Investing in today’s energy landscape

The world still relies on fossil fuels for 83% of its energy
Investing in today’s energy landscape
Sophie Haas, J.P. Morgan International Private Bank Head of Sustainable Investing

The world is torn between old-school fossil fuels and a future powered by clean energy. Although the speed of the energy transition is unpredictable, it is likely to be a defining issue of the future decades.

With nations making net zero pledges, sustainability and sustainable energy have become major concerns in the region. The UAE has vowed to decrease its carbon emissions to net zero by 2050, investing Dh600 billion ($163 billion) over the next three decades in clean and renewable energy sources. Furthermore, Saudi Arabia, the world’s largest oil exporter, has pledged to reduce carbon emissions in order to meet this target by 2060.

Looking ahead, we anticipate a surge in both traditional and clean energy, as well as associated industrial metals. High pricing and modest investment levels are expected to support healthy free cash flow and earnings for hydrocarbon-related organizations.

However, regardless of how promising the medium-term outlook appears to be, investors should proceed with caution. The economic cycle will continue to have an impact on energy prices, with recession-driven selloffs likely to occur.  At the same time, as with many disruptive developments, clean energy enterprises will be prone to swings in sentiment and may face difficulties in a rising rate environment.

Therefore, long-term investors should consider exposure to both aspects of the energy complex, especially when combined in the same portfolio. Below are key factors that investors must consider while investing in the transition to clean energy.

Fossil fuels still dominate the energy landscape


While the renewable energy transition is “irreversible”, the world still relies on fossil fuels for 83% of its energy. Even the most ambitious transition plans will involve the usage of hydrocarbons in the short run. There are various reasons why the progress of decarbonization has been sluggish to date.

Any credible strategy for achieving net-zero emissions by 2050 must incorporate a combination of greater electrification, energy storage capacity, reliance on renewables, and decarbonization technology.

A reality check for renewables


A significant transition to renewables, involving trillions of dollars of investment, is already underway, but advocates must remain realistic about renewables’ ability to power the world. For example, almost all of the growth would have to come from solar and wind energy. Although there are undeveloped hydroelectric sites, most estimates of their potential power equal only a small portion of the total electricity demand.

Furthermore, carbon-based energy systems – and nuclear ones – are locationally dense (they can generate lots of electricity from a small area), but renewables are the opposite: they require large areas to generate significant amounts of energy.

All in all, it is clear that we will need more than the vast renewable build-out to reach climate goals.

The Middle East is embracing the transition to renewable energy with many nations setting up ambitious targets and implementing investment and diversification strategies to meet these. According to a recent report, Arab countries’ renewable energy generation plans will meet approximately 92% of the region’s goals by 2030.

Investing in the booming chip-tech industry


As smart and electric vehicles (EVs) take a larger share of the global vehicle fleet, the demand for semiconductors will grow tremendously. The UAE’s EV sector is expected to grow at a 30% compound annual growth rate (CAGR) between 2022 and 2028.

Semiconductors will be critical in the development of sustainable energy and the overall transition to a net zero economy. When it comes to clean energy, semiconductors are nearly ubiquitous.  Semiconductors are important components in solar panels, wind turbines, and other forms of renewable energy because of their capacity to conduct electricity while also functioning as insulators to boost efficiency and prevent undesired power flows.

Investment opportunities


Investors should take into account exposure to both conventional energy and related real assets, as well as exposure to the upcoming clean energy investment cycle. Given the complexity of the transition, it is recommended to invest through active managers in both public and private markets. In addition to thematic strategies centered on investing in the clean energy transition across the value chain trend, avenues include securities investing in publicly listed equities with exposure to real assets (such as the metals and mining, energy, real estate, infrastructure, and agribusiness sectors).