The climate of change
The climate of change
From transition to pragmatism
- The energy transition has never promised to be a linear process and over the next five years, we believe climate pragmatism will prevail due to the uneven nature of transition pathways, government finances and geopolitical friction. Even across countries, we expect energy transition pathways to be asynchronous, depending on political will, availability of public and private funding as well as global policy alignment.
- That said, we believe investing in green enablers remains a structural theme due to the significant funding gap for climate transition, and favour established profitable companies with exposure to clean energy and EVs that possess significant competitive advantages in their industries. Enablers of the transition, including companies focused on energy efficiency and smart grid infrastructure, as well as those producing metals and minerals required for the energy transition are poised to benefit.
- At the same time, the momentum of policy shifts may open the door for the oil and gas industry to now be seen as part of the solution, leveraging technology – bio-energy and carbon capture – and its ability to manage complex energy systems. Companies that can demonstrate growth of a profitable transition business alongside a resilient oil and gas business are preferred.
Since the Russian-Ukraine war exposed the fault lines of the energy supply chain, the impetus for many European countries had turned from energy transition to energy security.
Over the next five years, we believe climate pragmatism will prevail due to the uneven nature of transition pathways, government finances and geopolitical friction which pose hurdles in the journey to net zero. This “get real” phase brings the climate agenda from rhetoric to reality.
We expect the energy transition pathways to be asynchronous around the world, depending on political will, availability of public and private funding as well as global policy alignment.
Rising politicisation of the green agenda
In the context of gradual economic stabilisation post-pandemic, governments worldwide face the legacy of higher debt and deficits (in part from the massive support packages offered during the Covid-19 pandemic).
Rising public debt burdens face the glare of electorates in over 80 economies and economic areas in 2024, especially as the “higher for longer” interest rate environment exacerbates debt burdens. As a result, environmental and climate policies face rising opposition as public spending priorities are politicised. As right-leaning political parties dominate the European Parliament after recent elections, the EU’s “Green Deal” policies could be at risk over the next five years.
In fact, prior to the EU Parliament Elections, there were already signs that certain environmental and climate related policies were at risk. In February 2024, the EU scrapped plans to halve pesticide use by 2030, and to completely prohibit pesticide use in “sensitive areas” such as urban green spaces. The Sustainable Use Regulation (SUR) was a point of contention amongst farmers concerned that the move would negatively impact crop yields and place food security at risk.
In the run-up to the US Presidential Elections in November, there is rising anxiety that the climate agenda is deeply intertwined with party politics. President Joe Biden’s landmark 2022 Inflation Reduction Act (IRA) has been a key limb of his administration’s green policy agenda. He also supported the establishment of the Green Climate Fund (GCF) and leading coalitions such as the Forest and Climate Leaders’ Partnership (FCLP). On the other hand, while under the previous Trump administration, the US exited from the historic 2015 Paris Climate Agreement and over 100 environmental rules were rolled back from 2016 to 2020; these rollbacks were estimated to contribute a third of US 2019 greenhouse gas emissions to the atmosphere by 2035.
Hence, investors are focused on the impact of a potential Trump presidency on the IRA, in which the actual impact will depend on whether the Republican party can gain control of the Senate and maintain a majority in the House of Representatives.
In the meantime, as the green agenda also pertains to strategic sectors crucial to the future, President Biden announced tariff increases across strategic sectors such as electric vehicles (EV), batteries, critical minerals, solar cells, and semiconductors in May 2024.
This was followed by the EU imposing additional tariffs on China EV makers such that total tariffs could reach up to 48% for implementation in July. About 20% of EVs sold in the EU were made in China. Given rising risks of retaliation from China, the pace of the global energy transition may be at stake.
Based on data from the IEA, China contributed to a staggering 76.4% of global lithium-ion battery manufacturing capacity in 2022, as compared to the US at only 7%.
Stay the course on sustainable investing
Sustainable investing remains a structural theme due to the significant funding gap for climate transition. It is estimated that about US$4t needs to be mobilised each year to fight climate change, according to the United Nations Conference on Trade and Development (UNCTAD).
Investors’ focus on sustainable investing is evolving from a pure exclusion approach to a transition approach that combines public and private capital investments to support the climate transition. The structural shift for investors will be in defining their investment objectives beyond traditional risk-reward metrics, in favour of measurable decarbonisation and climate risk outcomes.
Against this backdrop, we favour established profitable companies with exposure to clean energy and EVs, and which possess significant competitive advantages in their industries. Enablers of the transition are also on our radar, including companies focused on energy efficiency and smart grid infrastructure, as well as those producing metals and minerals required for the energy transition.
In Asia, countries like Indonesia offer an opportunity as one of the world’s largest carbon sinks. The country also boasts a rich reservoir of rare earth and minerals required in technological advancements. Energy pragmatism could be an answer for this nation which is primarily reliant on coal-fired power as it utilises its assets to generate significant decarbonisation outcomes if adequate capital investments and policy changes support energy transition goals.
Blended finance could present an opportunity in EMs as commercial capital serves as development finance towards sustainable development. Indonesia leads the development of G20 Principles to Scale up Blended Finance in Developing Countries, including Least Developed Countries and Small Island Developing States (or “G20 Principles”) which were agreed in 2022. The Tri Hita Karana Roadmap (THK) for Blended Finance represents a multi-stakeholder platform for formulating shared values and guidance on scaling up blended finance in support of the United Nations Sustainable Development Goals (SDG).
Traditional energy players – part of the solution?
With regards to the role of traditional energy players in this journey, the momentum of policy shifts may open the door for the oil and gas industry to be seen as part of the solution, leveraging technology – bio-energy and carbon capture – and its ability to manage complex energy systems.
We continue to favour companies that can demonstrate growth of a profitable transition business alongside a resilient oil and gas business.
Important information
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