The world’s energy supply is at a crossroads. On the one hand, global energy usage is expected to increase by 50% over the coming three decades, with demand for electricity more than doubling over that timeframe, mainly driven by electric mobility and the digitalisation of our world. On the other hand, the fossil fuels that generate 84% of the world’s energy supply need to be phased out in order to reach net-zero CO2 targets.
Therefore, a dramatic shift in the way energy, and electricity in particular, are produced is inevitable.
The International Energy Agency estimates that almost 90% of global electricity generation will have to come from renewables to achieve net zero, implying a fundamentally different energy infrastructure than we have today.
It is our conviction at UBP that money follows policy: as renewable electricity takes over the role of fossil fuels, the valuations of companies positively geared towards this transformation are bound to benefit.
For this reason, we believe that the following sub-sectors of the clean energy revolution may well be the object of growing investor interest:
- Global electrification: A defensive sector that lies at the heart of the energy transition. It includes the builders, operators, designers, financiers and developers of renewable assets and energy distribution infrastructure.
- Clean energy: Solar, wind and biofuels are the key angles we focus on in this pillar. These are core technologies to drive decarbonisation, with hydrogen at an earlier stage of development.
- Industrials: A broad range of companies essential for enabling the transition, ranging from electronics to components, services/engineering and hardware technology.
- Materials for the future: The energy transition will need copper, aluminium, lithium and steel amongst other metals. We select names with “greener” characteristics where possible.
We believe that it’s not just the quality and strength of the underlying businesses that matters, but also how well companies will be able to adapt to future regulation.
In terms of geographic exposure, North America and Europe account for the lion’s share of this thematic investment universe, each taking up nearly half of the allocation, with the rest of the world accounting for approximately 4%. In terms of investment style, a typical portfolio consists mainly of growth and cyclical stocks in equal parts, and 9% defensive stocks.
While the energy transition is widely seen as a long-term trend, things are already moving fast: 42 countries have defined targets for net-zero emissions so far, either enshrined in law, in countries such as the UK, Norway and France, or in terms of proposed legislation, as in the case of Canada, the EU and South Korea, or in documentation (US, Brazil, China). These countries account for nearly 80% of global emissions today, which illustrates how significant their targets are for the world. Next November, the UK will host the COP26 summit, which many believe will be one of the best last chances to tackle climate change, with more than 190 world leaders ready to accelerate the energy transition. This could provide an interesting catalyst for the sectors exposed to the theme.
It is however a trend not just driven by government action, but also by corporate and investor action. A growing number of companies are delineating net zero strategies. A growing number of major asset managers around the world are also exerting pressure on companies to act and tailoring their investment strategies accordingly.
In conclusion, we believe that we are at the cusp of an irreversible long-term trend towards clean and renewable energy that will have profound implications on infrastructures.