2022 Asia Pacific Investment Forum: The energy complex

The world may be gradually coming to terms with the COVID-19 pandemic, but new tensions have emerged, from geopolitical instability and soaring energy prices to record levels of inflation and rapid monetary tightening.

An environmental-social trade-off

The decarbonisation efforts of the energy sector have helped accelerate the net-zero agenda. This is especially the case for utilities companies, many of which are aggressively pursuing low-carbon sources. With gas prices at record highs, power suppliers are having to consider affordability as well. This is creating a trade-off between the need to reduce their carbon footprint and the care they owe more vulnerable customers. 

Social considerations are significantly more material for utilities companies than in the past, notes ESG Analyst Jennifer Rynne. In addition, governments are intervening to stabilise power markets, with some imposing windfall taxes on utilities companies to pay for energy subsidies. Not only are such measures injecting uncertainty into the power sector, but they also make utilities companies more susceptible to further policy changes. 

Governments must tread carefully, says Jennifer. They need utilities companies to further advance the energy transition agenda, while in the short term, “keep the lights on” in homes, businesses and industry. High gas prices are also prompting power producers to return to coal, thus reversing the positive climate action taken by the sector over the past decade or so.

The environmental-social trade-off should ease in the future as the growing availability of renewable energy will lessen the world’s reliance on gas. Meantime, the US’s efforts to increase liquified natural gas (LNG) exports should, to an extent, help relieve pricing pressures. According to Jennifer, a long-term resolution of the current ESG dilemma means meeting the three energy “lows” of low cost, low carbon and low conflict. Until we have found such a solution, governments, companies and investors will have to balance the associated E and S challenges.

Accelerating the low-carbon economy while generating investor returns

For Portfolio Manager Alan Hsu, the provision of renewable energy is not just critical for the transition to a low-carbon economy it also represents an opportunity for nations to become less dependent on energy imports, especially oil and gas. 

Many of the new technologies that are driving today’s energy transition can be assembled and deployed domestically. These range from solar panels to biofuels and smart grid infrastructure. In the face of rapidly growing concerns over climate change and energy security, governments around the world are incentivising companies to get on board. In the US, for example, the recent Inflation Reduction Act of 2022, also known as the Climate Act, offers tax credits to domestic businesses across a wide range of sectors, including EVs and hydrogen production.

While moving beyond fossil fuels will lessen reliance on oil- and gas-producing countries, adoption of cleaner energy sources also creates new challenges. Notably, a significant amount of the metals needed to build these new technologies are extracted from either Russia or Ukraine. Currently, inventories of copper, aluminum, platinum and palladium are well below five-year levels. Investors, therefore, must keep a careful eye on how these inventories evolve in the near to medium term.

Over the longer term, investments in the materials and technologies that will drive tomorrow’s decarbonisation agenda should contribute to a winning investment strategy. “Increasingly, there’s greater demand for this type of infrastructure, and we’re still far behind achieving an end-state,” asserts Alan. “Underappreciated companies that make the best technology or product lineup, have competitive moats and healthy balance sheets and are in a position to capitalise on supply-demand imbalances should, in my view, do well in the future”.