How to invest in the energy transition?

Massive investment is still needed to get all factories, vehicles, washing machines, etc. running on renewable energy. This offers opportunities for investors.

Whether in reference to climate change, consumer price indices or Ukraine, energy has been a topic that has haunted the front pages in recent years. In parliament and in your pocket: the energy issue demands our attention. Russia’s decision to close off its gas taps exposed Europe’s chronic dependence on gas and oil, and took large parts of our energy-intensive industry hostage overnight. In fact, the sky-high energy prices meant that Europe saw no other way than to unwrap and restart retired coal-fired power plants.

Energy wanted

However, energy challenges are not just a European issue. Globally, three quarters of all greenhouse gases today are related to energy consumption. The energy transition from black to green is therefore not optional but essential for the entire world if we want to put the brakes on climate change at all. With the exception of the dip in 2020, the need for energy has meanwhile been growing at the same time: the International Energy Agency expects demand for energy to increase by 1 to 1.3% annually by 2030, after which demand will increase slightly less rapidly. In other words: there are more and more people, and more and more of them have the money to buy a fridge or a car.

The money tap is flowing

Demographic, climatic and geopolitical challenges are gradually creating a wave of investments in renewable energy.

For instance, the US – the country with the highest oil consumption per capita – recently gave the green light to invest USD 369 billion more in the energy transition (over the period 2022–2031). In 2021, USD 215 billion was already being invested in renewable energy in the US. This pace is only set to increase. President Joe Biden wants to see only green electricity coming out of the country's sockets by 2035.

The EU has also earmarked hundreds of billions of euros to implement greening and become less dependent on foreign energy. In 2021 alone, USD 260 billion was invested in renewable energy in the EU.

There are also major developments in Asia. In 2021 alone, China invested USD 380 billion in renewable energy. Although still relatively modest in absolute terms (USD 14 billion in 2021), India has also been pumping more and more money into renewable energy in recent years. Hundreds of billions of yen, rupees, won and yuan in additional investments in renewable energy and energy efficiency are also expected over the next few years. In addition to China (2060) and India (2070), Japan (2050) and South Korea (2050) have committed to becoming climate neutral.

Eco-friendly and economically prudent

Dizzying amounts have already been invested, but the investment potential is far from exhausted. Only 5% of global primary energy production is renewable in origin today. This means massive investment is still needed to run all the factories, vehicles, washing machines, etc. on renewable energy. This offers opportunities for investors.

The total (investment) cost of renewable sources such as wind and solar energy is also currently lower than coal and gas in two thirds of the world. Renewable energy therefore makes economic sense in addition to ecological sense.

The energy transition: more than just solar panels and wind turbines

Investing in the energy transition involves more than just investing in companies that build solar panels and wind turbines. This area is divided into different parts:

1. Energy distribution and smart grids

The wind doesn't always blow and the sun doesn't always shine. With the increase in renewable energy sources, the power supply is becoming more volatile. To balance supply and demand, networks need to be flexible and smart. Energy production is no longer restricted to a small group of producers, but comes from millions of installations, including wind farms and solar panels on houses. As a result, more and more consumers are becoming prosumers, who both produce and consume energy. Smart and flexible grids are needed to ensure that supply and consumption remain stable.

2. Energy management and storage

Renewable energy sources cannot be "turned on and off" as easily as traditional energy sources like gas or coal power plants. Available energy therefore needs to be consumed immediately or stored. This increases the demand for energy storage and management in order to stock and control surplus energy.

3. Energy efficiency

This involves investing in companies that contribute to the energy efficiency of buildings, industrial processes and transport.

4. Renewable energy

This includes investment in producers and suppliers of renewable energy sources, such as solar panels, wind turbines and hydropower plants, as well as in energy suppliers that do not face any exposure to carbon-intensive sources.

How to invest in the energy transition

There are several ways to invest in the energy transition, such as with individual shares, trackers (ETFs) or actively managed investment funds. Which strategy suits you best depends on your risk appetite, knowledge of the topic and how much time you want to invest.

Individual shares require the most homework. You select companies that are actively involved in the energy transition, and buy, sell and track these shares yourself. On the one hand, this approach offers the greatest potential return, but on the other hand it also entails a higher risk of a large loss, especially if you only invest in a few shares. It is therefore important to do your research well and to diversify.

Trackers or ETFs track an index of shares related to the energy transition. With a tracker, you can invest in dozens of companies that generate turnover from this area in one fell swoop. The advantage of this is that you can invest in a series of companies all at once and spend less time selecting individual shares. The disadvantage is that a tracker does not distinguish between "good" and "bad" companies, but tracks all the companies in the index.

Investment funds also invest in a basket of shares involved in the energy transition, but in a more active way. This means there is a manager who makes a selection and tries to separate the wheat from the chaff. The disadvantage is that you pay a little more for this active management than for a tracker.

Are you looking for trackers or funds relating to the energy transition?

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• Click on Advanced at the top, next to search by instrument name, symbol or ISIN
• Tick Tracker and/or Fund
• Search for the terms clean energy, renewable energy, new energy, sustainable energy or energy transition