05 Jun 2024 4 min read

Challenges in a changing world: funding the energy transition

By Stephen Beer

In the second instalment of our series on investment stewardship and the transition, we look at the role of markets.


Our climate and the global economy do not stand still. Neither do investment stewardship expectations. This blog is part of a series looking at recent changes and challenges, and our expectations of companies.

Having examined the impact of higher energy prices on the sector in the first part of this series, let’s now turn to the outlook for renewables.

An investment stewardship approach reflects the fact that although the world is falling far short of the change required to attain net zero emissions by 2050, in some important respects the energy transition is accelerating.

We should certainly not expect the transition to be orderly. Instead, we should expect major economic and social transformation.

The energy transition is taking place much faster than expected – in some sectors

Demand for clean energy is growing fast and pulling a supply response, with few if any substantial technological barriers. For example, global annual additions to renewable energy capacity increased almost 50% in 2023, the fastest growth rate for two decades.1


As shown below, the cost of wind and solar power has fallen much further during 2010-2020 than had been anticipated.


The barriers are primarily in the arena of policy, most specifically the need for direct policy changes to enable clean energy innovation and roll-out and diminish economic preferences for fossil fuel use, as well as – more recently – higher financing and input costs.2

The role of the market in the energy transition

Much commentary notes that trillions of dollars need to be allocated to clean energy investment and the transition, especially in developing economies, so that fossil fuel use and production can be cut.3 There can be an implicit assumption that governments will act to direct and incentivise public and private funds, and that investors will take different risks with uncertain returns.4

There is little or no precedent for such a large, centrally directed shift of funds, apart from in command and control, or wartime, economies.5 It should not be assumed that will happen this time, at least not without unprecedented effort and incentives. Therefore, alongside calls for public-sector investment, we believe investors should also push for specific policies that will improve market incentives.

Scenarios and forecasts have consistently underestimated the rapid increase in clean energy investment together with the rapid fall in supply costs (see charts above) and the pace of innovation.

The shift to clean energy is a response to an increase in demand, stimulated and signalled via pricing mechanisms and changes in regulation. The energy crisis led to solar photovoltaic energy supply exceeding IEA expectations, requiring it to adjust its net zero scenario. Progress on solar photovoltaic energy generation, electric vehicles and lighting is fully on track with the IEA net zero scenario.6

Progress on many other transition components is running behind the required rate, but we should not expect the rate of progress to be constant. Driven by demand and regulation, and unlocked by innovation, we believe it is likely to increase further.

The critical minerals required for transition exist and are obtainable, as the Energy Transition Commission has reported.7 The increase in demand is driving a response, with investment in critical minerals mining rising by 30% in 2022 and 10% in 2023.8 The IEA reports that last year exploration spending rose by 15% and venture capital spending, including significant growth in investment in battery recycling, grew by 30%. Much more action is of course required but the market responses should be noted.9

Disruption in action

As we should expect in an emerging sector, specialist players are taking more risks and start-ups are challenging the status quo, with innovations in battery recycling and mineral extraction. This is the market in operation.

Higher prices during periods of constrained supply will stimulate innovation and alternative solutions. We are already seeing this. For example, sodium ion batteries do not require cobalt or some other critical minerals; iron oxide batteries, which can support renewable energy supply where scale is not a barrier, are in development. Not every idea or project will be successful; the pace and benefits of innovation are what matter.

The role of innovation is often underestimated, and impossible to model usefully. The challenge facing the world is whether the supply response will be timely, because positive and negative tipping points are close or already being reached.10

An effective investment stewardship approach is dynamic; seeking to understand the changes occurring and new challenges faced by companies, alongside setting clear expectations focused on mitigating systemic risks.

In the next part of this series, we’ll focus on innovation and will consider why it might confound expectations of a slow and steady energy transition.


1. IEA Renewables 2023 report p7. Demand for energy from fossil fuels has also been increasing.

2. There is some circularity here: general inflation rates are pushed up by higher oil and gas prices and can be embedded by higher money supply. Monetary policy effects can be said to have been a headwind for the energy transition, from being a tailwind via ultra-low interest rates previously.

3. E.g. see the UNEP Emissions Gap Report 2023.

4. Government action is not cost free. The aim is that incentives and other actions distribute costs and compensate over time for market failures.

5. The Marshall Plan post Second World War was much smaller, even after adjusting to equivalent value today ($160bn). See https://on.ft.com/3ETQqI7. Although, arguably, proportion of GDP figures could be used for comparisons.

6. Tracking Clean Energy Progress 2023 – Analysis - IEA Of over 50 transition components tracked, 28 were assessed as more efforts needed and 22 assessed as not on track. Growth in solar PV was 26% in 2022 and aligned with the average compound growth needed between now and 2030. Progress in building manufacturing capacity for electric vehicle batteries was judged sufficient to meet IEA NZE scenario demand expectations. There have been significant steps forward in other areas, such as nuclear generative capacity, heat pumps and energy efficiency.

7. The ETC reported last year that “There is no fundamental shortage of any of the raw materials to support a global transition to a net-zero economy: geological resources exceed the total projected cumulative demand from 2022-50 for all key materials.” Material and Resource Requirements for the Energy Transition Energy Transition Commission, July 2023

8. Global Critical Minerals Outlook 2024 - IEA

9. See Why the world’s mining companies are so stingy (economist.com)

10. E.g. see Global Tipping Points | Home (global-tipping-points.org)

Stephen Beer

Senior Manager - Sustainability and Responsible Investment

Stephen Beer oversees LGIM’s investment stewardship engagement with companies on climate and alignment with net zero, particularly via our Climate Impact Pledge, as well as engaging with companies on other issues. His career has been focused on responsible investing and investment stewardship for pensions and charities. Prior to joining LGIM in 2022, he held the combined role of chief investment officer and head of ethics/ESG at the Central Finance Board of the Methodist Church and Epworth Investment Management. He has also been a portfolio manager, investment strategist, and pension scheme trustee. He writes and speaks on ESG issues. 

Stephen Beer