Capturing the energy transition opportunities

In December, I wrote about the scale of the opportunity presented by renewable sources of energy.

The key components of the investment case included the increasingly obvious fragility of Europe’s current energy network, political will to avert a climate crisis and the cost competitiveness of renewables.

There are many lenses through which we can view the outlook for renewables, but all of them reveal a horizon filled with potential for growth. This time around, I’ll explore the investment areas we believe will be critical to the shift from fossil fuels to renewables, focusing on the role of metals and minerals.

A new chapter in mankind’s energy story

The energy story of the 20th century was a tale of discovery and exploitation, with coal the predominant energy source of the first half of the century and oil taking its place from around 1950 onwards.

As we embark on the energy transition – the next chapter of our energy story – what are we likely to need? We would highlight three broad categories:

1. Metals and minerals: From steel to build wind turbines to lithium for electric car batteries, the energy transition will require a wide range of metals and minerals
2. Transition fuels: During the scale-up of renewable capacity, transition fuels provide a pragmatic way of meeting energy needs while limiting environmental degradation. Examples include natural gas and ethanol-mixed fuels to reduce the carbon footprint of petrol vehicles – both can be thought of as bridging fuels
3. Carbon certifications: Regulatory approaches have a role to play in quantifying corporate emissions and assisting the flow of capital from companies engaged in, say, hard-to-abate sectors to companies aiding the energy transition

The metals and minerals category represents an interesting proposition for investors, in our view, as the energy transition will change demand patterns for mainstream commodities such as steel and copper, while also potentially transforming the market for more uncommon but critical metals.

• Aluminium: Lightweight and strong, used for solar panel arrays and wind turbines
• Cobalt: Critical to high-performance electric vehicle batteries
• Copper: Renewables workhorse. Widely used in renewables
• Gold: Used in fuel cells, electrolysers and solar panels
• Lead: Provides highly reliable battery storage that can capture renewable energy ready for deployment at peak demand times
• Lithium: Needed for high-performance electric vehicle batteries
• Nickel: Used in batteries, hydroelectric facilities, wind installations. Corrosion resistant and infinitely recyclable
• Platinum: A vital fuel cell and electrolyser catalyst; also used to reduce toxic emissions from internal combustion vehicles
• Silver: Widely used in solar and battery applications, highly conductive
• Steel: Used for wind turbines, grid infrastructure and more
• Tin: A versatile metal widely used in electronics and batteries
• Zinc: Used for rust prevention for solar panel components and wind turbines to extend their life batteries

Commodity or commodity-related equity exposure?

For investors looking to allocate towards the metals and minerals needed for the energy transition, there are two options to consider: indirect exposure via mining companies or direct exposure through commodity futures.

Equity exposure via mining companies and processors of these metals and minerals provides indirect and potentially leveraged exposure to one or more of the commodities these companies may be engaged in. It also introduces company-specific idiosyncratic risk and exposes investors to a number of other factors that may affect the share prices of companies operating within the mining sector. These may or may not be desired.

On the other hand, exposure via commodity futures may be preferred by some investors who want to access the underlying investment thesis directly through commodity markets and might allow investors to track commodity prices better.

This blog is an extract from our CIO Outlook. Read our full CIO Outlook.