ESG Club


Use of coal and (to an extent) biofuels is not


aligned with the


PI Partnership – Newton Investment Management climate-change


Phil Shucksmith is a portfolio manager in the real return team at Newton Investment Management


KEEPING THE LIGHTS SWITCHED ON


The acute energy crisis in Europe has highlighted the need for countries to increase their clean-energy efforts – not only owing to the climate imperative, but also because of the close links to national security.


The invasion of Ukraine and resulting sanctions have highlighted the geopoliti- cal risks associated with the import and export of energy. Therefore, although the energy crisis may have negative effects on the environment in the short term, we believe that it is likely to accelerate the transition towards alternative energy sources in the medium and long term. In the short term, we believe that power generation from sources other than gas in Europe will stand to benefit from the cut- off of Russian gas. Operators of power generation that are not subject to fuel supply from global markets, such as domestic coal or nuclear energy, could provide


short-term relief from gas


shortages. However, although non-gas power pro- ducers are theoretically well positioned, they may face additional taxes or have caps imposed on the price at which they can sell electricity in order to combat the rise in consumer bills.


ambitions of the EU, but in the short term this is likely to be overlooked out of neces- sity. Nuclear power is always controver- sial, though we think that it would be imprudent to decommission nuclear before a fully decarbonised grid has been built out. Therefore, we expect that nucle- ar facilities are likely to remain in opera- tion for quite some time yet. We believe that there is also an opportuni- ty in liquefied natural gas (LNG) storage, transportation and production as the EU looks to build extra resilience into the existing energy system. Nevertheless, there should be one eye on the exit strate- gy, to make sure we are not locked into more decades of burning carbon. Power generation is, in principle, the simplest sector to decarbonise, given established technologies in wind and solar. We believe that investment oppor- tunities will emerge across the supply chain, from developers of renewables to manufacturers of components used in renewables. A grid based on intermittent power is going to require significant upgrades, combining energy storage in the form of batteries and hydrogen with ultra-high-voltage cross-continental inter- connectors. According to the International Energy Agency (IEA), the buildings and building construction sectors combined are responsible for almost a third of global final energy consumption,¹ and we believe this is addressable in two ways. One is to accelerate the renovation and insulation of the current building stock and increase energy efficiency require- ments for new buildings. The second is to speed up the rollout of heat pumps to replace gas and oil boilers. The introduc- tion of heat pumps needs to go in tandem


with improvements in building insula- tion in order to work effectively. Smart home control systems can also save a surprising amount of energy. At an EU level, reducing building heating by just 1 degree can save 10bcm of gas per year,² out of a total 450bcm gas demand.³ Transportation accounts for 37% of CO₂ emissions from end-use sectors, accord- ing to the IEA.⁴ This sector presents a mixed picture; light vehicle transport is easily replaced with battery electric vehi- cles, the technology for which has already been proven. We are seeing investment opportunities in the electric-vehicle sup- ply chain and charging infrastructure. On the other hand, heavy road trans- port, shipping and aviation are much more expensive to decarbonise. This area is likely to start to see investment but may not be the main area of focus in the near term.


The manufacturing industry, by nature of its focus on producing products at the lowest possible cost, is already fairly effi- cient; however, the current high electricity prices make the payback period for installing more energy-efficient compo- nents like compressors much shorter, and therefore may accelerate investment.


1) IEA, Buildings, accessed 1 August 2022: www.iea.org/ topics/buildings 2) IEA, 10-Point Plan to Reduce the European Union’s Reliance on Russian Natural Gas, March 2022 3) Statista, Natural gas consumption in the European Union from 1998 to 2021, 19 July 2022 4) IEA, Transport, accessed 1 August 2022: https://www.iea. org/topics/transport


Important information This is a financial promotion. These opinions should not be construed as investment or other advice and are subject to change. This ma- terial is for information purposes only. This material is for professional investors only. Any reference to a specific security, country or sector should not be con- strued as a recommendation to buy or sell investments in those securities, countries or sectors. Compared to more established economies, the value of invest- ments in emerging markets may be subject to greater volatility, owing to differences in generally accepted accounting principles or from economic, political instability or less developed market practices. Issued by Newton Investment Management Limited. In the United Kingdom, NIM is authorised and regulated by the Financial Conduct Authority (‘FCA’), 12 Endeavour Square, London, E20 1JN, in the conduct of investment business. Registered in England no. 01371973.


40 | portfolio institutional | October 2022 | Issue 117


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