Simon Coxeter
Simon Coxeter
Head of Manager Research, Asia Pacific, Mercer

Long at the top of environmental agendas, climate change now features more prominently across political, economic and investment agendas around the world. With energy use contributing three-quarters of global greenhouse gas emissions — and recent geopolitical events reminding us of the fossil fuel supply chain’s inherent vulnerabilities — the shift towards renewables is garnering interest from an expanding spectrum of stakeholders, in what is the most urgent energy transition so far for humankind.
 

At Mercer, we continue our work with investors to mitigate risks and seize opportunities associated with this energy transition, which will be underpinned by an evolving array of elements as we move away from fossil fuels, composed of elements like hydrogen and carbon, towards greater reliance on other elements, like copper and lithium.
 

I recently shared our thoughts on the energy transition at Mercer’s Global Investment Forum in Singapore, beginning by framing the current transition in the context of history.
 

Human development has relied on combustion energy from new materials, with a shift from wood to coal in the 19th century facilitating the Industrial Revolution. Later, oil and gas also became significant energy sources. But it took 60 years for coal to grow from 5% to 50% of global energy consumption, with oil and gas growing from 5% to 40% and 25%, respectively, over a similar length of time.1 Energy transitions take a long time, partly because they require massive infrastructure investment and extensive “system” changes.

 

MercerInsight® Community

Connecting investors for richer insights.


Join our community for complimentary access to Mercer's latest insights and those of the broader asset management industry. Everything you need in one place to help you make informed decisions about your investments.

 

 

With net zero goals ever closer, we simply do not have a long time for this transition. Renewables (ex-hydropower) represented 5% of global energy consumption in 2012, growing to 10% in 2022. So we are moving in the right direction.2 Unfortunately, to meet carbon reduction targets, renewables should supply 45% of energy consumption by 2030.3 Investors have a critical role to play. To reach net zero by 2050, it is estimated that we need an additional US$25 trillion of clean energy investment by 2030.4
 

Separately, there is a popular perception that diversifying away from petrochemicals will finally free us from the geopolitical shackles of fossil fuel location. The Russia-Ukraine crisis provides a recent example of those shackles. National resiliency and energy independence are often celebrated as supplementary benefits of the pivot to renewables, but this glosses over fundamental truths of the energy transition. Although we will eventually be less reliant on the petrochemical supply chain, which is dominated by a few countries, we will become much more reliant on a range of minerals vital to clean energy generation, transmission and storage (also known as “green minerals”).
 

The amount of minerals required for renewables is in many cases a different order of magnitude to that of fossil fuel energy, and most countries will be heavily reliant on other countries for minerals supply. That is before we even consider reliance on other countries for processing these minerals, and fabricating the key equipment needed for clean energy. Given the replacement cycles of components used for renewable energy — such as batteries, wind turbine rotor blades and solar panels — there will be an ongoing need for more minerals, so we may never be liberated from the geopolitical manacles of mineral reserves.5
 

What does all this mean for investors? It makes sense to start with the elements that will underpin the transition, which we can access via investments in green minerals mining companies, for example. With breathtaking increases in demand for green minerals on the horizon, and considering that it can take a decade for a mine to go from discovery to production, it is easy to imagine the investment opportunities and risks that could lie ahead. Exposure to these minerals also bolsters portfolios’ resilience to inflation, which could be valuable with the potential for so-called “greenflation”.
 

Given the geopolitical realities of the green minerals supply chain, investors should consider the strategic alignment between the domicile of mining assets and their home country. Put bluntly, you don’t want all your eggs in your strategic competitor’s basket. In view of the uncertainties ahead, neither should you be too concentrated in any individual market.
 

Many investors are uncomfortable with mining exposure, because it has typically been viewed with antipathy from an ESG perspective. But the green energy transition will not happen without mining companies, many of which are taking a more active approach to sustainability. While it is true that mining is a high emissions industry, an investor’s climate transition plan should be more focused on the emissions of the planet than the emissions of their portfolio.
 

The good news is that some aspects of the energy transition are relatively straightforward, like scaling up wind and solar in certain parts of the world to achieve low-carbon electricity. The bad news is that one-third of emissions come from hard-to-abate sectors like steel, cement, chemicals, aviation and shipping. Fortunately these sectors are only hard to abate, not impossible. Substantial investment and innovation is needed for workable technologies to reach commercial readiness as replacements for fossil fuels, providing investment opportunities across public and private markets, even in hard-to-abate sectors.

In our view, investors should not rely completely on broad market exposures to navigate portfolios through this energy transition. Specialist strategies are better positioned to address strategic gaps in portfolios, forming part of a broad lifecycle of investment opportunities tied to the transition.
 

