Investment Strategy

How can you invest in the great transition to clean energy?

Nov 17, 2021

There may still be significant pockets of promise for those who are clear-eyed about where we are now and where we’re headed.

David Stubbs, Global Head of Cross-Asset Thematic Strategy, J.P. Morgan Private Bank

Ian Schaeffer, Global Market Strategist

Patricia Behling, Equity Strategist

 

Global leaders’ message at the 26th U.N. Climate Change Conference of the Parties in Glasgow this November was clear: We need to act now—and quickly—to avoid coming climate-change disasters. 

Will we? That’s the question U.S. President Joe Biden put to fellow leaders at the conference, asking: “Will we seize the enormous opportunity before us? Or will we condemn future generations to suffer?”

In the run up to the conference, some serious pledges were made. The U.S., EU and Japan are now committed to reach net zero by 2050. China is aiming to get there by 2060.

The conference did make significant progress.  The final agreement sets out a vision for a world that radically cuts back coal usage, eliminates fossil-fuel subsidies and commits governments to the most ambitious targets of the Paris Agreement. In short, it creates an even stronger tailwind behind the clean energy transition.

Meanwhile, companies around the world are responding with their own emission targets. More than 65% of companies in the S&P 500, making up more than 80% of market capitalization, have announced an emissions target.1

But to actually meet promised targets, the world must fundamentally change how humanity consumes energy. Here, we take a quick look at where the world is now in its transition to clean energy. We also focus on two key areas that are likely to provide investors with real opportunities: semiconductors and green buildings.2

Update: Where we are now in the transition to clean energy

The scientific consensus is that—to keep global warming to 1.5°C above pre-industrial levels—the world should reach net-zero carbon emissions by 2050. To do that, almost 90% of global electricity generation in 2050 must come from renewable sources. Staying on track for this goal means that, in the next eight years alone, wind and solar capacity will have to increase fourfold, according to the International Energy Agency (IEA).3

To stay on track to net-zero emissions, global renewable capacity additions must accelerate dramatically

Global historical rates of installed wind and solar capacity

Source: BP, IEA, OWID, JPMAM. 2020.
This chart shows the historical capacity additions of wind and solar energy in watts per year per capita from 1996 through 2020. The chart also shows the International Energy Agency (IEA) assumed build out for 2030. In 1996, capacity additions per year per capita were 0.27. The rate steadily and slowly climbed through 2007 when the rate reached 3.08. After 2007, capacity additions per year per capita began to increase at an increasing rate through 2012, when it reached 10.72. Capacity additions decreased slightly in 2013 to 9.35 before climbing again. Capacity additions climbed steadily from 2013 through 2019 to reach 20.26. The data peaks in 2020 at 30.50 capacity additions. The IEA assumed build out for 2030 is 130.86. There is no data shown for 2021 through 2029.

Economics now support a rapid transition. The cost of wind and solar technologies has fallen rapidly, making them now the cheapest sources of incremental additions to electricity generation (without subsidies).4

Meanwhile, many governments are pushing for faster adoption of renewable energy generation and are committing significant amounts of investments to finance this transition. It seems to be working. Already this year, renewables are expected to account for 70% of the total $530 billion spent on global new power generation capacity.5

Renewable sources will soon be the cheapest option for power generation

Estimated cost of Electricty generation in $/MWh after US renewable subsidey renmoval (2023)

Source: Nextera Energy 2019, EIA 2019
This chart shows the estimated cost of electricity generation in U.S. dollars per megawatt hour (MWh) after the U.S. renewable energy subsidy is removed in 2023. The data is broken down into two distinct categories: (1) generation and (2) storage. The data is shown for five categories: existing coal, existing nuclear, new natural gas carbon capture, new solar, and new wind. Existing coal and existing nuclear both have a cost of 42.5 dollars per MWh in generation with zero storage costs. New natural gas has a generation cost of 35 dollars per MWh with zero storage cost. New solar has a total cost of 35 dollars per MWh with 25 dollars of generation and 10 dollars of storage cost. New wind has a total cost of 25 dollars per MWh with 17.5 dollars of generations and 7.5 dollars of storage cost.

