The Lowdown
6 min read

Global markets to 2 April 2022

Mixed performance and even some rallies. The west needs to find alternatives to Russian energy supplies. Retail sales slip as inflation rises. Some changes in our asset allocations.

As the cost of living crisis worsens and energy security takes pole position on many countries’ political agenda, we discuss what geopolitical tensions in Eastern Europe might mean for sustainable investing and the energy revolution.

We are nearly two months into the current chapter of Russia’s conflict with Ukraine. The scale of the human tragedy is simply unimaginable. But as investors – and as investors with a responsibility to help bring about the energy transition – we also have to consider the ways in which the conflict is impacting the green revolution and the global climate challenge.

In this week’s Strategic Insights, we share our thoughts on these very live issues.

What does the conflict mean for energy policy?

Europe’s energy system is fundamentally flawed – and the Ukraine crisis has shone a spotlight on just how much. Could it be that we have been somewhat foolish in allowing the European continent to become so dependent on Russia for supplies of gas, crude oil and coal – to the tune of 45%, 27% and 46%, respectively?

Its invasion of Ukraine has triggered a profound reshaping of European energy policy, with energy security now a primary concern. In the short term, nothing has been ruled out. Everything from nuclear to extending the use of coal-fired power generation is on the table – as well as, of course, undertaking a global tour (cap in hand) of the world’s other dictators. Could Venezuela end up being our new best friend following Boris Johnson’s failure to secure a commitment from the Saudis to raise oil production?

Does all this mean that the energy transition has been kicked into the long grass and that investing in it is a fool’s errand? Quite the contrary.

When it comes to energy, sustainability goes hand-in-hand with resilience: decarbonising and electrifying the energy system is a way to phase out our energy dependency on Russia. Logically speaking, transitioning over to net zero always meant having a power mix made up exclusively of renewable energies in Europe. So while the overarching aim has not changed, what is happening in Ukraine has provided some impetus, catalysing the move towards a fossil fuel-free future.

A fair number of figures have been kicked about in recent weeks. But fundamentally, there is a commitment to reduce the EU’s dependency on Russian gas by two thirds by the end of this year. And by 2030 at the very latest, we want to have completely phased out all Russian fossil fuels from our European power mixes. Needless to say, all of these figures are subject to change as the situation continues to unfold.

In the short term, we need to diversify the EU’s gas supply, fill up all available storage ahead of next winter and ensure that vulnerable consumers and businesses are afforded some protection against skyrocketing prices.

Other measures will be all about the energy transition: deploying heat pumps to massively electrify heating, ramping up the short-term goals on the incorporation of green hydrogen into the power mix and optimising building energy efficiency. But nothing is going to happen overnight. It can take up to five years to develop an offshore wind farm (and NIMBYism can increase that to ten years when it comes to onshore wind). That said, concerted efforts are being made to overcome the procedural hurdles that have had a tendency to slow the transition down.

Now is the time for sustainable investing

Investment Quorum’s George Steger has a particular focus on sustainable investing and works with the rest of the team on analysing investment opportunities in that particular space. “The geopolitical tensions in Eastern Europe mean that there are no two ways about it: we have to do something about our energy vulnerabilities and become more independent in our energy policy. In short, now is the time to invest massively in renewable energies. Admittedly, there is significant expenditure involved early on in the equation, but renewables could end up being a cheap, clean and potentially limitless source of energy. Instead of funding the fossil fuel industry elsewhere, sustainable investing creates jobs here. Anywhere that the sun shines and the wind blows, basically. Ukraine is not just a human tragedy – it’s a wake-up call demonstrating just how urgent it is that we speed up our own clean energy transition.”

Steger goes on to point out that investing in the energy transition is not necessarily incompatible with continuing to invest in carbon intensive industries. He suggests that a climate strategy should be linked to transition across all sectors of the economy. Conventional energy companies, for example, have a great deal of decarbonisation potential. And the renewable energies sector has a great deal to learn from them about energy storage and transport – these are transferable areas of expertise.

