Watch: Three key forces driving energy transition

Inflationary forces should not detract from the longer term opportunities in energy transition.

Energy transition equities remained under pressure during the third quarter this year, as some of the inflationary forces that are impacting global industry continue to weigh on the space. What started with higher raw material and logistics costs have moved to higher energy and labor costs. The energy transition space remains firmly in the eye of the storm with respect to these inflationary forces, which together are not only impacting the ability of companies to generate earnings this year and next, but also the relative price that investors are willing to pay for future growth.

While we are concerned that these inflationary pressures will last for some time, potentially well into next year, they should not detract from the longer term view, which remains as robust and as exciting as it has ever been.

As outlined in the recently released IPCC Climate Assessment Report, the world still has a significant emissions problem and scientists are increasingly confident in saying that not only is our climate changing, but that humanity is one of the underlying causes. If left to continue on our current pathway, not only will global temperatures increase towards four degrees, we will also start to see some of those consequences in terms of increased extreme weather events that start to become very disruptive for businesses, economies and livelihoods around the world.

Read on: IPCC report: why the detail matters to energy investors

Three key forces driving energy transition

Depending on how you measure emissions, our energy system contributes to anywhere between 40% and 70% of all emissions globally. Fixing that part of our economy alongside our food and water system is absolutely crucial to meeting the net zero goals set out in the Paris Agreement. The good news is that the technology supporting the energy transition are very much available and there are three key powerful forces that are pushing this transition forward, which are cost, consumer demand and policy support.

1. Firstly, from a cost perspective, technologies across the energy transition space are becoming increasingly cost competitive versus the traditional energy sources, particularly as conventional energy process starts to rise. Not only are renewables becoming more and more competitive against conventional fuels but electric vehicles are becoming more widely available, and even green hydrogen is starting to look cost competitive as natural gas prices have increased.
2. Secondly, from a consumer demand perspective, not only are we seeing more interest in alternatives like residential solar and heat pumps, but electric vehicle penetration has started to rise quite dramatically. Penetration rates in China and Europe reached 15% and 20% respectively over the third quarter and we expect this to continue to rise over the next five plus years.
3. Thirdly, from a policy support perspective, we are excited about the COP26 conference in Glasgow. This climate event is one of the more important events that we have had for some time as governments from around the world meet to put in place firmly committed policies that will help reach net zero goals and targets in the form of nationally determined contribution plans.

Read on: Investor expectations for COP26

Where are we seeing the investment opportunities in the electric vehicles ecosystem?

One of the areas in the energy transition space that really summarises these three driving forces - the scale of the change required and the opportunity ahead for companies and investors, is electric vehicles (EVs). Not only in terms of the vehicle rollout, but also the broader infrastructure that is required to support EVs - the charging infrastructure and making the grid more robust, resilient and flexible going forward. On average, over the course of a year, one electric vehicle uses as much electricity as a house, so making our grid more flexible and resilient to manage that increased demand for electricity as we start to use more and more electric vehicles, is going to be absolutely key.

Not only does that create opportunities for companies involved in the charging infrastructure space, which will clearly benefit as we start using more EVs and demand more charging infrastructure, but also companies in the broader electrical equipment space, providing the critical sub-stations, transformers and software to help make the grid more robust and reinforce it as our electric vehicle usage increase.

We also see the energy storage space as an interesting area as this is required to inject additional power into the grid as we all start to charge our EVs at different times.

Read on: How can investors ensure a "just transition" in climate change fight?

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