Investing In Energy Transition: Gray Area Between Green And Brown Economies
The non-linear energy transition
A shift toward a lower carbon economy has captured investors’ attention, as sustainable investing evolves from an ethics-based discussion to an unmistakable investment opportunity. An effort to capitalize on the economic transition has led many investors to allocate away from energy companies reliant on fossil fuels in favor of their clean energy counterparts. Yet markets trended in the opposite direction last year, with energy outperforming every sector in the S&P 500 on the back of rising oil and gas prices.1 This persistent divergence has shown there may be more to capturing energy leaders than exclusion and avoidance. The question of “what’s next?” for the energy sector revolves around a central theme: the path towards a lower carbon economy isn’t linear and may call for a more nuanced approach.
A tale of two economies: “green” vs. “brown”
2020 was marked by flows into ESG assets, rising company commitments to lower emissions, an administration focused on climate initiatives – all clear signposts of a “greener” economy taking shape. This narrative played out throughout the year, convincing many investors that the “brown” economy was dead and gone (until suddenly it wasn’t).
In 2021, the economic restart brought price pressures from supply constraints and reflationary forces, adding complexity to the economic transition underway. Traditional energy mounted a comeback as increased demand drove oil prices to multi-year highs and renewables lacked the bandwidth to fulfill surges in demand.
Carbon neutral, not carbon zero
These developments have made it challenging for investors to prioritize ESG-centric energy investing, while capturing the price movement across the broader sector. In our view, investors leaning exclusively into clean energy are making a concentrated bet and potentially missing the gray area of a transition from “brown” to “green” economies.
Our approach to navigating the energy sector starts with understanding that carbon neutral doesn’t mean carbon zero. In 2050, it is almost certain that energy companies will exist, but they’ll function differently than they do today. The key is finding ways to identify innovative companies who will continue to evolve and lead in the transition to a lower carbon future.