Energy transition: invest in an environmentally-sound future

Why the energy transition is so important

The international community made history in December 2015 with the Paris Climate Agreement. For the first time ever, countries reached a binding agreement on ambitious climate protection goals: to limit global warming to a maximum of 2 degrees Celsius, but if possible to 1.5 degrees Celsius, compared to the pre-industrial reference level. One of the most important instruments to achieve this is the energy transition. And time is of the essence, because at present global warming is at about 1.2 degrees Celsius.

In order to achieve the climate goals, it will be necessary to lower EU-wide CO2 emissions by at least 40 per cent compared to the 1990 level. The energy sector produces around two-thirds of greenhouse gas emissions. In this regard, electricity generation plays a key role, as it is responsible for roughly 40 per cent of the energy sector’s total CO2 emissions. The logical conclusion: “We will only be able to deal with the problem of greenhouse gas emissions if we press forward with the energy transition,” according to Hannes Loacker, energy and commodities expert at Raiffeisen Kapitalanlage GmbH (Raiffeisen Capital Management). What this specifically entails can be illustrated using the example of Austria: In order to achieve the government’s goals of only using electricity from renewable sources by 2030, an additional volume of 27 terawatt hours (TWh) of electricity is needed from renewables. This is equivalent to almost the entire electricity consumption of Denmark.

Simultaneously with the goal of phasing out the use of fossil fuels over the long term, demand for electricity over the next 20 years will increase by around 60 per cent, among other things due to population growth and the electrification of mobility. According to IEA forecasts, this means that by 2040 around seven trillion US dollars will have to be invested in renewable energy sources, such as wind, solar and hydro power. Additionally, another eight trillion US dollars will be needed for investment in transmission and distribution networks, in order to make them suitable for higher volumes of wind and solar electricity. Over the long run, the energy transition offers us great growth opportunities.

Two trillion US dollars: This is the International Energy Agency’s estimate for the total volume of investment in renewables for 2030, representing an increase of 50 per cent versus the current level. As Loacker explained, “A massive amount of money has to be invested in transforming the energy sector, and there are a lot of companies that will profit in the process.” Some of this money will come from public coffers (either via subsidies for the construction of wind farms or investments in network infrastructure expansion). Above and beyond this, however, private sector funds and a positive investment climate will also be needed. While climate change represents a financial risk, in the years ahead the energy transition will offer investors a wide range of investment options along with the opportunity to promote the transition of the economy towards more climate neutrality with the capital they invest.

1. Renewables: eight times as much solar power

Generating just a little more electricity from solar and wind power will not be enough to make the electricity sector greener. Because the energy transition goes beyond just phasing out coal, natural gas, and oil, and involves the expansion of electricity generation in general. According to the IEA’s forecasts, global electricity demand will rise by 75 per cent by 2050. That is a massive increase. Electricity from renewables will become a universally used source of power. To a large extent, decarbonising the transportation sector (cf. e-mobility), the heating sector (cf. heat pumps), and industry will involve the direct or indirect use of renewable “green” electricity. The energy transition is about electricity. At present, all of the renewable energy sources together account for a generation capacity of 3,000 gigawatts, and by 2050 this needs to rise to 12,000 gigawatts, i.e. a four-fold increase. To achieve this, solar power must grow eight-fold and wind energy will have to be expanded four-fold. By contrast, experts do not predict such high rates of increase in the field of hydroelectric power. All of this will have to be accompanied by the expansion of electricity grids and the construction of additional and new storage capacities, which are one of three key components of the energy transition.

2. Storing energy: expansion of capacities

The rising volumes of renewable energy from solar, hydro, and wind power cannot be easily integrated into the existing electricity grids without encountering some problems. The main reason for this is that power generation with renewables depends on the weather or the time of day. It fluctuates and is thus difficult to plan and can only be controlled to a limited degree. A very high proportion of solar and wind power can overload electricity grids and pose a threat to the security of supply. As an additional factor, it is not only large power plants that have to be connected to the grid. The energy transition is characterised by decentralised generation by a large number of small units. In order smooth out the fluctuations and provide wind and solar electricity precisely in accordance with consumers’ needs or to adjust demand to generation, it will be necessary to develop long-term storage facilities for electricity.

Batteries and pumped storage solutions are short-term fixes and offer too little capacity. Hydrogen, on the other hand, can be used as seasonal energy storage option for the electricity grid. Another advantage of hydrogen is its high specific energy content: one kilogramme of hydrogen has almost three times as much energy as petrol and more than twice that of natural gas. Sectors such as the steel industry, the chemicals industry, and the transportation sector can also be at least partially decarbonised using hydrogen.

3. Energy efficiency: buildings as the key to the energy transition

The energy transition is also about utilising energy more efficiently. Not wasting energy is ultimately the most environmentally friendly and sustainable solution. In particular, the areas of buildings and space heating highlight the amount of energy conservation potential that is available. Space heating and warm water are responsible for about one-third of Austria’s energy consumption and more than 20 per cent of the country’s CO2 emissions. Nevertheless, the biggest problems in this area are that:

• Heating needs are still covered almost 60 per cent using fossil fuels.

• Of the 1.7 million heating systems in Austria, 40 per cent – representing 680,000 systems – are between 15 and 30 years old and thus in need of an overhaul.

