Where investors can find enduring value in the energy transition

It is, without a doubt, the most important investment thematic of our times. In spite of the war in Ukraine and other energy security-related headwinds, investment and government policy continues to flow in the direction of accelerating the transition away from fossil fuels and into more renewable forms of power. 

"The aggregate investment over the next 30 years has been estimated to amount to US$75 trillion – greater than 2% of global annualised GDP. It is truly an enormous undertaking," says Brad Frishberg, Chief Investment Officer at Macquarie Global Listed Infrastructure.

And until 2022, investors were piling into ESG and climate-aware products at a breakneck pace. 

So why is the energy transition such an important theme for investors? And how do its proponents answer the two main questions its critics have - namely, how will you get this done on time and without a blowout in cost?

In this wire, Frishberg answers our questions on why the energy transition is such an important theme for investors to watch. Plus, he also shares some thoughts on where the best value opportunities lie. 

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Edited transcript:

What makes the energy transition such a unique and enduring thematic?

The goals set out by the Paris Accord and individual country's goals of reducing carbon emissions and shifting to a world of greener power production have created one of the largest mega trends in history.

The aggregate investment over the next 30 years has been estimated to amount to around US$75 trillion, greater than 2% of global annualised GDP. It is an enormous undertaking.

What’s the biggest misconception plaguing investment in the thematic?

It's not easy to get this done.

In addition to the substantial logistic issues, given the scale of the transformation, there are also outstanding questions around the transition to greater electrification and cleaner production.

One notable example is the intermittency that occurs with renewables, meaning they only produce when the sun shines or the wind blows. So substantial storage or other solutions are needed to accompany the buildup.

The other challenge is financial. Specifically who pays for this?

Investors will require a return of and on capital. So ultimately, either energy consumers or governments will need to pay for this transition.

Higher interest rates and cost inflation of new renewable developments have only exacerbated this problem recently, as evidenced by project cancellations or delays on the US East Coast and in the UK. 

Where are you finding the best value opportunities along the supply chain?

Within the infrastructure universe, the safest way to gain attractive exposure to this thematic is the regulated transmission networks that connect the renewable generation, often located far from where the power is needed to the grid. 

These assets often earn attractive risk-adjusted returns and are not subject to many of the risks that renewable developers bear.