- As the major source of global greenhouse gas emissions, the energy sector holds the key to responding to the world’s climate challenge.
- Investment in the transition to clean energy sources is growing, but falls far short of the $100 trillion necessary to achieve net zero emissions by 2050.
- Though complex, we believe the transition can present significant pockets of opportunity for investors.
The energy sector accounts for nearly three-quarters of global greenhouse gas emissions every year. While this shouldn’t come as a surprise, it’s nonetheless a staggering sum, and clearly, the energy sector’s transition away from fossil-based production and consumption is central to successfully curbing rising temperatures. Fundamental shifts don’t happen overnight, however, and despite many pledges by governments to tackle the cause of global warming, CO2 emissions from energy and industry have increased by 60% since the United Nations Framework Convention on Climate Change was signed in 1992.¹
The good news is that efforts to drastically reduce carbon emissions have ramped up considerably in recent years, with global resolutions such as the Paris Agreement committing governments to measurable, multi-year targets. The cause of this accelerated pace is largely due to the growing recognition that we have a small window of opportunity in which to correct the current trajectory of global temperatures. Global temperatures have already increased by about 1°C since preindustrial levels, and left unchecked, they’re predicted to rise by between 2°C and 4°C by 2100, which would have devastating impacts on ecosystems, human health, and well-being. To put that into context, increases of between 1.5°C and 2°C are already considered to have damaging consequences, but going any higher means serious and potentially irreversible economic and environmental impacts such as extreme weather, food shortages, and disease.
Making the pledge
Government progress on climate regulation
Investing for the future
As the major source of global emissions, the energy sector holds the key to responding to the world’s climate challenge, but a huge amount of work is needed to turn today’s ambitions into real change. Although investment into clean energy has increased, with some $501 billion committed to decarbonization in 2020 and $304 billion specifically allocated to renewable energy sources, these significant sums still pale in comparison to what will be required to achieve net zero by 2050. Research by the International Energy Agency (IEA) estimates that the investment in clean energy needs to more than triple by 2030 to around $4 trillion to achieve net zero emissions by 2050. Over the next three decades, that equates to more than $100 trillion in clean energy investment.
Are we doing enough?
Global investment in the energy transition (US$ billions)
Looking ahead, however, there are reasons for investors to be optimistic about the transition to clean energy. In addition to signing up to initiatives such as the Paris Agreement, governments are increasingly pledging to “build back better” in the wake of COVID-19. Companies are also setting carbon neutrality goals and investors are serious about seeking climate action. While transition can be a complex process, we believe it creates significant pockets of opportunity for investors able to carefully time their decisions to benefit from the inflection points. We discuss the major themes we see playing out in the energy system, namely: decarbonization, deglobalization, the rise of new technologies, the role of new supply chains, and the development of future energy sources.
Decarbonization and shifts in the energy mix
Achieving net zero emissions will require the massive deployment of all available clean energy technologies—such as renewables, electric vehicles (EVs), and energy-efficient building retrofits—between now and 2030. For solar power, the IEA suggests the scale of change required is “equivalent to installing the world’s current largest solar park roughly every day.” Although the pandemic has had a significant impact on the pace of transition, we see several trends forming on the horizon.
- We expect to see higher levels of renewables in the power sector mix, particularly solar photovoltaics, over the next decade. Wind power is also likely to continue to see a greater share of future energy supply, as the supermajors and global utilities invest in offshore wind projects.
- Demand for oil could plateau around 2030 or perhaps even sooner, as a greater EV fleet is expected to affect gasoline demand. We expect to see a decline for oil demand in the aviation sector over the next few years with increased use of biofuels, but also a continued demand for oil and gas in petrochemicals until alternatives for plastic are developed.
- The decline of coal will continue as policies seek to replace the higher carbon intensive fuel source and the power sector sees competitive pricing in natural gas and renewables.
- The energy transition can’t happen without the participation of the major oil and gas energy providers given the magnitude of spending required, but there’s significant pressure from investors and other stakeholders to set science-based targets and curb greenhouse gas emissions in the short to medium term. The ability of incumbents to achieve these targets will be a key factor in deciding which companies emerge as winners in the energy transition.²
A changing world
Total energy supply, 2019–2050 (exajoules, predicted)
Deglobalization and the impact on energy security
One overlooked element that will likely have a significant impact on the energy transition is the trend toward deglobalization. The focus on energy security will affect oil and gas, as the primary traded fuels globally, as countries such as China, India, and the United States seek to minimize their dependency on imported fuels and encourage domestic production. This will help spur the growth of renewables, but could also create a lingering dependency on thermal coal given the abundance of the resource. We could also see a greater focus on natural gas as a transition energy source with fewer implications for air pollution than coal.
