Watch: How's 2021 shaping up in the Energy Transition space?

2020 was a breakout year for energy transition equities, with fundamental earnings growth very strong and valuations re-rating to reflect the long-term more visible opportunity ahead.

Read on: "People want to see change." Peter Harrison, Schroders' Group Chief Executive, explains why 2020 was a transformative year for sustainability and ESG investing.

Towards the end of the year, valuations had reached all-time highs, and in certain sub-sectors we felt some valuations had become slightly extended in the short term despite the positive long-term opportunity. As such, we rotated some of the strategy into slightly more defensive sectors.

And indeed at the start of 2021, we started to see some weakness and volatility creep in across the space, particularly in areas like solar, hydrogen, and renewable generation, where valuations we felt, had started to run slightly too hot in the short term.

We’ve used this weakness and the more attractive valuations as an opportunity to layer back into names that we fundamentally liked, but where valuations had started to look a little bit challenging.

Long-term visibility behind energy transition has never been stronger

Both despite and because of COVID-19, the case for energy transition has never been stronger for a few reasons:

  • Renewables are currently the cheapest form of power generation globally across three quarters of the world and are only getting cheaper.
  • Policy support has never been more aligned and never been stronger. For the first time ever, we've entered a calendar year whereby US, Europe, and China all have net zero carbon goals and together they account for 75% of all emissions globally.
  • Consumer demand for clean technologies is really starting to pick up. More and more consumers want to drive electric vehicles, have residential solar on their roofs and use clean energy technologies.

Find out what investors can learn from Bill Gates' climate warning. Learn more. 

Which ET sub-sectors offer the most compelling investment opportunity?

We look at the energy transition universe through five key sub-sectors and themes. These are clean energy generation, transmission and distribution, energy storage, energy efficiency, and clean mobility.

We're starting to see exciting growth across all these areas, particularly in:

  • Transmission and distribution: With the events we’ve seen in Texas recently, investment in the grid clearly needs to pick up and companies who are providing EV charging infrastructure, critical grid components, and grid software are very interesting
  • Solar: Given the recent weakness, we’ve started seeing attractive risk reward opportunities in solar
  • Clean mobility: New EV models are emerging in the market, and consumer demand for these models and EV penetration rates are picking up

Valuations and competition in some of the climate change sectors are heating up. Find out how investors can navigate the stiff competiton.

We've been identifying companies that have that clean mobility exposure and are driving the shift in our mobility system and pushing electric vehicle usage.

We've also been looking at names which we believe are fundamental to building out the grid, whether it be cables to offshore wind farms or smart distribution software for the grid.

Solar, both at the residential and utility scale, is going to be hugely important to driving the energy transition going forward. After the recent weakness, we’ve been allocating to solar names.

The transformation of the global energy sector will reduce climate change risks. Find out more about climate change investing here.