Still, more may be needed soon. If we want to keep 1.5°C within reach, the IEA estimates, global annual investments in clean energy projects and infrastructure must reach nearly $4 trillion by 2030.6 Clearly, such a financial commitment would significantly increase market opportunities for the companies involved in this transition. Indeed by some estimates the global investible market in renewable energy is likely to grow at an annual pace of at least 8% though out this decade.7

Investors have noticed. Since January 2020 alone, the S&P Clean Energy Index ETF has gained close to 105%, compared to a 44% return on the broad U.S. market (S&P 500).8 Despite these strong returns we believe the theme has further potential.

Two key areas in the clean energy ecosystem we find particularly interesting are semiconductors and green buildings.

Semiconductors—look at the big picture

Semiconductors have been in the news a lot, as shortages have been causing production delays and countries around the world have been vowing to on-shore. These issues are significant.

But the role that semiconductors will play in any successful energy transition is under appreciated by investors. Three examples show how intertwined semiconductors are with our technological future and the energy requirement that future will demand:

  1. Perhaps the biggest area, and interdependence, is in the field of artificial intelligence (A.I.). Semiconductors are essential for interpreting data to train A.I. systems, and then guide A.I. decisions by generating inferences about the future. Training a single A.I. model can cause carbon emissions equivalent to the lifetime emissions of five cars.9

    Without significant innovation, A.I. will require a dramatic rise in energy requirements. Indeed, some estimates see the 2025 power requirements for A.I. training and inference as exceeding more than 10% of global electricity supply (which is roughly Europe’s entire, current electricity usage).
  2. Only 30.4% of primary energy is truly usable after losses from both transformation and conversion.10 Semiconductor’s power efficiency will matter greatly, given they are set to be the key element for the majority of electronic systems, serving communications, signal processing, computing and control applications in both the consumer and industrial markets for the foreseeable future.

    Without innovations to semi-conductors, the primary energy requirements for the world’s growing population will spiral beyond the planet’s capacity.
  3. The need for semiconductors will rise exponentially as smart and electric vehicles (EVs) gain an ever-greater share of the global vehicle fleet.  Already today, electronics account for 40% of the total cost of a car, up from 18% in 2000. This is just the beginning.

    As autonomous driving features become more prevalent, the demand for semiconductors will increase dramatically to power all the necessary cameras, radar sensors, light detection and ranging (LIDAR) units and computer systems. Observers expect a three-fold increase in semiconductor sales revenues for the automotive industry between 2020 and 2025 alone.11

    Even if the transition to EVs from ICE vehicles is slower (as our firm has suggested may be the case12), the demand for semiconductors from automobiles is likely to be insatiable in coming years.

Despite the powerful link between sustainability and semiconductors, the semiconductor sector does face some near-term risks as short-term supply-chain disruptions affect different companies to varying degrees. For investors, active management in this sector is crucial.

Green buildings

Buildings account for a staggering 38% of global carbon dioxide gas emissions (counting building construction and operation). Indeed, in most major metropolises today, buildings are the largest single source of emissions.13  Clearly, it will be difficult to meet the goals of the 2015 Paris Agreement without almost all major buildings on earth being net zero by 2050.14

Shifting to green buildings is already top of mind for the real estate sector, thanks to growing environmental pressures from the public and policymakers. And there are many ways commercial and residential buildings can achieve greater energy efficiency; for example:

  • Using more sustainable construction materials that are designed to be more energy-, water- and resource-efficient
  • Installing efficient HVAC systems, higher-grade insulation, and energy-efficient lighting
  • Incorporating smart devices and digital infrastructure to gain access to vast sums of data that could improve building efficiency (particularly for commercial buildings)

A major shift to green buildings could take place over the coming years, creating real opportunities for investors. Real estate companies already are finding that the increased upfront costs of more sustainable construction methods and materials can lead to significant reductions in operational costs.15 It is estimated that by 2028, there could be more than four billion smart devices in commercial buildings worldwide.16 Real estate companies are expected to leverage data from smart devices to improve the efficiency of existing buildings and improve construction for future buildings.

