Investment themes in clean energy and cleaner energy

As we prepare for COP26 in Glasgow later this year, an awareness of how the UK can be a role model for positive change and soft global influence is becoming discussed more and more. For companies in the Energy sector especially, and all other sectors, their environmental impact is being increasingly analysed, measured and scrutinised. This will ultimately affect and touch almost every part of corporate development strategy, from recruitment to competitive tender processes, public relations and investment.

For companies in the Energy sector looking for investment today, one thing that has changed significantly over the last year is a much greater emphasis and awareness from the investor community and their funders on the green agenda and low carbon economy.

The investor view of considering ESG (Environmental, Social & Governance) factors is not new. However, it is becoming increasingly established and commonplace as part of investor considerations andclear that the Covid-19 pandemic has pushed raised the profile, focus and accountability of ESG factors higher up the agenda.

In the Energy sector, the “E” of ESG is preeminent when looking at a major investment trend towards energy transition and the low carbon economy. Another important emerging trend complementing environmental considerations is digital and tech enabled industry focussed solutions. New technologies that can create efficiencies on how business operations are delivered – whether it’s through reduced transportation of equipment and people or more accurate predictability of scheduling. This can help not only to reduce the carbon footprint of an Energy business or investment proposition, it has the potential to reduce considerable costs too.

In clean energy and energy tech segments, investor appetite and sentiment is growing rapidly. The sheer scramble to secure clean energy investment in the portfolios of wealth and pension funds and investment portfolios has led to some reports of large surpluses of funding facing low volumes of investment opportunities. Many funds, large and small are adapting, re-grouping and taking the opportunity to re-invent themselves towards in this area.

In the more traditional hydrocarbons segment of the Energy sector, funding options are becoming more challenged, limited and harder to find, but they have not gone away. There is plenty of evidence of investor belief and confidence in the long-term potential that remains in oil, and particularly gas markets, and how these will help enable a realistic transition to net zero objectives over time.

There are often new ESG or digital efficiency factors being introduced for consideration alongside purely financial factors in the investment decision making process. This does not prevent investment in oil & gas, but it adds new layers of corporate strategy and identity profiling to be addressed.

For companies and investors who have built highly successful businesses in and around the hydrocarbon sector, their business models, revenue streams and corporate identity revolve around oil & gas. Many cannot simply turn their backs on oil & gas.

Whilst some investors have tweaked the barriers to entry in order to access the right opportunities for their portfolios, others are steering in the direction of emerging markets key to energy transition and the low carbon economy. These include CCUS (carbon capture, usage and storage), hydrogen, wind and solar power, amongst others.

Another important differentiating trend in the oil & gas sector relates to innovation around emissions reduction technology. Whether it’s in the wellbore, pipeline or flare stack, a new technology development might not be in the pure clean energy camp, but this is definitely cleaner energy than before.

From Net Zero to Covid-19 to COP26, drivers for change in the Energy sector and all other sectors feel like they have never been so prominent. The investor community has reacted quickly to these changes with a much greater emphasis on ESG factors and on digitally enabled tech solutions. Clean energy is an emerging hot market, but so is cleaner energy. For companies seeking investment, being fully alert to new challenges and opportunities must be an essential part of their strategy.

If you have any questions or would like to find out more information, please get in touch with Alasdair Green or your usual AAB contact.