Rising raw material prices – an additional factor

The energy landscape is about to change beyond recognition. And this change will come with a whole new set of tools for decarbonising it: wind turbines, solar panels, electric vehicles, next-generation energy storage systems and heat pumps. But be warned: the road to net zero will be bumpy. Indeed, the conflict is pushing up the costs of key raw materials used in making these technologies and impacting their availability.

Nickel, for example, is widely used in electric vehicle batteries and its price has shot up. Meanwhile, aluminium is used in solar panels, cabling and electric vehicles. It is far from rare, but even it has increased significantly in price over the past two months.

Mining these metals (particularly aluminium) requires energy. And Russia accounts for some 7% of global nickel exports and just over 6% of global aluminium exports: another supply chain over which Putin potentially has a stranglehold. Aluminium prices increased by almost 50% last year. And they have risen by more than 20% by over the last 12 months. Nickel prices rose on the back of concerns over disruption to Russian exports. Even before Ukraine, our Chief Investment Officer Peter Lowman was predicting a commodities super cycle. Could it be that we are on the brink of it right now?

All of this means headwinds for companies playing a part in delivering the energy transition. And many of these companies have already had to tackle rising costs because of Covid (steel and logistics companies in particular).

Leaving aside geopolitical tensions and the human tragedy for just a couple of moments, investors are wondering whether or not rising prices will impact the economic viability of these technologies. It is looking increasingly as though energy prices across the EU and the United Kingdom will remain higher… and for longer. So new renewables will remain the cheapest option – even though prices have risen to reflect rising costs.

One of the corollaries of skyrocketing petrol prices is that they reduce the total cost of electric vehicle ownership relative to internal combustion engine vehicles. This more than compensates for the impact of rising battery inputs. But the rising cost of living has a negative effect on the automotive sector generally. So although the underlying case for electric vehicles is not affected by Ukraine or the energy crisis, the industry does find itself having to deal with cyclical challenges.

There are further complications: Covid hit semiconductor production hard last year and in 2020, and this is still affecting the supply chain. Overall, however, the electric vehicle market is still expected to grow this year and beyond.

One final factor is the effect that elevated gas prices have had on parity with green and grey hydrogen. That parity has come about years earlier than forecast. Since gas prices show no signs of falling, this further enhances the appeal of investing in systems to create hydrogen from electrolysers powered by renewable electricity.

The political will is there

The world is currently focused on the humanitarian crisis in Ukraine. Interestingly, the international press paid relatively little attention to two major climate announcements last month. Firstly, the IPCC published its most recent report, essentially telling the world that the time we have left to adapt to climate change is running out fast.

But on a more positive note, almost 200 countries have pledged to work together on developing a framework for reducing plastic waste. A world at war will have difficulties tackling global warming. But the fact that decarbonisation and electrification are so closely aligned with the medium-term objective of reducing our dependency on Russia’s fossil fuels means that policy is still generally moving in the right direction.

We have a key role to play in the energy transition

A number of uncertainties remain over the months ahead. Indeed, many of the headwinds currently affecting certain areas of the market will most likely be stronger and for longer. Investment Quorum is focused on buying companies with solid balance sheets – they will be best placed to withstand the near-term pressures. In the medium term, speeding up the energy transition remains utterly essential. Our strategies are made up of funds that seek to provide capital growth by investing in equity and equity-related securities of global companies playing a part in delivering the energy transition, while at the same time meeting our own stringent environmental, social and governance (ESG) criteria.

In recent years, the proliferation of policies designed to achieve net zero has shown that companies are increasingly aware of just how urgent it is that we address climate change. But actual progress in decarbonising our practices has remained frustratingly slow.

Perhaps Putin’s brazen incursion and its ensuing crisis are what is needed to finally catalyse an energy revolution.

Author Picture
Peter Lowman
Chief Investment Officer, Global Market Strategist
Peter is the firm’s Chief Investment Officer, a Director of the company and an integral member of our investment committee. Peter is a member of the Chartered Institute for Securities & Investment and is regularly sought for expert opinion by the investment press.
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