recalcitrant inflation, uncertainty over the path of monetary policy and of the economy, and conflicts in Ukraine and the Middle East have set markets on a roller-coaster ride over the past several quarters.

In this environment, it is easy for investors to focus on short-term realities and lose sight of the long-term macroeconomic forces that will shape the future. One of those, clearly, is the shift from carbon-intensive to carbon-neutral sources of energy. Despite the recent buzz of news over war, rising prices and central banks, this so-called green transition is still under way – and institutional investors are increasingly realizing the opportunities that it will present.

In a recent survey of 143 pension funds, endowments and foundations conducted by Coalition Greenwich and commissioned by AGF Investments, nine out of 10 asset owners said they expect to be investing sustainably or working towards introducing sustainable investment practices into their portfolios within the next five years.

The surveyed firms also believe that sustainable investments over that time frame will match or outperform their benchmarks. And they are pursuing sustainable investing opportunities through thematic strategies, concentrating asset exposures to enhance both environmental and social impact as well as investment returns.

Of these strategies, respondents were especially focused on the so-called green transition, which they believe is particularly rife with opportunities for investors going forward, in large part because the move to lower-carbon energy sources will likely have such significant and wide-ranging impacts.

So, where are the potential opportunities for thematic investors in this transition story? We have mapped them out into five sub-themes, each of which may offer several investible options:

Sub-theme 1: Electric vehicles (EVs) and autonomous transport

The largest solution set in the EV and autonomous sub-theme lies in the electrification of vehicle powertrains. Automotive original equipment manufacturers (OEMs) that are perceived as leaders in this space have attracted significant investor attention, but opportunities also lie elsewhere. The widespread adoption of battery-powered vehicles will directly impact demand for materials, mining and processes, as well as for the manufacture of components and fuel cells and for EV-charging infrastructure. Meanwhile, the rise of autonomous vehicles and their safety requirements create potential opportunities in technology – for instance, adaptive cruise control and vision software.

Sub-theme 2: Hydrogen

The adoption of hydrogen as a transportation fuel source presents several solution sets for thematic investors. Among those are fuel cells for mobile and stationary power production, along with the storage and powertrain components those uses require. Hydrogen itself comprises another set: “blue” (which produces greenhouse gases) will require carbon capture and other technologies; “green” (produced through electrolysis with renewable energy) will involve electrolysis components, producers and distributors. Both will rely upon hydrogen distribution networks.

Sub-theme 3: Green buildings

While cars and manufacturing get much of the attention when it comes to the green transition, it’s worth noting that buildings account for about 40% of global energy consumption – more than either transportation or industry. Increasing buildings’ energy efficiency – by way of insulation, lighting, heating and cooling, and better energy and building management – comprises an important solution set. So, too, does the technology driving implementation of “smart” grids, including automation, advanced demand response management systems and smart metering.

Sub-theme 4: Industrial automation

For industry, automation has the potential not only to reduce labour costs and improve quality control, but also to improve energy efficiency. It presents several energy transition solution sets, including industrial control systems and equipment (for example, distributed control systems, robotics, vision systems), as well enterprise software for produce lifecycle management, computer-aided design/engineering and other applications.

Sub-theme 5: Renewable energy

The International Energy Agency (IEA) forecasts that low-emission energy sources will account for almost all the growth in global electricity demand and renewable energy will comprise 35% of global power production by 2025. For investors, that growth most visibly presents solution sets in generation, from materials and equipment to renewable energy producers. Yet it may also create opportunities in financing – for example, lease providers and facilitators of debt and equity allocation for renewable energy companies – as well as in storage (e.g., batteries and battery management).

Together, these sub-themes represent something of a playbook for thematic investors looking for potential opportunities in the energy transition. There are risks, of course. In fact, the current environment has not been kind because rising interest rates have elevated the cost of capital, which, if it persists, could slow the production and adoption of green energy solutions. So, too, could a global economic downturn.

The base case that informs this playbook, however, is that the commitment to carbon neutrality – among governments and, increasingly, private sector participants, too – is entrenched enough to insulate the energy transition from short-term shocks and financial conditions. If so, then the opportunities for long-term investors – institutional or otherwise – could be both broad and deep as the global energy landscape evolves.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds, or investment strategies.

Commentary and data sourced from Bloomberg, Reuters and company reports unless otherwise noted. The commentaries contained herein are provided as a general source of information based on information available as of October 31, 2023 and are not intended to be comprehensive investment advice applicable to the circumstances of the individual. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Market conditions may change and AGF Investments accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained here.

This document may contain forward-looking information that reflects our current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein.

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