In Focus: Megatrends  

Investors have everything to gain from fast-tracking shift to clean energy

Giles Coghlan

Giles Coghlan

The consequences of economic sanctions against Russia are being felt across the globe, and for many in the west, the conflict has provoked a sense of moral outrage as well as a re-evaluation of what constitutes an appropriate environmental, social and governance investment. 

Many investors are finding themselves in an unusual double-bind: if a hard ban on Russian oil and natural gas is the ‘right’ thing to do, then how should world powers balance this decision alongside broader net-zero commitments?

Such a question is puzzling the minds of policymakers and investors alike. Moreover, it has brought about an unfortunate consequence – that is, a new lease of life for coal.

As Russia is the largest supplier of gas, crude oil and coal into the EU (it accounts for 45 per cent, 27 per cent and 46 per cent of imports respectively), undoubtedly, the conflict has prompted an urgent rethink over energy policy and investment.

Right now, energy security is Europe’s prime concern, and all options are on the table in the short term. Critically, this includes extending the use of coal-fired power generation, and even intervention in the carbon market.

In many ways, the conflict has provided an alarming reminder that the world still relies on oil, gas and coal for a sizeable proportion of its energy needs, and this demand has an undeniable impact on the energy markets.

The question now is whether the flip side of high prices will accelerate the shift to low-carbon energy, renewables, green metals, and electric vehicles (EVs) – or whether investors will double down on their commitment to coal.

A short to medium-term spike in prices

For now, at least, the markets paint a harrowing picture for net-zero goals. Surging energy prices have amounted to the largest commodity shock investors have witnessed since the 1973 oil crisis.

With prices for coal and natural gas at all-time highs, Brent crude oil is expected to average $100 (£79.5) a barrel in 2022 – its highest level since 2013, and an increase of more than 40 per cent compared to 2021. 

So, what should investors expect next? Energy prices are expected to rise more than 50 percent in 2022 before eventually easing in 2023 and 2024.

In the event of a drawn-out conflict between Russia and Ukraine, or additional sanctions on Russia, prices could climb higher still, proving more volatile than currently projected. Only time will tell.

In terms of how this feeds into the wider ESG narrative, in the near-term, higher prices do threaten to disrupt or delay the transition to cleaner energy sources.

Meanwhile, several countries have announced plans to boost fossil fuel production, with high metal prices also driving up the cost of renewable energy, which depends heavily on the likes of aluminium and battery-grade nickel.

The longer-term picture

It’s important to acknowledge the fact that the energy picture is less clear at the global level.

When prices for oil and gas have surged in the past, companies and consumers tend to pull in opposite directions: while consumers tended to drive less and purchase more fuel-efficient versions, companies and nations on the other hand invested in oil and gas infrastructure around the globe to ramp up production. But the current crisis might not trigger the same response.