17 August, 2021 / Research

Investing in the energy transition

By Ingrid Kukuljan, head of impact and sustainable investing, Federated Hermes

Federated Hermes' Ingrid Kukuljan outlines how impact investors can access the energy transition

Investing in the energy transition

Impact investors must be able to define, validate and report on the positive corporate impacts of companies. We have therefore identified nine key themes, in line with the UN Sustainable Development Goals (SDGs), which enable us to focus on businesses whose positive impacts are aligned with the growth drivers of tomorrow. Energy transition is one of those nine themes, making up around 20% of the portfolio.

Any strategy focused on reducing 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.

And yet this theme goes beyond energy production. We must consider energy wastage and energy efficiency. Below, we outline how impact investors can access the energy transition.

Green energy policy changes are certainly a welcome tailwind. The UK government is the latest to dramatically accelerate decarbonisation plans in keeping with 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 (COP26) delegates.

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

Vestas and Itron

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. Through their cost-effective turbines, it has created an impactful solution and boosted the attractiveness of wind power relative to other energy sources.
Two things are particularly encouraging about Vestas’ product and service offering. First, its 4MW platform accommodates a broad range of wind and site conditions, allowing users to mix turbines across various sites. This kind of solution is becoming ever-more popular as it delivers superior energy production.

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

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 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 mismatches in supply and demand can be efficiently managed without outage.

Fuelling the transition

Some $150bn (£108.4bn) was invested in clean energy last year in developing economies alone. Although this is a vast sum, the International Energy Agency predicts the figure must hit $1trn by 2030 if we are to deliver a net-zero world.
Another 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
IPO in 2013. The cumulative metric tons of carbon dioxide emissions avoided through the group’s investment since 2013 hit 3.2m in 2019. The company seeks to make $1bn worth of climate-positive investments each year. It estimates 87,000 metric tons of carbon emissions will be avoided annually by the transactions closed during 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.

A part of the Mark Allen Group.