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Energy transition: investment opportunities
One of the biggest changes in society is underway: the energy revolution. Find out why you should be investing in it and where the best opportunities are now.
The energy transition is not only good for the environment – it is also a unique opportunity for investors. Investing in sectors, technologies and companies associated with the energy transition offers the potential for capital appreciation and passive income. But what are the drivers of this transition? And where are the most promising opportunities?
What is driving the energy transition?
We have identified three key players at the forefront of the energy transition.
• Innovation. Green technologies, such as clean energy generation and electric vehicles, are constantly evolving. Today, renewable energy sources can be as economical as conventional sources such as coal.
[Source: BlackRock]
• Government policies. Governments have made significant efforts to create regulations and subsidies that encourage the energy transition. One example is the European Union’s first border tax to prevent European companies from shifting their carbon emissions to other countries. The EU also introduced the European Climate Change Act to support the European Green Deal and provided funds to incentivise investment in energy transformation in its member countries. At the same time, in the US, the Inflation Reduction Act (IRA) package created incentives for the use and production of renewable energy, benefiting businesses, families and local governments.
• Consumer preferences. On the demand side, the trend is equally clear. Sales of electric cars in 2023 were 35% higher than in 2022 and six times higher than in 2018. In other sectors, the trend is similar, with estimates pointing to a dominant low-carbon energy demand by 2050.Projected energy needs up to 2050.
[Source: BlackRock]
Fastest growing sectors
The trends point to three sectors that will see the most significant changes.
Energy
Of course, the energy sector will experience rapid growth in the years ahead, driven primarily by increasing electrification and the declining cost of renewable energies and their storage.
Transport
The different sub-sectors (road, maritime and aviation) will experience different rates of energy transition. In the road sub-sector, the transition will be faster, with almost all new light vehicles expected to be electric by 2050, while the transition for heavy vehicles, aviation and shipping will take longer, with full decarbonisation expected only after 2050.
Construction
This could be the sector with the most rapid changes, as a large proportion of building energy demand is expected to come from low-carbon sources. This will be helped by the development of low-cost energy efficiency schemes and policies to restrict gas heating.
Most promising technologies
The energy transition offers many opportunities for investment in innovative technologies. The most promising are highlighted below.
Green hydrogen
Green hydrogen can be used in several sectors, including transport and industry. In transport in particular, it can be a solution for decarbonising heavy vehicles where batteries can be less efficient. The European Union has ambitious plans to increase the production and use of green hydrogen as part of its European Green Deal. In fact, one of the European priorities is to produce 10 million tonnes of green hydrogen and import 10 million tonnes by 2030.
Internet of Things
The Internet of Things (IoT) has had a major impact on energy efficiency in buildings and industry through real-time monitoring and control of heating, ventilation and air conditioning systems, lighting and other equipment. The IoT is nothing more than the interconnection of different devices via the Internet, allowing data to be collected and shared. In smart grids, for example, the IoT helps to balance electricity supply and demand.
Recycling
Thanks to advanced recycling technologies, valuable materials such as metals and plastics can be recovered for reuse in the manufacture of new products. One of the best known examples is the recycling of electric car batteries, which is being driven by the growing demand for this type of vehicle. Initiatives to encourage consumers to return products at the end of their useful life are also noteworthy. Recycling schemes offer financial incentives to encourage people to participate.
Spotlight on companies and funds
For investors looking to align their financial goals with sustainable values, there are a number of specialised investment funds and companies that are leading the way.
Green Bonds
Green bonds are investments that focus on environmental protection. They are issued by organisations that use the capital raised to finance green projects with measurable environmental benefits, such as renewable energy, energy efficiency, clean transport or sustainable management of natural resources. To ensure credibility and transparency, Green Bonds are certified by independent organisations, which guarantee that the funds are used in accordance with the guidelines for environmental investments.
Like any other bond, green bonds offer investors interest payments and the return of principal when the bond matures. Green bond sales rose to $492 billion in 2023, up 10% on the previous year. Europe leads the ranking. The pace of issuance is expected to pick up in 2024 as global central banks ease monetary policy.
ESG Funds
ESG funds are investment vehicles that follow responsible investment principles focused on three main pillars: Environmental, Social and Governance (ESG).
These funds select investments according to strict criteria, which means that the companies in which they invest must demonstrate a commitment to reducing carbon emissions, fair labour practices and diversity in management, among other things. One of the advantages of ESG funds is that they offer exposure to a wide range of assets, such as equities, bonds, infrastructure funds and real estate, as long as they meet the ESG criteria.
Impact investing
Impact investing incorporates ethical and sustainability considerations with real benefits for society. Capital is invested in companies, organisations or projects with the explicit aim of solving social or environmental problems in areas such as education, health, access to clean energy, financial inclusion and others.
In addition, many investors are choosing to become actively involved in the companies or projects in which they invest, providing expertise, strategic guidance and operational support to maximise both impact and financial performance. The impact investment market is growing substantially and is expected to reach significant milestones in the coming years.
[Source: Eden Green]
Shares of leading companies
Companies that excel in their sustainable practices attract investors committed to ESG values. Because they are at the forefront of innovation, investing in the shares of such companies can be a good strategy.
For example, Corporate Knights’ 2024 Global 100 list identifies the world's most sustainable companies based on the social and environmental impact of their operations, revenues and investments. Two Australian companies, Sims Ltd. and Brambles Ltd, are on the panel, as is Vestas of Denmark. The former recycles metal waste in 30 countries, the second one is a global supply chain and logistics company, and the third one is a leading manufacturer of wind turbines. All scored 100% for sustainable revenue and investment.
[Source: Corporate Knights]
Banco Carregosa, investing in the energy transition
Investing in the energy transition is both an ethical choice and a smart financial one. Long-term sustainable growth is one of the main benefits, as is reducing the risks associated with fossil fuels, which are subject to price volatility and stricter regulations.
Explore the investment opportunities in this sector with Banco Carregosa’s expert advice and benefit from our strategic insight for the safe management of your assets.