How to invest into a multi-trillion dollar megatrend

The global economy is undergoing a profound transformation. From governments to boardrooms, supply chains, industries and energy sources are being rethought and reshaped in fundamental ways.

These seismic changes are being driven by geopolitical and energy security concerns, changing weather patterns, consumer demand, and—more recently—grid constraints stemming from AI’s insatiable demand for power. The movement is picking up in size and speed, and we expect it to accelerate further, providing a compelling opportunity to invest ahead of the curve.

Supported by regulation and driven by private capital, investments into the transition have driven down costs, increasing adoption and bringing the opportunity to a turning point.¹ While investment in this space has, until recently, consisted almost exclusively of early-stage funding of revolutionary technologies, enabling software and infrastructure, today, that’s no longer true. In recent years, the investment opportunity has expanded to require later-stage capital, where market players are looking to scale up operations to meet market demand.

What’s brought us to an inflection

It is estimated that more than $5 trillion in capital will need to be spent annually through 2050 in order to meet global decarbonization targets.²

We believe now is the time to consider investing in the transition, especially in the private markets, for the following reasons:

1. Public policy: The Paris Agreement of 2015 provided a general framework for governments to reduce emissions to hit aggressive global net zero targets. Today, net zero pledges cover 92% of the world’s GDP, and companies connected to this energy transition are supported by more market participants and stronger infrastructure.
2. Private sector support: This shift in public policy was mirrored by a momentous evolution in corporate behavior, a change spurred by new consumer preferences and the need for more efficient and reliable energy sources. Nearly 1,000 corporations have adopted net zero pledges since 2018^3,4, and two thirds of Fortune 500 companies now have a climate commitment.  We view this increased private sector support as critical to fostering investment flows and enhancing the feasibility of the investment opportunity.
3. Declining cost curves: Over the last decade, the cost of photovoltaic (PV) solar power⁵ has declined nearly 90%, making it cost competitive with, and even in some cases cheaper than, the cheapest fossil fuel alternative—even absent subsidies⁶. The cost of electric vehicle batteries has also dropped by about 90%⁷, while the cost of onshore wind has dropped by approximately 70%⁸. These declining cost curves are a key component of the investment thesis, as they lead to mass adoption - enhancing the profitability of decarbonization technologies.
4. The need for energy security and resilient supply chains: Geopolitical tensions and increasing global conflict have made governments ever more aware of the security of their energy sources and supplies. This has prompted a re-examination of supply chains for fossil fuels and other critical materials, spurring a wave of innovation focused on identifying and developing technologies that will increase efficiencies, reduce dependency on single suppliers or geographies, and diversify sources⁹.

The opportunities we’re paying attention to

This opportunity set spans multiple industries, geographies, and sectors, and it is important to note that many of the opportunities include long-term capital commitments and loss of tangible liquidity, as well as operational and technological risks that investors should consider before making an investment.  In an effort to understand the breadth and scope of the opportunity set, we believe it is helpful to delineate its key segments and their relative stages of maturity:

1. Electrification and renewable power generation: The most mature decarbonization sector, this segment includes everything that can be electrified, including renewable power generation, the evolution of the grid, and transportation. Investment opportunities in this space can partially be accessed through public markets, as well as private markets in infrastructure, buyout, and growth.  Emerging technology solutions, such as AI-driven energy management systems and services, are unique to the buyout, growth and venture segments and offer substantial return potential above public markets and infrastructure.
2. Alternative fuels and materials: This segment includes the replacement of fossil-fuels and materials with alternative, cleaner options. While this is a newer investment space, it is a key piece of the transition that includes biofuels¹⁰, drop-in fuels¹¹, hydrogen, and green materials¹².
3. These technologies are gaining traction and present significant investment opportunities as they move towards commercialization. Today, they are primarily available through private market investments in buyout, growth, and venture funds.
4. Carbon removal technologies: For anything that cannot be decarbonized, experts agree that market-based solutions and carbon removal technologies will be needed. These will include carbon markets and carbon capture, storage and sequestration technologies. This segment features a mix of older technologies with more moderate return profiles, which can be accessed through timber investments and through investments in more traditional segments of the energy sector, as well as emerging technologies within the venture segments that offer the potential for long-term significant investment returns. It also includes carbon markets, which are experiencing renewed growth and investment interest as companies and consumers look for reliable and transparent solutions for hard-to-abate and unavoidable emissions. 

The different stages of maturity of these sub-sectors have two major implications for investors looking to access the theme.

First, this is primarily a private markets opportunity today. An investor seeking access in public markets will find a limited set of options, primarily concentrated in the renewable energy, electric vehicle (“EV”) and battery sectors. These represent only a portion of both the financial return and investment opportunity. Investors will hear echoes of tech investing in the early 1990s, when the companies that went on to define the market were at their beginning of their ascent but not yet accessible through the stock market.

Secondly, as noted earlier, most private market investments in these areas has been concentrated earlier in the capital stack. This has allowed winning business models to grow into companies that are now ready to scale and meet the market opportunity. However, the funding needed to support their growth has not yet emerged at the scale needed. This has given rise to the rather pessimistic terms of the “Missing Middle” or the “Valley of Death.” We prefer to view it more pragmatically—a “Mountain of Opportunity”—and as a potential source of significant returns for investors who have the ability to allocate capital strategically.

We can help

At J.P. Morgan, we aim to deliver ideas and insights that help our clients navigate and invest in the future. If you have questions about investing in the ongoing revolution in the green economy, contact your J.P. Morgan team.