The World has changed (a lot) in six years
The COP is usually presented as a major catalyst for the Clean Energy sector. After Glasgow, we believe it is fair to ask whether this is still the case.
During the two weeks of the event, the S&P Global Clean Energy NR Index was down by 0.7%. However, it’s only fair to point out that this rather dull performance followed a rally for the sector in October. But volatility during COP26 was low, judged by the industry’s standards. All the pledges, the announcements, the final Glasgow Climate Pact were treated mostly as a non-event by the markets. Surprising? Not really.
Pessimists might say that pledges made in Glasgow (like these from Paris in 2015) are easily broken and, as such, should be taken with a pinch of salt. Some might even be reminded of President Chirac’s famous quote: “political promises engage only those who believe in them”.
But the reality is very different. The reason why COP is no longer the catalyst it used to be for the Clean Energy sector is rather simple: the industry has been, and continues to go, through one of the fastest and most profound transformations ever witnessed. Since the Paris agreement in 2015, more than USD 2trn has been invested into green energy and related technologies. Sectors have matured, production has been scaled, costs have fallen, driving massive ever-larger adoption, and new leaders with critical mass and increasing margins have emerged. These in turn are already being challenged by start-ups working on even more promising technologies. The automotive sector is the poster boy of this transformation, especially given its visibility to the public on main street. Over the past two years, consultants have increased the predicted share of total car production that will be fully electrified in 2030 from 15% to 40%. And this forecast seems likely to continue to be revised up, providing a perfect example of how fast change can happen once a tipping point has been reached.
Our view is that many of the sub-sectors in the Clean Energy space have reached that tipping point between Paris and Glasgow’s COPs, which means their future growth or business models no longer rely on favourable policies or subsidies. This doesn’t mean policies and subsidies aren’t welcome, as they can accelerate growth, speed up capex plans and reassure investors. But they are now ‘nice to have’ rather than vital to these industries.
We fully agree with John Kerry, US special presidential envoy for climate, who declared that: “companies are ahead of government.”
So where are the opportunities now?
The long-term story remains largely unchanged, a net-zero transition requires USD 150trn of capital spending and promises decades of growth for the best companies in the value chain.
While our convictions have not really changed during the COP, we note one area in which we believe there are good (or even better-than-anticipated) opportunities: energy efficiency.
As previously mentioned, corporates are under increasing pressure to move from net-zero pledges to tangible net-zero plans. For example, under rules proposed by the UK Treasury during COP26, listed UK firms and financial institutions will be forced to communicate by 2023 how they intend to hit climate change targets (i.e. 2050 net-zero). If it is not the regulator, it will be investors that will request such detailed plans, so this is definitively the direction in which we are heading.
As companies start their journey toward net-zero, they are likely to begin with the “low-hanging fruit” and focus on easy-to-abate emissions and on investments that generate positive returns. The International Energy Agency (IEA) which provides very detailed reports on the Energy sector, published its first report on Energy Efficiency in November. In this report, the IEA notes that efficiency-related spending makes up to two-thirds of government clean energy and sustainable recovery measures. They also insist that Energy Efficiency offers some of the fastest and most cost-effective routes to reduce CO2 emissions.
Energy Efficiency investments will therefore come high in the decarbonization agenda of most companies.
Energy Efficiency accounted for 21.2% of the Accessible Clean Energy portfolio as of end-October. This percentage has been increasing during the past few months.
 Source : Bloomberg NEF
 Source: McKinsey