Energy transition is accelerating

The world we live in is fundamentally changing. Technological innovation, urbanisation, climate change and the transition to clean energy are re-shaping our lives and the planet as we know it.


During the Schroders Global Transformation Seminar 2019 several experts took the audience on an in-depth tour of how these themes are forcing the pace of change, presenting significant investment opportunities for those who know how to find them.

Energy transition from carbon-based energy production is getting more and more attention in recent years, with political support coming from all the main regions in the world. “There are some strong initiatives taken in Europe and China”, points out Mark Lacey, Head of Commodities at Schroders, “and while there is a lot of pushbacks at the federal level in the United States, the different states have completely different approaches regarding the need to reach the goals set at the Paris Climate Change Conference (COP21) back in 2015”.

Lower carbon

Mark Lacey is also the portfolio manager of Schroder ISF[1] Global Energy Transition which was recently launched.  “It took us two full years in order to set-up this strategy, and the performance over the first three months has been very promising”. This thematic approach will be supported by the huge investments needed in order to reach the emission targets. “All in all, 120 trillion dollars will be needed by 2050 across the different sectors, and some companies will highly benefit from this flow of money”.

Decarbonisation of power generation

The fund has exposure to three major trends. The first is the decarbonisation of power generation towards renewable energy, whose share in the global electricity generation is expected to reach 85% by 2050. “Wind and solar are now cheaper to produce than traditional energy production based on coal or oil; while nuclear energy remains very costly when you take into account all the externalities”, Mark Lacey points out. Best case scenarios see revenues grow at a compound annual rate of 6% for the renewable equipment manufacturers.

The fund is nevertheless structurally underweighted in the energy generation business, due to the fact that many producers still have an elevated exposure towards fossil fuel. “At this point, we think that investors have not missed out on the opportunity as the MSCI Global Alternative Energy Index has lagged behind the rest of the market since 2013, despite EBIT margins expanding over the last three years”. Furthermore, the sector is much less dependent on public subsidies, and is therefore less risky than right after the financial crisis.


The second trend is the electrification of energy use in several areas of the everyday life, most notably the growing importance of electric cars during the next decades. “We expect a strong consumer take-up in electric vehicles from next year, with the increased choice in models coming from traditional car manufacturers”. This will require important investments in energy capacity to meet that demand. “We aim to be exposed on the entire value chain, with energy storage becoming an increasingly cost-effective solution for the consumers”.

Energy efficiency

And the third major trend in the fund is energy efficiency. There is a significant need to better use the energy produced, in order to avoid that a significant part of the energy produced is lost by the time it reaches the consumer. “Efforts are needed across the entire chain to limit the energy waste. This will also be done by investing in companies like ABB or Schneider, who will help upgrading production buildings in order to increase their energy efficiency”. 


Finally, many of the sectors in which the fund is invested are oligopolies or even duopolies, a fact that usually translates into very interesting investment opportunities for the investors. “The rechargeable batteries business is dominated by two providers (LG Chem and Samsung), while there are only three major producers in the wind turbine business”, signals Mark Lacey. “This allows these companies to enjoy some nice pricing power going forward, and fits with our strategy to invest in profitable businesses that will benefit investors”.


Global Transformation at Schroders

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[1] Schroder International Selection Fund is referred to as Schroder ISF