FOR PROFESSIONAL CLIENTS ONLY.
The world is undergoing a remarkable transformation right now, greatly accelerated by the energy transition, coupled with an urgent need for energy security. In our view, these diverse drivers of change can be summarised into the “3Ds” of infrastructure, fundamental themes related to decarbonisation, digitalisation and decentralisation, that we see as crucial over the decades ahead.
This note explores the infrastructure investment implications of decarbonisation and the way ahead, intended to help investors navigate the new landscape, drive change with investment capital, and innovate with new solutions to meet complex, evolving challenges.
1. Navigating the carbon transition
We believe infrastructure sits at the heart of the energy transition and energy security needs in Europe and globally, in our view opening up a window of investment opportunities ahead, not just in adding renewable power capacity but also in decarbonising all sectors, including the transportation, manufacturing and agriculture sectors. The transformation of the way the world makes and uses energy, moves goods and people and constructs the built environment will reshape the real economy and we expect infrastructure to play a central role in accelerating the transition to a more sustainable, low-carbon economy. We believe the transition to a low-carbon global economy is going to create the greatest investment opportunity of our lifetime. Indeed, the International Energy Agency (IEA) estimates a need for US$125 trillion of new investment in the next three decades.1
However, the transition will not happen overnight. While renewables are expected to continue to grow and become the leading source of energy in the global supply mix by 2050, we cannot just simply turn off the switch on fossil fuels as we need to maintain current infrastructure for reliability. The global energy transition will be a long, multi-decade journey that will require companies to progressively pass through shades of brown to shades of green. For the foreseeable future, we see hydrocarbon and renewable companies working side by side to ensure the continuity of supply and affordable energy prices. Existing infrastructure will still need to be upgraded and repurposed as we move along the transition. It will take considerable time and capital to retool the hydrocarbon industries that provide essential services.
2. Driving change with capital
As the world moves towards net zero with increasing urgency, we see considerable scope for investors to drive the transition with their investment capital. In our view, there are several distinct components to this investment push. First, the one thing we are certain about is that renewable power generation will play a critical role in all net zero scenarios, allowing investors to capitalise in the transition by investing in zero-carbon investments that directly lead to an avoidance of emissions. While there is good progress already, with renewables accounting for 38% of electricity supply in 2021 - surpassing the contribution from coal - more investment is still needed, with growth of 20% per annum needed by 2030 to align with the 1.5°C goal set by the Paris Climate Agreement.2
"We believe that replacing coal with a combination of renewables and natural gas can potentially yield the quickest carbon reduction at scale."
Further, we believe investors can gain exposure to the transition not only through “already-green” assets but also through assets of hydrocarbon companies with a credible transition plan. A portfolio that only gets exposure to the transition through low-carbon sectors and companies could miss important investment opportunities. For example, we see natural gas playing an important role as a transition fuel to support both industries and consumers. It is a vital energy source that society needs for reliability, given its portability. We believe that replacing coal with a combination of renewables and natural gas can potentially yield the quickest carbon reduction at scale. In addition, blue hydrogen and ammonia are also critical. According to the IEA, over 60% of the hydrogen network may be repurposed from natural gas infrastructure 2. This means that the energy companies of today can drive the build-out of tomorrow’s sustainable infrastructure network. As investors, we need to manage conventional infrastructure assets well to ensure they continue to provide critical services today while positioning these assets for a green transition tomorrow.