In addition to shifting the supply of heating to renewables, comprehensive thermal renovation of the building stock is also necessary for the heating transition.

• The current building stock in Europe is very old: 75 per cent of the buildings are categorised as energy inefficient, and 35 per cent are older than 50 years.

• To address this issue effectively, the renovation rate would have to be doubled from its current annual rate of one per cent. The EU estimates that every year an additional 275 billion euros in investment in buildings is necessary to reach the targeted renovation rate of two per cent.

Buildings are one key to achieving the ambitious climate targets. According to the study “Wärmezukunft 2050” (Heating Future 2050) by the Technical University of Vienna, measures such as thermal renovation and efficient heating systems using renewables can reduce the total energy usage in the heating sector by 50 per cent. An energy transition in the heating sector could result in annual savings of around three billion euros in Austria.

Looking to the decades ahead, the energy transition offers investors a wide range of investment options along with the chance to promote the transition of the economy towards more climate neutrality with the capital they invest. “Many of the relevant industries are characterised by growth opportunities, which in turn increases the prospects of attractive returns,” said Loacker.

“In order to really exit fossil fuels, investment is also necessary in a number of other areas outside the field of renewable energy.” This goes beyond pure investments in the shares of companies active in solar, wind, and hydro power. Topics ranging from energy efficiency, e-mobility, and energy storage to the circular economy also play an important role. This involves companies, which for instance supply key technologies for the energy transition (cf. microchips), manufacture equipment for the smart management of energy consumption, or are leaders in battery technology, as well as companies that do business in building renovation.

A smart investment in the energy of the future

It is rarely possible to tell in advance which providers and technologies will prove successful over the long term. An ESG fund investment in the field of green energy thus diversifies the investments accordingly, as is the case with Raiffeisen-SmartEnergy-ESG-Aktien, which consciously focuses on the market segment “smart energy”. This segment covers renewable energy and companies that offer and/or develop solutions for the more efficient use of energy. The fund invests in around 50 different companies which are active in the field of “smart energy” and also promote sustainability in their own business practices and operations. Raiffeisen-SmartEnergy-ESG-Aktien is thus a sustainable theme fund. If there is a downturn in this market segment, however, the fund is unable to avoid this and consequently loss of capital cannot be ruled out.

• Almost 50 per cent of the fund volume is invested in companies operating in the fields of wind, solar, and hydro energy.

• Around 25 per cent is allocated to the energy management, transport, and e-mobility.

• 16 per cent of the investment is focused on energy efficiency, including green buildings.

• 5 per cent is invested in energy storage and energy distribution, including so-called smart grids.

The term “sustainability” encompasses more than just ecological topics such as environmental and climate protection. In the world of investment funds, sustainability is expressed through the ESG approach, which differentiates the concept on the basis of three criteria: in addition to the environment (E) as noted above, this also includes social (S), and corporate governance (G) aspects. These ESG criteria provide orientation for investors. The sustainability of a company can be assessed using these criteria.

However, modern approaches to sustainability now also take into account other categories as well, such as best-in-class, ESG integration, impact investment, and engagement and voting. (For more information on this subject, see Good reasons for more sustainability in investment funds.)

Raiffeisen-ESG-indicator

Raiffeisen KAG’s yardstick for the sustainability of companies and investment funds is the Raiffeisen ESG indicator (How is sustainability measured?). This indicator incorporates the sustainability analyses of reputable rating agencies as well as information gathered in the Raiffeisen network (sustainability criteria – integrative approach). Raiffeisen KAG also engages in direct dialogue with companies to obtain a more detailed understanding of the sustainability aspects, using both on-site visits to the companies and special questionnaires. The results from these various sources form the basis for the Raiffeisen-ESG-indicator.

Note: You can look up the ESG indicators of our sustainability funds in our publication SUSTAINABLE INVESTMENT.

Raiffeisen Kapitalanlage-Gesellschaft m.b.H. analyses companies and governments on an ongoing basis using internal and external research sources. The results of this sustainability research are combined with a comprehensive ESG rating, including an ESG risk assessment, to create the so-called Raiffeisen ESG indicator. The Raiffeisen ESG indicator is measured on a scale from 0 to 100. The assessment also takes into account the relevant sector.

The portfolio of Raiffeisen-SmartEnergy-ESG-Aktien has a carbon footprint that is just one tenth the size of that measured for the global energy index, the MSCI World Energy All Country. This takes into account direct emissions in the value chain (Scope 1 and Scope 2 emissions), as well as indirect emissions generated in the purchase of products and sales of the finished goods (Scope 3 emissions). With regard to Raiffeisen-SmartEnergy-ESG-Aktien, Raiffeisen KAG has also set the target that the CO2 emissions per invested million will decline every year for this fund. In this case as well, Raiffeisen KAG pursues its own shareholder engagement with the companies. “We have initiated an active dialogue with the ten companies in Raiffeisen-SmartEnergy-ESG-Aktien which have the largest carbon footprints of the 50 names, to discuss how they can reduce their carbon footprint,” explained Loacker.

The Raiffeisen-SmartEnergy-ESG-Aktien exhibits elevated volatility, meaning that unit prices can move significantly higher or lower in short periods of time, and it is not possible to rule out loss of capital.

As of march 2023