Thematic investing focus: evolving the current generation of energy

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11 min read
2025-04-30
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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

In this two-part series, we examine the thematic investment opportunities arising from the world’s energy transition. Our first article in the series looked at the scope for investors to access opportunities within what we refer to as the clean energy transition opportunity set, such as companies involved with renewable power generation. 

In this article, we explore another way for investors to think about the energy transition: one that looks at the critical role that the current generation of energy sources plays in a successful transition — a more nuanced approach that considers the opportunities, risks and inherent trade-offs. 

Among our key conclusions:

  • The energy transition is taking place amid a greater focus on energy security and affordability, leading to greater acknowledgement of the pivotal role that traditional energy industries play in meeting global energy needs while striving for sustainability.
  • In the meantime, investors increasingly recognise that focusing solely on divestment may decarbonise investment portfolios without addressing the broader challenges associated with transitioning the economy away from fossil fuels.
  • Active engagement can help drive meaningful change while facilitating the transition to the low-carbon economy. 
  • A holistic approach spanning both current and next-generation opportunities may be more aligned with the reality that the energy transition is a complex and multifaceted endeavour for which there is no one-size-fits-all solution.

What the energy trilemma means for the energy transition

Demand for energy is increasing, driven by the megatrends of population growth, urbanisation and higher standards of living. Meanwhile, energy markets have experienced an increased level of volatility.

The European energy crisis of 2022 has served as a powerful reminder of the importance of energy security and affordability, helping to drive recognition that renewables are more likely to offset incremental additional demand in the medium term, rather than displace existing power generation.

The focus on each of the three often conflicting challenges — energy security, affordability and decarbonisation — in the “energy trilemma” will continue to change over time. In 2020, we saw the era of “decarbonisation at all costs”. Decarbonisation was the focus of government and corporate sustainability agendas, which led to carbon-emitting industries (such as metals and energy) being less favoured by investors and the slowdown in investments contributing to a growing supply/demand imbalance. Today, given our view that higher energy volatility is here to stay, we believe energy security and affordability will remain in focus. 

At the core of this shift is a renewed emphasis on active engagement as a way to work collaboratively with companies and stakeholders towards long-term change, rather than simply divesting from certain sectors, which may decarbonise investment portfolios without addressing the broader challenges associated with transitioning the real economy away from fossil fuels.

This approach acknowledges the pivotal role that industries such as metals and oil and gas play in meeting global energy needs while striving for sustainability. Through bottom-up research, we seek to identify and invest in those companies with strong environmental and social performance, as well as a focus on decarbonisation. 

Through our natural resources subtheme, we target the often-overlooked segments that we think are essential to the energy transition: traditional energy sources that can assist with the transition and undersupplied critical minerals. Paired with deep research and consistent engagement, we believe a thematic approach to the energy transition can offer a differentiated way for investors to access potential opportunities.

Where are the investment opportunities and risks?

In our view, investing in clean energy stocks is not the only way to support the energy transition. We see the role of traditional energy (hydrocarbons) as important in continuing to meet energy demand as the economy decarbonises, with data from the International Energy Agency (IEA) using projections to illustrate how critical decarbonising existing energy sources is to the energy transition (Figure 1).

Figure 1
Small cap market companies

We believe that holding publicly listed companies accountable to high environmental and social standards can help them to continue to meet the growing demand for energy, while enabling real-world emissions reductions. 

It may sound counterintuitive, but many companies within emissions-intensive sectors are at the heart of the energy transition and are contributing to climate change mitigation efforts. We have found that large “traditional” energy companies have the financial strength and technical expertise, including in their human capital and technology, to take risk and partner with others to develop and invest in earlier-stage, unproven technologies that will be vital to advancing the energy transition. 

For instance, we are witnessing companies invest in cleaner technologies and practices, such as methane detection and capture systems, to minimise emissions from extraction, production, and transportation processes. Certain companies in these sectors are also increasingly investing in research and development of carbon capture, utilisation, and storage (CCUS) technologies to capture and store CO2 emissions from industrial processes and power generation. We also find that many traditional energy companies are adapting to regulatory shifts by proactively aligning their operations with evolving environmental standards and regulations, as well as integrating climate risk assessments into their strategic planning processes. Engaging with companies and their management on a regular basis helps us monitor progress, so that we can better identify whether a company is on the right trajectory. 

Case in point: Engagement success at a large oil company

After a large integrated oil company updated its business strategy and revised its emissions targets as a result, we met with the company’s sustainability team, and also had the opportunity to meet with the CEO a few months later. Through our engagement, we were able to better understand the assumptions behind the stated emissions targets and transition pathway. 

The meetings affirmed our view that the revised strategy will enable the company to leverage its scale and strengths to double down on the technologies and solutions where it can have the most impact. We believe that this will enable it to advance the transition while also capturing more value from the changing energy landscape.

Example is for illustrative purposes only and is not intended as an investment recommendation.

These potential opportunities are not limited to traditional energy suppliers. A capital-cycles approach, seeking areas of the market where we believe capital is most needed, can be a helpful way to identify further opportunities for investment. We believe the energy transition is, in many ways, a metals transition, given the metals-intensive nature of decarbonisation. However, underinvestment in recent years due to exclusion-led ESG pressures at a time when demand for metals has been growing has resulted in a tight supply/demand outlook for many critical metals, particularly as the lead time from discovery to production is, on average, more than a decade. The IEA sees a significant investment gap for critical metals (Figure 2) and we believe investors may be able to benefit from focusing on metals that are seeing the largest supply/demand imbalances such as copper, steel, lithium, iron and aluminum and that require the most capital investment to meet future demand.

Figure 2
Small cap market companies

Investors in the energy transition may take pause due to the mining sector’s poor record and elevated ESG risks. In our view, this is an opportunity for active engagement. In our framework, we seek to identify where a company may be potentially mispriced due to a controversy overhang but where engagement with management is positive.

Why a balanced approach may benefit investors

Above all, we believe it is essential to maintain a balanced perspective. While renewable energy technologies hold promise for the future, traditional energy sources will continue to play a role in the global energy mix for some time to come.

Incorporating a more holistic energy approach may also provide portfolio-level benefits to investors. Green assets such as clean technology, renewables and climate solutions are often real-asset heavy, and institutional investors may already be overweight or at capacity in these areas. Clients may also find that this opportunity set could complement the physical unlisted assets in their portfolios and act as a source of liquidity. Lastly, this broader definition of the energy transition provides investors with an avenue to gain access to energy, materials, and utilities — places where global equity managers tend to be underweight — by offering what we believe is a more constructive, forward-looking opportunity.

Bottom line

As with any investment theme, there are risks to our outlook, such as government policy, technology shifts and evolving consumer preferences, which we track and constantly evaluate within our thematic research and framework. Idiosyncratic risk arises from our bottom-up investments, driving our pursuit of companies with a culture of good governance and operational excellence, which we seek to understand and assess through active and regular engagement. However, we believe that by embracing a pragmatic approach that prioritises engagement, collaboration and balanced decision making, active managers can navigate the complexities of the energy transition while delivering sustainable returns for their clients and stakeholders.

Experts

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