ESG Club feature – Energy


Britain is full of wind. For the first time the energy that lights up our homes at the flick of a switch and allows us to keep working when the battery powering our laptop runs flat has mostly been generated by wind turbines. Indeed, this accounted for almost a third (32.4%) of Britain’s electricity during the opening three months of the year, slightly ahead of gas (31.7%), power company Drax says. It gets better. If solar, biomass and hydro are considered then the gap widens with renewable sources responsible for 42% of Britain’s energy during the first quarter, compared to a third for oil and gas. The growing dominance of cleaner energy sources and the decline of carbon dioxide-emitting oil, gas and coal will be welcome news. To halt the damage to our climate that causes rising temperatures, extreme weather patterns and asthma, the government wants all of Britain’s electricity to be generated from clean sources by 2035. Although decarbonising the energy mix is moving in the right direction, eradicating fossil fuels from the system is a chal- lenge. Oil and gas have powered our lives for around 200 years and developing the reliable alternatives needed for such struc- tural change will take time. And that is something we are run- ning out of. The world has set ambitious net-zero targets, with the typical deadline being 2050 – just 27 years away. One of the biggest issues is that the favoured alternatives to burning oil and gas are not as reliable as fossil fuels. Wind farms only produce power when the wind blows and solar parks when the sun shines. “How can we change a grid from something which is very much in the past – coal, oil and gas – where lights come on at the flick of a switch, to a point where you have to organise the energy load around wind speeds and when the sun is shining. This is a challenge,” says Gabrielle Kinder, an investment specialist in BNP Paribas Asset Manage- ment’s environmental strategies group.


The problem is not limited to how we power our homes and businesses, but also how we move around the world. Electricity is seen as the solution to stopping the pollution emanating from our roads. However, the concerns associated with battery-powered vehicles include cost, range and the size of the recharging infrastructure.


Then there is maintenance. A survey conducted by consumer group Which? found that electricity is the least reliable type of fuel, with such vehicles spending longer off the road when in need of repair. In response, battery-powered car maker Tesla cut the price of its vehicles twice this year to tempt buyers. It is clear that transitioning the world from an extractive to a regenerative power base will take money…lots of it. Craig Bethune, a senior portfolio manager on the capital appre- ciation team in Canada at Manulife Investment Management, believes that in the coming decades $6.9trn (£5.5trn) needs to be spent annually. “It’s a big ask,” he says, “but net zero is


40 | portfolio institutional | June 2023 | Issue 124


going to be a challenge for the world to achieve without aggres- sive spending.”


Digging deeper


If electricity generated from renewable sources is at the heart of transition plans across the world, more natural resources, such as copper, need to be taken out of the ground to build the car batteries, wind turbines and solar panels that are crucial to eradicating the use of fossil fuels. Wood Mackenzie, an energy consultant, says that to produce the copper, nickel and lithium needed to reach net zero, min- ing capex needs to rise from $30bn (£24.1bn) to at least $100bn (£80.5bn) a year until 2050. “So you get a sense of how difficult it is,” says Diana Racanelli, a senior portfolio manager on the capital appreciation team in Canada at Manulife Investment Management. More than 30 years of monitoring the mining industry has given Racanelli a greater understanding of the enormity of the net-zero challenge. “One of the problems with reaching these transition targets is that we don’t have enough of the metals required. “Copper is a big one because it is needed at so many levels of the transition, but there is just not enough of it,” she adds. The market is expected to be so tight, she says, that copper pro- ducers are starting to discuss the risk of possible substitutions for the commodity in certain uses. “There has to be alternatives and the world is starting to look at that.” But there is a conflict when it comes to producing more of the minerals needed, as investors have traditionally pushed for higher returns from their mining stocks or companies have reduced their exploration spent to pay down debt. The barriers to producing more of the minerals needed are not just down to money. There are other issues. One is that it can take well over more than a decade for a newly discovered mine


The focus needs to be on emission reductions, not excluding one type of


power over another. Diana Racanelli, Manulife Investment Management


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