How is the 3D Reset impacting the energy transition?
We discuss how the energy transition can be viewed through the lens of the 3D Reset, the long-term trends that are impacting the investment landscape. Decarbonization, particularly in the energy sector, is a priority due to the urgent need to mitigate climate change. Demographic shifts and deglobalization are seen as drivers of energy demand growth.
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In this video, Marina Severinovsky, Head of Sustainability, North America, Alex Monk, Fund Manager, Global Resource Equities and James Samworth, Partner and co-head of Schroders Greencoat’s Energy Transition team, Schroders Greencoat discuss how the 3D Reset; decarbonization, deglobalization and demographic changes may impact the energy transition. Below is a summary of their discussion.
What are your thoughts on the decarbonization of the global economy?
James Samworth, Partner and co-head of Schroders Greencoat’s Energy Transition team, Schroders Greencoat:
We start from the point that we need to collectively decarbonize the global economy in order to prevent climate change from spiraling out of control. It is widely accepted that temperatures will not stabilize until we cease emitting greenhouse gases. Assuming this premise, the focus shifts to determining the most effective approach for decarbonizing the economy. How are we best to do that?
I think, first of all, what the last 20 years has shown us is that we can decarbonize the power system relatively quickly and a lot cheaper than we anticipated 10 or 15 years ago. This has been made possible through mass rollout and build of wind, solar, and other balancing technologies globally.
Secondly, once we've established that clean power, we can leverage this resource through electrification to decarbonize other sectors. This includes decarbonizing passenger cars through wide adoption of electric cars (EVs) and through the electrification of heating, either directly through heat pumps or indirectly through heat networks and low-carbon ways of heating.
Thirdly, that leaves us with decarbonizing the ‘hard to abate’ sectors i.e. large emitting sectors that are quite hard to decarbonize for example: steel, which is 8 or 9% of global emissions, cement, 7 or 8%, aviation is about 4% and shipping, 5%.
There are some question marks about the most viable approaches to approach this challenge. We believe the two most likely routes are the use of hydrogen as an alternative fuel source and some use of carbon capture and storage. However we're at the early days of figuring out from a business model point of view and technology to an extent, what's going to work best.
How are the long-term trends of deglobalization and changing demographics impacting the energy transition?
Alex Monk, Fund Manager, Global Resource Equities:
When I think about demographics and deglobalization, principally, these are two drivers of energy demand growth. Populations are continuing to grow and becoming more affluent, driving up energy demand globally. We're digitalizing a lot of the things we do which require more energy, and sometimes, vastly more energy. I would encourage anybody to just go and look at how much energy it takes to just run one query in some of these AI platforms. It's vast.
To learn more about AI and energy demand, watch our video ‘How will AI drive energy demand.’
Deglobalization is exactly the same. We're seeing a growing focus on energy security. For many places around the world, energy security is going to be reliant on sustainable forms of energy to some extent. Even in places where there is abundant fossil fuel reserves, incorporating sustainable energy is going to be important from a security perspective as well as helping grow onshore and other industries within local geographies.
To learn more about energy security, read our article ‘Energy security and the implications for the energy sector.’
James Samworth:
One demographic shift we see globally is the increasing lifespan of people and longer retirements. The whole pensions and saving industry, therefore, needs to cater for this fact by investing in higher savings rates and assets that will deliver predictable cash flows and returns for people for their retirement years. It is worth noting that when the concept of pensions was introduced by Bismarck, the retirement age was 65, and the average retiree lived to 67.
On the deglobalization front, we've seen a notable drive for more local investment. People do want to see their savings and pension pools investing in assets within their region that benefit their communities.
How can you better understand how the long-term trends of the 3D Reset may impact investment opportunities in the energy transition?
Alex Monk:
When considering renewable power as an example of the sustainable side of the energy equation, it serves multiple purposes. It can be a provider to decarbonize our society but it can also be a way of improving energy equity. If you look at emerging markets, and South Africa is an interesting example here where they've had traditionally large centralized coal-based power plants. In many places in South Africa, people still struggle from blackouts on a regular basis. However renewables like wind and solar, whether it be in utility or rooftop installations, can provide localized energy security in places where existing energy markets are struggling because of the nature of the unequitable distribution of conventional fossil fuels.
We’ve been through a really unique period post-pandemic where we saw oil prices fall below zero, higher renewables valuations and then have recently normalized down. However, when I step back and think about what the energy sector can do, whether it be renewables or conventional energy, is that it can provide a consistent long-term earnings’ growth profile. The energy transition is one of the world's great structural trends alongside the internet and AI. Energy demand, and the decarbonization of that energy demand is something that can help companies consistently grow earnings.
While you might get years where sometimes that earnings growth is better or worse, and therefore you have volatility on an individual year basis, on a long-term view, that consistent earnings growth, driven by that huge amount of investment that needs to go in, should be a long-term provider of return, certainly in the public market space.
Learn more:
- 3D Reset
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Important information
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.
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