Meanwhile, strained geopolitical relationships may affect China’s willingness to make the switch to natural gas, given much of it will need to be imported. While the European Union and United Kingdom aim to be climate neutral by 2050, China’s carbon neutral pledge extends to 2060. And although Beijing claims that CO2 emissions will peak before 2030 and carbon neutrality will be achieved before 2060, the bulk of transition activity shouldn’t be expected before 2030. This commitment leaves a good deal of uncertainty on the trajectory of global warming, given China’s emissions are greater than those of the United States and EU combined.³
New technology and the decline of the internal combustion engine
Technological advances have also improved energy efficiency across generation, transmission, and distribution, and paved the way for new models of distributed generation such as microgrids, community solar, and peer-to-peer energy trading. New technologies such as solar and wind power also allow utilities to reduce ongoing plant maintenance costs compared with managing coal-fired plants. The intermittent nature of renewables such as wind and solar power remains a challenge, and we expect innovations in storage systems, and hydrogen as a backup power fuel, to be part of the solution.
The power sector is expected to face much higher demand as a result of the movement to electrify transportation and the rise in popularity of hybrid and EVs. The industry is already making progress on the production and storage of green hydrogen to help accommodate the expected demand, and some companies are now assessing whether green hydrogen can provide a fuel replacement for gas turbines and a feedstock for industrial use. With the early and rapid success in ramping up renewables, energy storage, and green hydrogen, we expect to see winners and losers in the power sector’s energy transition, but overall, the success of the power sector’s transition will be critical for the delivery of an emissions-free power source and decarbonization of the transportation and industrial sectors.
An important driver of increased electrification is national vehicle emission standards and, as these standards tighten, auto companies will be increasingly incentivized to sell electric cars. Global automakers have clearly started the shift toward going electric and are introducing battery cars or hybrid options to their model lineups. Some of the large global automakers have even set dates as to when they’ll only produce electrified cars or stop developing internal combustion engines. In more advanced economies, stricter environmental standards are expected to result in a phasing out of the internal combustion engine by around 2040 and we could see this timeline shift earlier, following the example set by the United Kingdom in 2020.
Governments with defined targets to fully phase out sales of new ICE cars
Supply chains for critical materials
Clean technologies depend on a secure and growing supply chain of critical minerals and metals. Yet ensuring that these technologies have a stable supply chain to support the acceleration of the energy transition around the world is a significant and underappreciated global challenge. Lithium, cobalt, and nickel, for example, give batteries greater charging performance and higher energy density. Copper is essential for the increasing use of electricity throughout energy systems due to its conductive abilities. The prevalence of these materials in the transition is significant: an EV uses up to five times the amount of copper needed by a traditional car, and an onshore wind plant can require eight times as much as that of a gas-fired plant of the same capacity.⁴
Copper culture: the rising cost of minerals, 2020–2050 (predicted)
Despite the promising growth in clean technologies, their rapid growth has put a strain on the supply chain, leading to price volatility. There has been a five-fold increase in cobalt prices between 2016 and early 2018. Supply chain security has been further tested by geopolitical concerns given the geographical concentration of supply and processing. To successfully navigate the transition, investors need to understand the volatility of prices as well as how companies and governments in turn will respond to the importance of reliable mineral supplies in the energy transition.
The birth of a megatrend
Few investors appreciate the scale of disruption under way. We believe that the energy transition and simultaneous impact from global warming will result in long-term outperformance of companies that are able to provide solutions that contribute to this transition and address the challenges of a warming world. In particular, we believe that the revolution will favor companies providing low carbon energy, electrification and efficiency, and materials such as copper for the electric grid and EVs. Investors have largely ignored many of the companies actually required to achieve the global climate targets.
With an anticipated $100 trillion of spending required by countries and companies to fund the transition to renewable energy, investors need to think about which companies will be the beneficiaries of this massive inflow of spending.
1 Net Zero by 2050, International Energy Agency, 2021. 2 See here for more information on how companies are setting science-based targets. 3 “China’s Greenhouse Gas Emissions Exceeded the Developed World for the First Time in 2019,” Rhodium Group, May 2021. 4 "Clean energy progress after the Covid-19 crisis will need reliable supplies of critical minerals" – Analysis - IEA .
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.
Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.
The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.
This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions. These opinions may not necessarily reflect the views of Manulife Investment Management or its affiliates. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.
Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.
Manulife Investment Management
Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than a century of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset managers from around the world through our multimanager model.
This material has not been reviewed by, is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at manulifeim.com/institutional
Australia: Hancock Natural Resource Group Australasia Pty Limited., Manulife Investment Management (Hong Kong) Limited. Brazil: Hancock Asset Management Brasil Ltda. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area Manulife Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Investment Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad 200801033087 (834424-U) Philippines: Manulife Investment Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G) South Korea: Manulife Investment Management (Hong Kong) Limited. Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. United Kingdom: Manulife Investment Management (Europe) Ltd. which is authorised and regulated by the Financial Conduct Authority United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Manulife Investment Management Private Markets (US) LLC and Hancock Natural Resource Group, Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited.
Manulife, Manulife Investment Management, Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.