Three themes driving energy transition

The energy sector will undergo a huge transformation in the next 30 years at an unprecedented rate.

There are three aspects which stand out to us about the theme:

  1. The transition is needed

This transition simply has to happen from an environmental perspective, in particular due to carbon emissions. This is being supported by politicians and investors globally.

  1. Investment is ramping up

The scale of investment in renewables is largely under-appreciated at this point. The investment rates are as much as $120 trillion globally across the entire value chain, which is up to three or four times the previous last two decades' investment rates.

  1. Investors still have time

Finally, we think investors have not missed this opportunity. If you look at the MSCI Alternative Energy Index, the average return has been -1% per annum for the last five years.

How the MSCI Alternative Energy Index has performed since 2009


Source: Schroders. Data for MSCI Global Alternative Energy Index from Refinitiv correct as at 22 July 2019.

But we’ve started to see an inflection in terms of how companies involved in alternative energy are performing, when you look at factors such as EBIT (earnings before interest and tax) margins and return on capital.

This has a huge amount of longevity going forward. It will be driven by increasing use of electric vehicles, the cost of energy coming down in wind and solar, plus the adoption of new technologies such as storage and smart grids which will drive the overall transition.

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