New research from PGIM, the $1.3 trillion global investment management business of Newark-based Prudential Financial, finds that a surge in power demand fueled by artificial intelligence, the growing energy demands of a rising middle class in emerging market economies, rising geopolitical tensions and the push to decarbonization are combining to dramatically reshape the global energy system.
For investors, this new energy landscape offers both opportunities and hidden risks across a variety of sectors and asset classes, as well as wide-ranging portfolio implications.
In “Fueling the Future: Investing Across the Global Energy Landscape,” the latest in PGIM’s Megatrends research series, 30 investment professionals from across PGIM’s fixed income, equity, real estate and private alternatives managers lift the veil on their investment strategies amid the shift toward electrification and a low-carbon energy mix.
The research finds that, despite the urgency of the Paris Climate Agreement and ambitious plans for green energy growth, the energy transition cannot happen everywhere all at once, and a simplistic strategy that divides the investment world into “brown” villains and “green” heroes will not be an effective approach to achieve environmental or fiduciary objectives.
“No source of energy and electricity is perfect,” Shehriyar Antia, PGIM’s head of thematic research, said. “Whether an investor has decarbonization objectives or not, it’s critical they understand which companies will power us through the energy transition and which technologies may not live up to the hype.”
The best investment opportunities will come from companies that supply, facilitate and adapt throughout evolution of the energy system. Some of the ways companies can power us through the energy transition include:
Renewable power generation is soaring in every region. The global need for complementary infrastructure — like power storage and transmission — should drive demand for critical metals like copper and grid components.
The experts at PGIM said there is a need to meet rising demand for energy while renewable power infrastructure is being built. Natural gas — especially where it displaces high carbon-emitting coal — is a key fuel source in this transitionary period. Indeed, global demand for liquid natural gas is expected to grow by over 50% by 2040 as the coal-to-gas transition expands in China and South Asia.
Some speculative green technologies like hydrogen power, nuclear fusion and carbon capture hold great promise but face immense challenges to operationalize and scale in the near term. Furthermore, trendy green tech startups are not likely to displace incumbent global energy players. In fact, some research suggests traditional energy firms may actually be leaders in select areas of innovative green tech.
“Big Oil” adaptors — oil majors that are leaning into the energy transition — are finding ways to remain energy providers regardless of what the primary energy sources might be — and are more likely to emerge as winners. Peers that rely on the extended sunset of fossil fuels, meanwhile, run the risk of being rendered obsolete by efficiency gains and better infrastructure in renewables.
“How we can meet rising global demand for energy reliably, affordably and in a way that avoids environmental harm is one of the biggest challenges of our lifetimes,” Taimur Hyat, PGIM’s chief operating officer, said. “Resolving these challenges will create several important long-term investment opportunities while requiring rigorous discipline in overhyped areas where the rhetoric exceeds the attractive and accessible investment opportunity set.”