In the established energy transition sectors there are high-growth and mature-growth opportunities in solar, wind, green minerals and natural gas; accessible via growth private equity, sustainably-themed public equity strategies, and sustainable bonds, for example. There are also early-growth opportunities in storage and other transition infrastructure. At the more innovative end of the lifecycle, there are start-up and research stage opportunities for hydrogen and fusion technologies, which can be accessed through venture capital and research funding. Towards the mature and declining end of the lifecycle, there are investment opportunities in oil and coal, although some investors may choose to access this area opportunistically or avoid it. There are also opportunities across the lifecycle to use less energy — focusing on the demand side of the problem as well as the supply side.
 

The next decade entails a whole new capital investment cycle, with sweeping changes in the ways we generate, store, transmit and use energy resources. This is not just about obvious benefits to the planet and humankind, but also about enhancing investment outcomes, taking a holistic total portfolio approach that acknowledges the need for flexibility in decarbonisation pathways. Even if you are unconvinced about “doing good” for humanity, you cannot afford to ignore the energy transition if you want the best for your portfolio.

1 Our World in Data; Vaclav Smil, Energy and Civilization. A History (Cambridge: MIT Press, 2017); BP Statistical Review of World Energy (2021, 2022); Mercer estimates.

BP Statistical Review of World Energy (2021, 2022); International Energy Agency; Mercer estimates.

Net Zero by 2050: A Roadmap for the Global Energy Sector (International Energy Agency, 2021); Mercer estimates.

Net Zero by 2050: A Roadmap for the Global Energy Sector (International Energy Agency, 2021).

5 Mark P. Mills, Mines, Minerals, and “Green” energy: a reality check (Manhattan Institute, 2020). 


Important Notices

 

References to Mercer shall be construed to include Mercer LLC and/or its associated companies.

 

© 2022 Mercer LLC. All rights reserved.

 

This content may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity without Mercer's prior written permission.

 

Mercer does not provide tax or legal advice. You should contact your tax advisor, accountant and/or attorney before making any decisions with tax or legal implications.

 

This does not constitute an offer to purchase or sell any securities.

 

The findings, ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or capital markets discussed.

 

For Mercer’s conflict of interest disclosures, contact your Mercer representative or view here.

 

This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. Mercer provides recommendations based on the particular client's circumstances, investment objectives and needs. As such, investment results will vary and actual results may differ materially.

 

Information contained herein may have been obtained from a range of third party sources. While the information is believed to be reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential, or incidental damages) for any error, omission or inaccuracy in the data supplied by any third party.

 

Funds of private capital funds are speculative and involve a high degree of risk. Private capital fund managers have total authority over the private capital funds. The use of a single advisor applying similar strategies could mean lack of diversification and, consequentially, higher risk. Funds of private capital funds are not liquid and require investors to commit to funding capital calls over a period of several years; any default on a capital call may result in substantial penalties and/or legal action. An investor could lose all or a substantial amount of his or her investment. There are restrictions on transferring interests in private capital funds. Funds of private capital funds’ fees and expenses may offset private capital funds’ profits. Funds of private capital funds are not required to provide periodic pricing or valuation information to investors. Funds of private capital funds may involve complex tax structures and delays in distributing important tax information. Funds of private capital funds are not subject to the same regulatory requirements as mutual funds. Fund offering may only be made through a Private Placement Memorandum (PPM).

 

Not all services mentioned are available in all jurisdictions. Please contact your Mercer representative for more information.

 

Investment management and advisory services for U.S. clients are provided by Mercer Investments LLC (Mercer Investments). Mercer Investments LLC is registered to do business as “Mercer Investment Advisers LLC” in the following states: Arizona, California, Florida, Illinois, Kentucky, New Jersey, North Carolina, Oklahoma, Pennsylvania, Texas, and West Virginia; as “Mercer Investments LLC (Delaware)” in Georgia; as “Mercer Investments LLC of Delaware” in Louisiana; and “Mercer Investments LLC, a limited liability company of Delaware” in Oregon. Mercer Investments LLC is a federally registered investment adviser under the Investment Advisers Act of 1940, as amended. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Mercer Investments’ Form ADV Part 2A & 2B can be obtained by written request directed to:  Compliance Department, Mercer Investments 99 High Street, Boston, MA 02110.

 

Certain regulated services in Europe are provided by Mercer Global Investments Europe Limited and Mercer Limited.

 

Mercer Global Investments Europe Limited and Mercer Limited are regulated by the Central Bank of Ireland under the European Union (Markets in Financial Instruments) Regulation 2017, as an investment firm. Registered officer: Charlotte House, Charlemont Street, Dublin 2, Ireland. Registered in Ireland No. 416688. Mercer Limited is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 984275. Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU.

 

Investment management services for Canadian investors are provided by Mercer Global Investments Canada Limited. Investment consulting services for Canadian investors are provided by Mercer (Canada) Limited.