World pivots to energy independence

The ongoing global energy crisis has been exacerbated by the current geopolitical turmoil between Russia and Ukraine.
This has brought to the forefront our huge dependency on fossil fuels and the challenges associated with weaning away from traditional sources of energy. It has also led to speculation about the future of fossil fuels and renewables. In this commentary, we address several aspects that are propelling the energy transition to renewables and the multi-decade investment opportunity they present.

A key milestone for renewables

A recent BBC news report is an indicator of both good and sombre news in the ongoing fight against climate change and greenhouse gas emissions. The good news: for the first time, renewable sources (wind & solar) of energy accounted for more than 10% of the total global electricity generated. This is a major milestone for wind and solar, the two fastest growing sources of renewables that are likely to lead the transition away from fossil fuels. The sombre news: the report highlights the limited progress achieved despite many decades of effort and the long list of challenges in transforming the energy mix currently leaning heavily on fossil fuels. Renewables require massive investments, and strong support from governments and regulators. It may take a while before the scales tilt in favour of renewables.

Source: www.bbc.com/news/science-environment-60917445

Wind and solar generated a tenth of global electricity for the first time

The Net Zero initiative

Many of us have heard the term ‘net zero’, but what exactly does it signify? In simple terms, net zero refers to the balance between the amount of greenhouse gases produced and the amount removed from the atmosphere. We reach net zero when the amount of greenhouse gases we add is no more than the amount taken away*.

At the UN Climate Change Conference in 2015, the Paris Agreement was reached to move towards carbon neutrality by the second half of the 21st Century (2050), to mitigate the effects of climate change. The recently held COP26 summit again highlighted the commitment to net zero and the challenges as emerging markets like China and India negotiated for the timeline. As of 2 November 2021, over 140 countries had announced or are considering net zero targets, covering 90% of global emissions, compared to the 130 countries, covering about 70% emissions, in May 2021.

Energy Independence

While Climate change has been a big theme driving policy, energy security has now become the second pillar driving the energy transition in the wake of the Ukraine invasion. European leaders know they must now reduce their reliance on Russian gas, and this will result in faster adoption of wind and solar installations. Wind, solar, storage and green hydrogen will play a key role in ensuring the continent becomes less dependent on Russian gas. Already, European leaders have pledged to reduce Russian gas consumption by two thirds by the end of 2023. We have also seen some responses from both the EU and other countries that indicate accelerated spending on the energy transition. As a result, European companies may benefit from transition in energy strategy. In the past month alone, we have seen the following policy announcements which deepens our conviction in the opportunity.

Sun Life KBI Sustainable Infrastructure¹

The convergence of these diverse factors can translate into a favourable tailwind for investors looking for a multi-decade investment opportunity. Investors could also benefit from looking beyond popular over-owned sectors such as Technology and Communication Services to diversify into new opportunities. The Sun Life KBI Sustainable Infrastructure may be the answer they need at this moment. The fund can provide investors the following:

• An avenue to invest into new end markets within Renewable Energy
• Participation in the entire value chain and not just one sleeve (power generation)
• Diversification beyond home market and be closer to key markets which benefit the most from the opportunity
• The ability to combat inflation and manage a rising interest rate environment
• A seasoned and experienced team of portfolio managers

Participate in the entire value chain through portfolio allocation to various end markets

Benefits from global diversification by being closer to the action!

The Sun Life KBI Sustainable Infrastructure has the highest weighting to Europe across the three focus areas of sustainable infrastructure in part because the continent has the most ambitious emission reduction targets and the most supportive clean energy policy. The energy transition is a global theme but one which has gained the most traction across European countries.

To reiterate the investment opportunity, critical infrastructure related to food, water and clean energy are currently undergoing a transition. Sun Life KBI Sustainable Infrastructure is forward-looking, and investing in under-owned infrastructure assets in these three areas. Investing in these firms could mean reaping similar benefits associated with investing in traditional infrastructure firms – monopolistic advantages that come with regulatory support, long term contractual business, low volatility of earnings, quality of assets and management, stable and predictable cash flow. Such companies also help the fund deliver long-term capital appreciation and inflation protection while also generating income.