Facing a zero carbon future: climate change, engagement and energy transition

Rebecca Tomes reports on M&G’s recent ESG roundtable event, which explored why now is the time for asset managers and investors to be bold in their actions to drive change towards a zero carbon world

Environmental, Social, Governance (ESG) is front and centre of investment decisions at the moment and shows no signs of slowing as we look to the future of the investment industry. Increasing considerations of ESG are now being seen around the world – evident, for example, in many corporate decisions – to address climate change and help reverse the devastating effects that will inevitably follow.

M&G Investments are at the forefront of investment companies demanding that the industry plays its part in confronting the climate crisis; recently holding a virtual event on ‘climate change, engagement and the energy transition’ which addresses this. The event was hosted by M&G’s experienced portfolio manager, Randeep Somel, who has worked in the company for over fifteen years and now manages M&G’s Climate Solutions Fund. Randeep shares his own expertise, whilst also steering the discussion and eliciting comment from Alex Araujo, Manager of The M&G Global Themes Fund and The M&G Global Listed Infrastructure Fund, and Rupert Krefting, Head of Corporate Finance and Stewardship at M&G Investments.

The event comprised three main themes:

1. The climate
2. The requirement for green infrastructure
3. How M&G as an asset manager and asset owner engages with companies.

The case for infrastructure

Kicking off the conversation, Randeep asked Alex Araujo to explain the role infrastructure plays in the conversation around climate change. Alex argues that infrastructure is “an unruly asset class” in that the various sectors that represent it are largely the source of the problem. For example, Alex identifies energy and electricity generation and transportation as being primary contributors to greenhouse gas emissions, which are very much associated with infrastructure. Alex then turns this argument on its head by recognising that despite the threat infrastructure poses to the climate, it is also at the centre of the solution: bearing exciting opportunities in the energy transition, particularly with regards to electricity generation.

Alex asserts that there are many companies with asset bases that need to be transitioned: this providing big opportunities for contribution to the energy transition, as well as for capital and investment returns for investors backing these transition businesses. He goes further to argue that companies deploying renewable energy whilst at the same time also decommissioning carbon-intensive forms of energy generation are playing the greatest role in the energy transition as they are, as summarised by Alex, “helping both sides of the balance sheet – decommissioning on one side and replacing with another”.

Alex identifies decarbonising initiatives as a particularly important element of the energy transition, as he claims that pure renewables alone cannot replace all existing fossil fuel-based power supply. He says: “It’s really about transitioning the energy mix.

“Renewables can’t fill the gap all at once, we need transition fuels, things like natural gas as a less dirty or less offensive form of electricity generation”.

Alex also looks to the future and forecasts a reliance on new, clean fuels, such as green hydrogen, to aid the energy transition. Although this technology is currently in its infancy and not economic to scale as of yet, it represents a promising climate solution. In addition, Alex states that Governments and policymakers are often driving initiatives, which results in good returns in order to incentivise investment and propel the transition. Therefore, infrastructure businesses will undertake much of the required investment – which, according to Bloomberg New Energy Finance, is $92 Trillion – due to the healthy investment returns promised.

In terms of where M&G are currently investing, Alex comments that “renewable energy is key”, and that returns are expected to be robust. He recognises that selectivity is important, as on-shore solar, for example, is commoditised and has low returns, but on the other side of the coin, off-shore wind – in which the UK is a market leader – is a renewable energy source providing healthy returns to investors. Alex calls attention to large scale deployments as another great opportunity for investors. For example, there is an urgent need for investment in improving infrastructure and protecting against climate change-related events.

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