Insights
Energy at a Crossroads - Key Considerations
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Sustainable Investing
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July 31, 2022
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Energy at a Crossroads - Key Considerations
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July 31, 2022
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Energy at a Crossroads - Key Considerations
Energy at a Crossroads - Key Considerations |
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With global energy supplies under intense pressure today, key questions are being raised around how the energy transition will cope and progress. At a recent roundtable, Navindu Katugampola, Global Head of Sustainability at Morgan Stanley Investment Management, spoke with sustainability experts Jessica Alsford, Chris Ortega and Vikram Raju about the prospects and potential pitfalls that the move away from fossil fuels to alternative energy faces at this critical time. In particular, participants discussed their near- and longer-term expectations, the role that existing infrastructure and fossil fuels might play, the evolution of sustainable investing, and where they see opportunity.
We highlight five key takeaways from the event:
- Fossil Fuel Use to Rise Short Term: While high fuel prices, concerns regarding energy security, and the approach of key 2030 and 2050 carbon reduction target dates for EU countries may help to catalyze the transition, fossil-fuel dependence will likely increase shorter term. EU member states are pursuing tactical solutions in carbon-intensive fossil fuels (e.g., coal, liquefied natural gas (LNG)) to alleviate the supply/demand imbalance wrought by the post-lockdown economy and Russia’s invasion of Ukraine. Longer-term, however, reliance on renewables (e.g., wind, solar) is likely to increase, as the crisis has accelerated capital investment to bring these projects online.
- Adapt Infrastructure to Save Time and Money: Repurposing existing infrastructure can play a role in the production of cleaner energy, particularly in the near term. In many cases, there is a material time and capex advantage to retrofitting existing assets relative to building new. For example, developed economies have pivoted toward converting existing “brown” infrastructure (e.g., converting oil refineries to biodiesel) and upgrading legacy green infrastructure (e.g., converting first-generation solar panels to newer, more efficient models). Positively, cost and time advantages are not limited to the infrastructure asset alone and can be garnered throughout the entire value chain and ecosystem that support it.
- Liquefied Natural Gas (LNG) a Stepping Stone toward Transition: Fossil fuels are likely to play a key role in bridging the energy transition, particularly LNG. As countries and corporations have a dual mandate to reduce carbon emissions and succeed economically, reducing coal in favor of cleaner fossil fuels, such as LNG, furthers that objective. Despite significant progress in reducing carbon intensity in countries like the U.S., reducing CO2 emissions is a global challenge that is characterized by high coal dependence in developing countries. Substituting coal for LNG would be a meaningful first step in reducing carbon intensity for these countries.
- Green Opportunities not Limited to Energy Assets: Balancing financial returns with a positive climate impact requires investors to first focus on the commercial viability of a given opportunity. Simply put, an investment cannot succeed as an impact solution if it does not succeed as a business. For growth investors, investing in enablers of the transition and within the wider green energy ecosystem can often be more advantageous than investing directly in the energy asset itself (e.g., software companies that improve the efficiency of energy transmission).
- Engagement and Impact Data de Rigueur Today: Historically, investors have primarily employed an exclusionary approach or directed their capital to green companies to address climate change. While such approaches continue, they are now being complemented by more direct engagement around decarbonization with high emitters. This evolution in investment approach marks a meaningful shift, as too does the move to better measure and quantify impact through the development of climate-specific metrics and data.
For a more in-depth read of the roundtable discussion, please find the full report here.
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Global Head of Sustainability, Morgan Stanley Investment Management and Global Head of Sustainable Investing, Fixed Income
Global Fixed Income Team |
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Jessica Alsford
Global Head of Sustainability Research,
Morgan Stanley Research |
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Head of Climate Investing | Private Credit & Equity
AIP Private Markets Team
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Americas Investing, Infrastructure Partners
Morgan Stanley Infrastructure Partners
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