Nations have risen and fallen, governments come to power and been ousted, and businesses created and destroyed, all in the quest for energy. Today we stand at another critical inflection point for the energy system. For long-term investors, navigating this unprecedented and uncertain energy landscape is critical for four key reasons:
- Energy not only accounts for 10% of the global economy but is also a crucial input into the remaining 90%. Energy prices drive key macroeconomic indicators including inflation, consumer spending, economic growth, and external balances.
- Establishing and maintaining dependable access to energy lies at the heart of many geographical fault lines. These geopolitical risks are critical for understanding sovereign risk, evaluating potential capital restrictions, and monitoring country-specific risk factors across the portfolio.
- The energy transition – the shift towards electrification and a low-carbon energy mix – creates an array of attractive investment opportunities, leads to obsolescence risk in waning energy sectors that may be over-represented in investors’ portfolios, and requires vigilance against overhyped innovations that in reality are often too distant, uneconomic or politically unfeasible.
- For investors with ESG goals, the inescapable arithmetic of global energy supply and demand means fossil fuels will remain a major source of energy supply for decades to come. Such a world requires considerable investment nuance – and a simplistic strategy that divides the world into brown villains and green heroes will not be the most effective approach to achieve either environmental or fiduciary objectives.
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