Policymakers also are paying close attention. The G7 countries have allocated over $267 billion in post-COVID stimulus towards a greener and more equitable recovery , which includes more than $51 billion in stimulus specifically targeted towards “greening” buildings.17

For investors, these trends mean…

Remaking and saving the world is an exciting, even noble venture. Investing wisely in energy’s “Great Transition” requires a careful look at renewables, e-mobility, greener buildings and other enabling technologies. It also means finding those companies and funds that have exposure to these trends and are best placed to benefit from the tail wind of technological change, growing policy support and shifting social attitudes.

Your J.P. Morgan team is available to help you identify opportunities in the great energy transition that align with your personal long-term goals.

1 According to Refinitiv, an American-British global provider of financial market data and infrastructure. Morgan Stanley, Refinitiv. (2021). https://ny.matrix.ms.com/eqr/article/webapp/885fbb1e-2143-11ec-b650-75bc2cd14629?ch=rpext&sch=tr

2 See also our firm’s flagship annual energy paper: the 11th Annual Energy Paper  by Michael Cembalest, which earlier this year examined the broad situation with global energy markets.

3 Net Zero by 2050, International Energy Agency (2021).

4 Nextera (2019); EIA (2019). However, it is important to remember that the real world cost of adding renewables will rise as they represent a larger share of energy generation. Renewables also have built-in added costs as their intermittent generation of energy needs to offset by either: massive battery storage capacity, excess renewable capacity to ensure batteries are keep charged, or redundant base load capacity (as back up when renewable generation slows).

5 World Energy Investment 2021, International Energy Agency (2021).  

6 World Energy Outlook 2021, International Energy Agency (2021).

7 Renewable Energy Market, Allied Market Research (September 2021).  

8 As of November 11, 2021.

9Energy and Policy Considerations for Deep Learning in NLP,” Emma Strubell, Ananya Ganesh, and Andrew McCallum, The 57th Annual Meeting of the Association for Computational Linguistics (ACL). Florence, Italy (July 2019).

10 Pictet Asset Management.

11 Bank of America Research, Gartner (2019).

12 11th Annual Energy Paper, Michael Cembalest, J.P. Morgan.

13 “The path to a greener future begins in our cities,” World Economic Forum (March 2021). Building construction accounted for 10% of carbon dioxide (CO2) emissions globally in 2017, while the amount of CO2 emitted during typical daily building use accounted for an additional 28% of total CO2 emissions.

14 “From Thousands to Billions - Coordinated Action towards 100% Net Zero Carbon Buildings by 2050,” World Green Building Council (2017).

15 In a newly constructed building, a an increase of 20 percent in construction costs for sustainable and efficiency purposes can lead to 30 percent reduction in operational costs over three years, yielding an overall decrease of 10 percent in the total cost of ownership of the building. “Urban Future With a Purpose,” Deloitte,(September 2021).

16 “Hype Cycle for Smart City Technologies and Solutions,” Gartner (2019).

17 BloombergNEF, “Building on Cities to Deliver a Green and Just Recovery.” September 2021.

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To learn more about J.P. Morgan’s investment business, including our accounts, products and services, as well as our relationship with you, please review our J.P. Morgan Securities LLC Form CRS and Guide to Investment Services and Brokerage Products

 

JPMorgan Chase Bank, N.A. and its affiliates (collectively "JPMCB") offer investment products, which may include bank-managed accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC ("JPMS"), a member of FINRA and SIPC. Annuities are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. JPMCB, JPMS and CIA are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states. Please read the Legal Disclaimer in conjunction with these pages.

INVESTMENT AND INSURANCE PRODUCTS ARE: • NOT FDIC INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED

Equal Housing Lender Icon Bank deposit products, such as checking, savings and bank lending and related services are offered by JPMorgan Chase Bank, N.A. Member FDIC. Not a commitment to lend. All extensions of credit are subject to credit approval.