Bloomberg Professional Services March 23, 2023
This article was written by Chris Hackel, Head of Sustainable Indices at Bloomberg.
In this series, Bloomberg’s Sustainable Indices team takes account of current market sentiment and conditions surrounding sustainable and ESG investing in the U.S. market and explores opportunities for 2023. Catch up on the Introduction and Part 1 which discusses opportunities to Use ESG without using “ESG”.
Today, in the second practical part of this blog series, we take a closer look at strategies that seek opportunities in the low-carbon transition.
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An inhospitable climate
In the introduction to this series, we highlighted that U.S. investors are not nearly as aligned in their views on climate change and fossil fuels as are Europeans. That’s due in part to the significant role fossil fuels continue to play in the US economy: according to a report by Brookings, as of 2019, nearly 1.7 million US jobs were in fossil fuel industries.
As a result, investment approaches that incorporate climate considerations, or that divest from fossil fuels, have gotten far less traction in the U.S. than in Europe and have increasingly been the target of political backlash. Further adding to the challenge in 2022 were global concerns regarding energy security following the Russian invasion of Ukraine, and a subsequent strong performance of the energy sector resulting from rising oil prices.
With this backdrop, it might not be surprising that investment managers have been hesitant to introduce new climate strategies into the US market.
But there’s another side to the climate story that investors should consider.
Out with the old, in with renew
The key word is transition. The energy transition isn’t meant to be an immediate move away from fossil fuels. Instead, it can be seen as a near-term diversification of energy sources and a long-term gradual reduction of fossil fuel dependence. This could be viewed as an end in itself – more energy sources create price competition and redundancy; or as essential to achieving the necessary reduction in global greenhouse gas emissions by 2050 to mitigate catastrophic climate change risk, as called for in the Paris Agreement.
As things stand, alternative energy sources aren’t nearly plentiful enough to power the planet. And even those who are most urgently pressing the need to mitigate climate change risk will acknowledge the continued need for fossil fuels in the energy mix. But, as fossil fuels are phased out over time, there will have to be proportional growth in the companies creating new low-emissions solutions. This includes, in addition to renewable energy sources, the electrification of transport and industrial processes along with buildings and heat; and carbon capture and storage (CCS), such as the retrofitting of fossil fuel plants with emissions-reducing technologies.
And that growth is set to create many new investment opportunities.
The fuel for change
The shift away from fossil fuels will require significant investment into clean energy infrastructure. As noted in the BloombergNEF report “Energy Transition Investment Trends 2023,” in 2022, global energy transition investment totaled $1.1 trillion, including investments in areas such as renewables, storage, charging infrastructure, hydrogen production, and low-carbon energy tech (such as solar and EVs). The report also notes that energy transition investment is already near to overtaking fossil fuel investment.
In the past year, Bloomberg has launched various thematic indices that include markets or companies most benefiting from the global transition to a low-carbon economy. This includes the Bloomberg BioEnergy index, the Bloomberg Goldman Sachs Clean Energy index, and the Bloomberg Hydrogen index.
We are also working on new indices that will decarbonize by gradually reducing exposure to high-emissions companies while shifting allocations to firms creating transition solutions.
From the ground up
The low carbon investment opportunities also extend to commodities, as companies are now hunting for more direct access to the raw materials that are essential to energy transition technologies.
We recently introduced The Bloomberg Electrification Metals Index to track the performance of the base metals key to the energy transition: aluminum, copper, nickel, zinc, cobalt, and lithium.
In the coming weeks, we’ll have an additional blog post that will go into more detail about the investment trends benefiting from the energy transition and the race to reach net-zero by 2050.
Up next…
Meanwhile, this series will round out in the next weeks covering our final two topics on sustainable investment opportunities in the US market:
- Going long regulation
As more countries, including the U.S., introduce related regulations, opportunities are being created for funds and investment vehicles to align with these initiatives and effectively be “long regulation”.
- Investing as usual, but with an impact
Finally, indices that achieve specific, targeted sustainable impact but provide an alternative to ESG score integration, where impact can be less clear or recognized.
