Energy


Sustainable Insights

Sustainability topics that relate to investment portfolios, the environment, society and our future.

Livvy Mortimer, Sustainable Investment Analyst

Traditional Energy


Many believe energy is one of the foundations of the world’s economy.  A good foundation (like what you would expect your house is built on) should be sufficiently robust in order to withstand turbulence and shock.  But as we’ve seen over recent months, the form of energy the world has largely chosen to use appears to be lacking in these qualities. 

Currently, 83% of the world's energy is sourced through fossil fuels (oil, coal and gas).  These forms of fuel are not only subject to strong price volatility, they are also highly exposed to geopolitical tension.  Unfortunately, fossil fuel reserves are not evenly distributed across the globe, resulting in power disparities and can become a source of leverage or control as we have seen during the Russian invasion of Ukraine, or in the past, with Persian Gulf tensions.

This is not a ground-breaking concept.  The consequences of our global fossil fuel reliance were previously felt through the OPEC oil embargo of 1973 and Russia’s invasion of Crimea in 2014.  After the invasion of Crimea, the crevices in our economic foundations were revealed insofar that the European Union devised mechanisms for change.  They constructed a new European energy security strategy, with the aim being to diversify away from Russian gas.
This forward-thinking strategy could have reduced the economic and political power available to Putin at the outset of his invasion into Ukraine.

Unfortunately, this strategy was not sufficiently actualized.  Today, Russia supplies 40% of European gas imports… just like it did eight years ago.

Renewables


We need to learn from our past as this economic foundation continues to wane and wobble in the face of global turbulence.  This economic restructure needs sustainability as a driving factor, more specifically, investments into renewable energy (sun, wind, water…) infrastructure.

The UN Paris Agreement and other UN-sponsored forums have previously outlined the need to achieve this economic transition on a global scale.  Commitment to net-zero (the reduction of greenhouse gas emissions) by 2050 is a must.  This was already a venture on many minds across the public and private sector.  21% of the largest public companies in the world have committed to meet net zero targets, and 61% of countries have committed.  Now that the urgency has increased, these commitments need to be transformed into action.

Fortunately, this is occurring – albeit a little slowly.  We are seeing leaders from all over the world consider renewable energy investments as a means to reduce carbon emissions and to escape geopolitical tension.  In the US, President Biden has introduced ‘federal clean energy tax credits,’ aiming to double America’s clean energy production in solar, wind and other forms of renewable energy.  Many other countries throughout Europe are implementing similar pro-renewable policies.

These developments are paving way for an improved economic foundation, which will be less reliant on fossil fuels.  Renewable energy inputs are also far more accessible than fossil fuel reserves, creating a more equal power distribution across the globe.

So what does this mean for your investments?


Firstly, at AMP Wealth Management, we exclude fossil fuel investments from our portfolios.  We believe the long-term trend is one where the world decreases its appetite for fossil fuel energy and transitions to one based on renewable energy.  When there is a geopolitical event that impacts either the supply or demand for oil, gas or coal (oil and gas is likely a key factor in Putin’s invasion) we are reducing both the economic power available to a country like Russia, and our overall direct portfolio exposure to such regions/countries.

Secondly, our investment philosophy is targeting the energy transition away from fossil fuels.  The Russia-Ukraine conflict has shown us the imperative to diversify away from fossil fuels.  It is imperative not only for the planet, but we believe it will drive longer-term investment value as the world makes the changes required to keep climate warming under control.  As the world awakens to this, we will be prepared with our investments aligned with the transition.