The energy transition offers many growth opportunities, but there will be winners and losers, particularly as rates remain higher and economic growth slows, so investors should maintain an eye toward quality.
The last 18 months have seen a significant slowdown in flows into ESG funds, as the sober reality of higher rates has kept risk assets in check. Yet, over the same period, policymakers have continued to make meaningful commitments to the energy transition that should support private sector investments, providing opportunities for long-term investors.
In the U.S., the Inflation Reduction Act of 2022, which provides USD 369 billion in green subsidies, is projected to drive nearly USD 3.5 trillion1 in cumulative capital investment into energy infrastructure over the next decade. This year, Europe responded with its own package of subsidies and regulatory reform with the Green Deal Industrial Plan. The UK followed, opting to lead with regulatory reform rather than new funding commitments, a tack that could gain greater traction in the future as global government spending becomes constrained by higher debt and deficits.
Now that policymakers have cleared the initial hurdle of making sizable commitments, the private sector can leverage these incentives to bring various technologies and infrastructure to scale. Key beneficiaries are likely to be solar and wind installations, electric vehicles, batteries, grid infrastructure, energy efficient appliances, heating and cooling systems and nascent technologies like hydrogen and carbon capture. While this presents many compelling opportunities, investors ought to focus on companies with either established products or more diversified business segments, a clear pathway to profitability and sensible valuations. The energy transition offers many growth opportunities, but there will be winners and losers, particularly as rates remain higher and economic growth slows, so investors should maintain an eye toward quality.