Positive commitments as well as challenges... What will COP28 bring for investors?
COP 28, the 28th UN climate conference, did not produce a ground-breaking final declaration at its conclusion on 13 December 2023. But it wasn't without some achievements. The sacred cow of fossil fuels was slaughtered, immediately opening doors for forward-looking investors.
Hydrogen, biofuels and Next Gen batteries are only in their infancy but have the potential to knock oil off its pedestal.
Jonas Theyssens, Equity Analyst KBC Asset Management
Sacred cow slaughtered
The phasing out of fossil fuels stirred emotions the most.
‘Fossil fuels are a major source of revenue for Russia and many Arab countries. And the fact that the negotiations were chaired by the oil state Dubai made finding a consensus difficult. The OPEC cartel called on its members to reject any deal that focused on energy, rather than emissions,’ says Cora Vandamme, Senior Economist at KBC Economics.
Opposition to this plea came from those advocating the phasing out of fossil fuels. They were not happy with the vague wording in the draft version of the final declaration, which referred to reducing the use of fossil fuels as one of eight options for reducing greenhouse gas emissions. The final declaration explicitly mentioned transitioning away from fossil fuels, in a fair, orderly and equitable manner.
Including all fossil fuels in the final declaration sends a strong signal for the future. Although there was no actual mention of phasing out fossil fuels, a transition away from fossil fuels is explicitly mentioned in the final declaration.
Cora Vandamme, Senior Economist KBC Economics
Tripling renewable energy. Doubling energy efficiency
A total of 118 countries, including Belgium, made a non-binding pledge to triple renewable energy generation capacity by 2030. The aim of this commitment is to drastically reduce the share of fossil fuels in global energy production during
this decade. There is also a commitment to doubling the annual growth of energy efficiency improvements by 2030. ‘An important step is being taken. One disappointment for the scope of this agreement, however, is the absence of the signatures of China and India,’ says Vandamme. These two countries are among the biggest consumers of fossil fuels in the world.
118 countries pledged to triple renewable energy generation capacity by 2030. Achieving this goal will require significant investment.
Cora Vandamme, Senior Economist KBC Economics
Challenges and funding
Despite funding worth hundreds of billions flowing into the sector through government programmes such as the Inflation Reduction Actin the US and the European Fit for 55 initiative, the stock market was mostly in the red. The gap between ambitious climate agreements and corporate results remains wide. Complex licensing procedures, acute staff shortages and ambiguities around tax benefits are obstacles to a real breakthrough. Higher interest rates, making investors more likely to adopt a wait-and-see approach, also remain a challenge.
Although 2023 has felt like a cold shower for renewable energy investors, COP28 marks a big step in the right direction. The energy transition may not be proceeding in a straight line, but there can be no doubt that it is unstoppable.
Jonas Theyssens, Equity Analyst KBC Asset Management
Wide range of opportunities for investors
While it is true that investments in the energy transition are moving in time with the economic cycle whilst at the same time being temporarily impeded by geopolitical interests, everyone agrees that this trend is irreversible. And that presents opportunities for investors.
‘First and foremost, we can think of renewable energy producers and developers of green projects. These projects are needed to fulfil the promise around tripling renewable energy,’ says Jonas Theyssens, Equity Analyst at KBC Asset Management. Green power capacity will have to increase to at least 11,000 gigawatts within just six years, an annual increase of 17%. The International Energy Agency (IEA) estimates that this will require an annual investment of 1.2 billion USD, double the amount currently flowing into the sector.
Companies which build and operate solar farms, wind farms or hydropower plants will start up new projects. ‘These utilities companies have had a lousy year, but agreements like the one just signed at the climate summit are undoubtedly positive. They support an ongoing demand for these companies’ projects. The prospect of a relaxation of monetary policy also makes the future of these companies look brighter again,’ believes Theyssens.
Besides the manufacturers themselves, companies that produce and supply accessories will also receive a boost. ‘The power generated has to be connected to the grid if it is to find its way to businesses and households," adds Theyssens. ‘That means things like switches, transformers, cabling, fuses and inverters. And
when you factor in that the increase in renewable energy means the power supply is becoming more volatile, that creates a need for flexible and smart grids to keep supply and demand in balance.’
The supply of raw materials needed to generate renewable energy is struggling to keep up with demand. It’s therefore important to invest in sustainable ways of enriching this supply, such as recycling raw materials.
Jonas Theyssens, Equity Analyst KBC Asset Management
The flipside of the coin is the sheer volume of raw materials needed to generate renewable energy. Steel is indispensable, but so too are rare metals. The supply is struggling to keep up with demand. ‘It will be key to invest in sustainable ways to boost this supply, such as the potential for recycling these raw materials,’ adds Theyssens.
As well as producing renewable energy, reducing current energy consumption is also important. The biggest gains lie in making office buildings and homes more energy-efficient, given that they account for more than 40 percent of annual energy consumption worldwide. Producers of energy-efficient building materials, LED lighting, energy-efficient heating and air-conditioning systems will benefit from stricter regulations and sustainable renovation.
Electric vehicles are the future, as well as low-carbon energy sources to charge the electric vehicle fleet of the future.
Jonas Theyssens, Equity Analyst KBC Asset Management
If we want to eliminate fossil fuels completely, we cannot avoid the issue of cars. According to figures from the Automobile Manufacturers Association ACEA, one in five new cars sold last year were electric. If we include plug-in hybrid vehicles, that swells the total to around 30%. The exponential growth in electric cars naturally requires expansion of the charging infrastructure. But other forms of transport such as trucks, public transport, cargo ships or aircraft will also have to look for other fuel. Hydrogen, biofuels and Next Gen batteries are only in their infancy but have the potential to knock oil off its pedestal.
The switch to green energy may be seen as a structural shift, with a major impact on the environment as well as on your investments.
Jonas Theyssens, Equity Analyst KBC Asset Management
The transition to a low-carbon economy is essential to slow down climate change. Billions are being invested in this worldwide. Those huge investments not only benefit the climate, but also create opportunities for investors.
The bar has been set high, and achieving the targets will be quite a challenge. ‘As an investor, it’s important to do your homework well and maintain a well diversified portfolio,’ Theyssens concludes.
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This article is informational only and should not be considered investment advice.
