UBS believes the transition to net-zero carbon will prove to be one of the most consequential investment trends of the coming decade.
The investment bank sees opportunities across the greentech, clean air and carbon reduction sectors, as well as in carbon trading strategies and ESG (environmental, social & governance) leaders but it also claims it is not realistic for investors to stick all of their eggs in the greentech basket yet.
“The war in Ukraine has added urgency to a long-standing energy dilemma: the trade-off between security of supply, price, and carbon emissions,” UBS noted.
“Reliability of supply, which had been taken for granted by many countries, is now back in focus. We are witnessing a relentless rise in global energy demand — which the Energy Information Administration (EIA) expects to grow 50% by 2050 — as the world population expands and living standards improve. At the same time, nations are trying to wean themselves off the world’s dominant energy source, fossil fuels, which still accounts for more than 80% of total consumption. This desire to decarbonise, along with low prices, has led to years of underinvestment in oil and gas extraction, which is down about 60% since 2014, based on International Energy Agency data,” the Swiss bank noted.
The fast rise in renewable sources, which account for just 6% of global energy consumption, is not yet enough to compensate for this decline, the bank added.
Reducing reliance on Russia, the world’s third-largest oil producer and second-largest exporter, and the second-largest natural gas producer and largest exporter makes the problem more acute.
Against that backdrop, UBS recommends going for a balanced approach, investing “in the past, present, and future of energy,” stressing that it is not realistic for investors to shun traditional fossil fuels.
“Though we are committed to the transition to green energy, this will not happen overnight. We estimate it will take more than 20 years to fully reduce our dependency on fossil fuels, even assuming renewable capacity continues to grow at the 12% annual rate it has averaged over the past 10 years; however, this does not mean investors need to abandon their principles. Instead, they can direct funds toward sustainability leaders within the fossil fuel industry, including companies that use the least environmentally harmful extraction techniques and are stepping up spending on renewables,” UBS advises.
It recommends investors should invest in the present generation of renewable technologies, including solar and wind, along with the battery and grid systems needed to enable these sources to be stored and delivered to customers.
The disruption to natural gas and oil from Russia is likely to provide further incentive to spend on these sources, given that they can be domestically produced, UBS argues.
“Finally, turning to the future of energy, we are keeping a close eye on innovations that outstrip current technologies and have the potential to provide green solutions beyond power generation. These include developments in green hydrogen, carbon capture and storage, and biofuels,” UBS said.