ESG Focus: How To Invest In The Energy Transition

ESG Focus | Jul 08 2021

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

How To Invest In The Energy Transition

By Ingrid Kukuljan, Head of Impact and Sustainable Investing, at the international business of Federated Hermes

Any strategy looking to reduce carbon emissions needs to take sustainable energy production into account. With global demand for electricity set to double by 2050, there is an urgent need to shift from unsustainable fossil fuels to renewables like wind and solar power.

And yet this theme goes beyond energy production. In thinking about sustainable energy, we must consider energy wastage and, by the same token, energy efficiency.

A policy tailwind

Green energy policy changes are certainly a welcome tailwind. The UK government is the latest to dramatically accelerate decarbonisation plans in keeping with the likes of the EU Green Deal, the impending US Green Recovery, and prospective unilateral agreements between the US and China, as well as Climate Change Conference of the Parties (COP 26) delegates.

Encouragingly, we are seeing corporates take action, even without government incentives and backing, perhaps because sustainable energy solutions are beginning to provide lower lifecycle costs to operators and consumers alike.

Our holding, Vestas, is exemplary in this regard. A global leader in onshore wind turbines, Vestas is at the forefront of lowering the cost of wind power with an 18.1% market share in 2019.

Two things are particularly encouraging about Vestas’ product and service offering. First, Vestas’ 4MW platform accommodates a broad range of wind and site conditions, allowing users to mix turbines across various sites. Not only is this kind of solution becoming ever more popular as it delivers superior energy production, Vestas also remains the supplier of choice, commanding over 50% of the product segment.

Secondly, the fact that Vestas’ solutions are competitively priced is key to understanding the company’s impact. As one of only a few companies providing larger, more powerful turbines, Vestas are producing more cost-effective turbines per MW.

The need for an efficient, flexible grid system

But the electrification of products currently consuming fossil fuels, and the integration of renewables into electricity supply, is predicated on an efficient and flexible grid system. The energy transition will make both supply of electricity more intermittent, and demand of electricity more irregular, both of which are challenges for the legacy grid. 

Companies such as our holding, Itron, address this problem. Itron produces advanced metering infrastructure to help operators ensure that mismatches in supply and demand can be efficiently managed without outage.

Fuelling the transition to a low-carbon future

Some $150bn was invested in clean energy last year, in developing economies alone. While this is a vast sum, the International Energy Agency (IEA) believes the figure must hit $1tn by 2030, if we are to deliver a net-zero world.

Our holding, Hannon Armstrong, is the first US public company solely dedicated to investments in climate change solutions and aims to reduce carbon emissions by providing capital to businesses with a clean energy focus. Using proprietary tools, Hannon Armstrong has certified the climate impact of each of its investments since its IPO in 2013.

The cumulative metric tons of carbon dioxide emissions avoided through the group’s investment since 2013 hit 3.2m in 2019. What’s more, the CO2 reductions from the group’s investments in 2019 were equivalent to taking 83,000 cars off the road.

The company seeks to make $1bn-worth of climate-positive investments each year. The company estimates that 87,000 metric tons of carbon emissions will be avoided annually by the transactions closed in Q1 2021.

It will take a sustained effort from governments, companies and investors to drive the energy transition, but we believe a wealth of opportunities exist to engage with companies around SDG 7 and SDG 13 – transforming the energy system to power a low-carbon economy.

See Deloitte, ‘Making a clean, green break for the future’.

Vestas leads by a considerable margin. Nearest competitors – Goldwind Global, General Electric (GE) and Siemens Gamea – represent a market share of 14.4%, 13.1% and 10.3% respectively.

Platforms represented a market share of over 40% in 2019, compared to just 19% in 2018.

See IEA: To reach net-zero, renewable energy investment in developing nations must increase sevenfold

CarbonCount measures the expected CO2 emission reduction per $1,000 of investment and WaterCount estimates the expected water consumption reduction per $1,000 of investment.

“Hannon Armstrong and ENGIE to jointly invest in 2.3GW portfolio of US wind and solar projects,” published by Hannon Armstrong in July 2020.

“Hannon Armstrong announces third-quarter 2020 results and declares dividend,” published by Hannon Armstrong in November 2020

“Hannon Armstrong announces first-quarter 2020 results and declares dividend,” published by Hannon Armstrong in March 2021.

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms