Energy transition and energy security – complementary or conflicting? As Russia turns off Europe’s energy supplies, countries are opportunity for investment, with the IRENA World Energy importing liquified natural gas (with twice the environ- Transitions Outlook 2022 report estimating investment mental impact of natural gas), recommissioning coal-fired needs at USD 5.7 trillion annually through to 20304. power stations and resuming fossil fuel exploration and Just as IRENA lays out a map for the next eight years production. Notably, new investments in these short-term for policy makers, asset managers are increasingly energy solutions have uncertain returns as they are assets constructing portfolios with formal climate goal overlays, in danger of being “stranded” in the long term. making use of continuing improvements in climate data Investment urgently needed to close the energy and disclosures. As Allianz Global Investors is a member of infrastructure funding gap the Net Zero Asset Managers initiative – and our parent The most inconvenient truth to arise from the current crisis company Allianz is a member of the UN-convened Net is the shortfall in energy infrastructure investment in recent Zero Asset Owners Alliance – we have formal portfolio decades, especially in Europe. The just-in-time economy commitments for certain assets under management, prioritised cost over resilience and the impact of that is with specific climate goals. However, we are also actively now being felt. Yet that gap means there is a significant seeking the opportunities arising from decarbonisation. Implications of the future energy mix for investors cobalt and natural graphite are critical for batteries and We classify the investment opportunities arising from a fuel cells. As prices for these essential commodities rise, changing energy mix into three groups: formerly uneconomic sites with respectable provenance 1. Support the transition from fossil fuels and governance can reopen. As the net-zero goals for decarbonisation 3. Invest in climate solutions become increasingly embedded into portfolio – Carbon capture utilisation and storage is vitally 6 construction and outcomes, we expect these important for reaching net zero . CCUS facilities 7 to be reflected in several ways: in operation have tripled since 2010 , CCUS – Formalised carbon performance outcomes using retrofits of power stations and heavy industries could cut 8 CO emissions by more than 2GT annually by 2050 , and the carbon key performance indicators. These may be 2 9 “green” (an ambitious threshold versus the benchmark) global CCUS market could grow to USD 7 billion by 2030 . or “transition” (a less ambitious starting point, but – Energy efficiency solutions are multifarious. The many progressively more ambitious). options lend themselves to private sector development, – Net-zero alignment. This can vary from requiring especially those concentrating on alternative or clean companies to have a formal decarbonisation strategy to energy infrastructure. Beyond solar and wind power, validating companies’ Science Based Targets5. potential private sector projects include clean electricity transmission, adapting energy networks to alternative – Formalised alignment of portfolio carbon intentions and energies (eg, hydrogen or green gases) and building proxy voting. supporting infrastructure such as energy storage – Formalised screening of high carbon intensity, or and CCUS. unconventional, energy sources. Three final points for investors to consider. First, climate 2. Seek renewable energy opportunities strategies will evolve as the data disclosed by companies – Investing in clean tech. This includes backing improves, especially regarding the key constituents of firms developing and applying rapidly evolving aligning with net zero. Second, until data improves, technologies like energy storage, green/blue engaging with company management is the only way hydrogen, and grid technology, as well as mainstream to gain a full perspective of climate goals, especially renewable energy eg, solar and wind. for those companies at an earlier stage of transition. – Investing in the raw materials that support the clean Lastly, companies’ activities must be judged within the energy transition. Another consequence of war is the context of the countries in which they operate – collective vulnerability of access to the strategic metals and engagement through industry body participation can help minerals required for producing renewable energy to promote action by governments. As the next global infrastructure. Rare earth elements are essential for forum for such discussions approaches – the UN Climate capturing wind power; magnesium is a key component Change Conference (COP27) – to be held in Egypt’s Sharm of fuel cells, as well as wind and photovoltaic technology; el-Sheikh in November 2022, expectations remain high. 4. Hydro Review, $5.7 trillion in annual investment needed for clean energy transition, March 2022; IRENA, World Energy Transitions Outlook, 2022 (page 26); IRENA, IRENA Director-General Reacts to UNSG Remarks on Energy Transition, May 2022 5. . The Science Based Targets initiative (SBTi) defines and promotes best practice for organisations in science-based emissions reduction targets 6. Stated by Professor Johan Rockström, a director of the Potsdam Institute for Climate Impact Research, during the Allianz Global Investors 2021 Sustainability Days conference 7., 8. IEA, A new era for CCUS, 2020 9. Carbon Capture, Utilization and Storage Market Overview 2030 4