NO MATTER your opinion on climate change, there’s no doubt we’re undergoing an energy transition – a global shift away from fossil-based energy to renewable sources.
There are two main reasons an investor might show interest in the energy transition: aligning a portfolio with their values and making money.
“For retail investors, the number-one issue that arises when you survey them is climate change,” says Pendal’s head of multi-asset, Michael Blayney.
“People care about plenty of issues, but climate change is number one.”
The second reason is to make money.
“This massive transformational change in the world is happening fast,” Blayney says.
“It started in Australia with solar rooftops and now you see plenty of Teslas driving the streets.
“The transition is very real and there’s going to be a massive amount of money spent on it.”
Approach to diversified sustainable investing
The bigger question is how best to invest in the energy transition.
It’s not simply about identifying innovative, listed companies with strong pricing power and a growing addressable market, Blayney says.
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Sustainable investors should also “participate across multiple asset classes as part of a broader diversified portfolio”.
That might include infrastructure or sustainable bonds for example.
“You want to maintain a robust multi-asset portfolio that’s competitive with any sort of traditional, unscreened investment,” Blayney says.
“It makes sense to participate across multiple asset classes as part of a broader diversified portfolio.
“Just like you don’t put all your money into one asset class, investors shouldn’t put their whole portfolio into one thematic or indeed access a large thematic via only one asset class.
“Investors should consider gaining exposure across many asset classes.
“You can invest in companies that are providing products and services for the energy transition. It might be a manufacturer of wind turbines.
“You can invest in operators of the infrastructure that’s part of the transition economy. And it is worth having some exposure to battery storage opportunities, which is part of the transition.”
All of these investments need to be undertaken using the normal risk-reward framework, Blayney says.
“The sun shines with lower volatility than the wind blows. So solar is slightly a less volatile income stream than wind in many geographies.”
More generally, the typical portfolio construction principles apply — equities are the top end of the risk-reward spectrum, cash is at the bottom end and renewable infrastructure is somewhere in the middle, Blayney says.
Investing in renewable infrastructure also provides exposure to energy prices via the cash flows which is something normally lacking in other parts of a portfolio when ethical screens are applied.
In debt markets, green bonds provide exposure to the energy transition.
Pendal’s head of responsible investing distribution Jeremy Dean adds more options: “There’s lending money to corporates which have the specific goals of reducing their carbon emissions through increasing energy efficient of their operations.
“And there’s retail bank syndication processes which might fund wind or solar farms.”
Blayney says commodity futures also provide opportunities for energy transition investors, particularly if buying into specific companies has been screened out.
“There are some obviously structural trends. Copper is needed to electrify and a vast amount is going to be needed. That provides a structural demand tailwind,” Blayney says.
“One way to play that, in a small way, is through commodities futures which allows you to participate in some of the upside in commodity prices, which you might miss out if you screen them out of your equities.”
Blayney’s final word: “Ultimately it comes down to developing a well-diversified portfolio that’s consistent with the client’s risk profile.”
Dean agrees: “You can have a high-quality, risk-adjusted returns while playing the energy transition theme.
“There are multiple ways of doing that, but fundamentally it has to be about making money.”
Michael Blayney leads Pendal’s multi-asset team. Michael has more than 20 years of investment management and consulting experience. He was previously Head of Investment Strategy at First State Super and head of Diversified Strategies at Perpetual.
Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.
The team — which also includes Allan Polley — manages our multi-asset portfolios with a focus on strategic asset allocation, active management and tactical asset allocation.
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