Russia’s invasion of Ukraine in late February 2022 has impacted many, with extensive conflicts and resulting humanitarian crises. The invasion of Ukraine highlighted Europe’s reliance on energy imports from Russia, and the European Union (EU) recognizes the importance of becoming independent from Russian oil, coal and gas. Russia’s invasion made both the energy transition and energy security hot topics among the financial markets, and intensified the case for a just and orderly clean energy transition.
European Union’s plan
On March 8, 2022, the EU has brought forward plans for decarbonization. The European Commission published REPowerEU, its plan to achieve more affordable, secure and sustainable energy and phase out its dependence of Russian fossil fuels before 2030. Over the next year, the EU aims to cut reliance on Russian gas imports by two-thirds through gas storage and a faster shift to renewable energy sources, according to the Washington State Journal. The European Commission revealed that the EU intends to have renewables account for 40% of its energy supply by 2030 to address the climate crisis. Diversification of energy supplies, accelerating the roll out of green energy technologies, and reducing demand of energy should help the EU reach energy independence.
Asset managers have joined a global effort to isolate Russia from the capital markets, severing financial, business and operational ties. Globally, governments have imposed sanctions, multiple companies have suspended operations in Russia, and companies and governments have re-evaluated their dependencies. From an ESG perspective, multiple factors have become more prominent due to the armed conflict, including energy policy, human rights, defense, corruption and global governance. The effect on energy is of particular concern to the ESG investor, as they typically have structural underweights to traditional energy and over weights to alternative energy.
In the near term, reducing dependence on imported natural gas will likely require the utilization of all available energy sources. However, as countries scramble to find new sources of energy, it may lead to increased consumption of coal, oil and gas for many countries, slowing down the global progress toward net zero in the short-term. Crude oil hit an all-time high during the month of March, and nickel, a key metal of stainless steel and EV batteries, spiked in price following Russia’s invasion. According to Bloomberg, Russia is the world’s third-largest producer of nickel and largest exporter of refined nickel metal.
The energy transition is representing a security issue, not just an environmental one. Accelerating the green transition would help reduce emissions and dependency on imported fossil fuels, while protecting against price hikes. Higher commodity and energy prices are disrupting the economy, and may result in increased oil production and drilling over the next few years as the transition unfolds. The Wall Street Journal reports that many western nations are planning to release oil from reserves in a bid to tame prices and meet demand. Over the next few years, increased production of oil will likely be needed to replace reserves and serve industries that continue to heavily rely on fossil fuels.
Due to an already fragile supply-chain from the COVID-19 pandemic, multiple industries have been impacted and it will take time and resources to diversify sources and become energy independent. Short-term tensions may slow the pace of the climate transition, but the shift toward cleaner sources of energy remains strong for market stakeholders over the medium and longer term perspective.
Companies at the forefront of developing technology solutions to sustainability issues may offer compelling long-term opportunities. Certain companies investing in GreenTech (Green technologies) will likely benefit from the energy transition, including industries within renewables, energy storage, green hydrogen projects, transmission and distribution of electricity, and electric vehicle manufactures and charging infrastructure. Rising gas prices have led some consumers to seriously consider hybrid car models and electric vehicles (EVs) asan alternative.
Despite short-term volatility and tension, in the long-term, it’s likely that initiatives toward the clean energy transition will represent important investment opportunities. Driven by innovation and technology, sustainability through technology (SusTech) will play a critical role in creating solutions to make a more sustainable global economy. We are seeing a transformative shift to a clean energy world as companies develop environmentally friendly technologies that present long-term GreenTech opportunities, and the next normal. While it won’t be a quick or easy, the transition to net zero can make a meaningful difference in the years to come for companies and investors alike.