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Clean energy transition

The Clean Energy Transition: opportunities beyond the obvious

Active Equity
The clean energy transition presents a huge investment opportunity, tapping into some of the fastest growing segments in the economy. One of the most obvious routes is investing in listed renewable energy companies.
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The problem is that they are in increasingly short supply. According to our calculations, renewable energy stocks represent less than 8 per cent of the global equity market’s capitalization, or $9.3 trillion. That’s a relatively small and crowded pool.

Which means investors seeking green energy opportunities need to extend their reach within the energy transition ecosystem. It helps to take a broader view on what constitutes a clean energy investment. We believe this can be done through four broad themes, which cover the entire energy system value chain from supply to demand.

  • Renewable energy: The costs of generating renewable energy have dropped steeply over the years and in many regions are now cheaper to deploy compared to fossil fuels. We believe that existing power utilities have a key part to play in this sector, given the improved economic attractiveness of renewables, and support from governments eager to meet their net-zero commitments.
  • Energy efficiency: This is crucial for reducing the carbon footprint of energy-heavy industries such as transport, construction and manufacturing. Increased electrification (e.g. of vehicles) can help, although the impact is most significant if that electricity comes from renewable sources. By improving efficiency, the global economy can continue to expand without putting too much additional pressure on Earth’s resources.
  • Enabling technologies: Battery storage and power-management semiconductors are just some of the technologies needed for the transition to a low carbon economy. Some are still being developed, but there is clear progress. For example, large-scale batteries are increasingly able to offer an effective and affordable way to smooth out the intermittency of renewable energy generation.
  • Enabling infrastructure: Electric networks, smart grids and car-charging infrastructure are also necessary. For example, we need more transmission lines to transport renewable energy over long distances from areas with high wind/solar resources to the demand centers in cities.

Green Capex boom

More broadly, we believe that investing in sustainable practices and technologies—so-called “Green Capex”—will be a multi-year secular theme driving the next wave of infrastructure investments across electrification, electricity grids, renewables, green buildings, battery storage, electric vehicles and more.

The current dislocations in the energy markets have been accentuated by the Russia-Ukraine conflict.

Investors seeking green energy opportunities need to extend their reach.

These will continue to stimulate corporate investments in energy-saving technologies, as well as providing an additional incentive for the transition away from fossil fuels. Not only is such a shift good for the environment and our planet, it is now also increasingly seen as a key step toward improved energy independence (particularly, but by no means exclusively, in Europe).

Ultimately, we believe that high-quality companies underpinned by secular growth will be more resilient than the broader economy and stand out because of the underlying structural drivers. By focusing on a broad universe of companies which have a part to play in the energy transition—rather than looking exclusively at the renewables sector—investors can achieve better diversification and access a wider pool of opportunities.

Key pillars of the clean energy revolution

Key takeaways for the Clean Energy Transition

Takeaways for the Clean Energy Transition

  1. Increased sense of urgency globally to combat climate change and air pollution
  2. Clean energy becoming more competitive as technology innovation enables steep cost reductions
  3. Supported by governments aiming to improve energy security and independence

Driving transformations in entire industries

  1. Redirecting entire energy production landscape toward renewables
  2. Transformation of the transport industry toward electrified and smart mobility
  3. Focus on energy efficiency driving new solutions in infrastructure and manufacturing

Creates opportunities in some of the fastest growing economic sectors

  1. A diverse opportunity set allows for investment optionality
  2. High-quality companies with strong free cash flows and high barriers to entry
  3. Secular theme provides long-term visibility on growth