The clean-energy transition is accelerating as tangible policy, infrastructure and investments are being made around the globe to meet net-zero carbon emissions by 2050. Alongside being a positive outcome for the environment and community, the shift away from fossil fuels is also a potential opportunity for long-term investors.

2022 was a record year for global investments in clean energy, totally around USD$1.4 trillion, according to the International Energy Agency. 

While the world’s transition to a cleaner economy is still in an early adoption phase, momentum is accelerating with the United Nations Environment Programme stating that “US$4 to $6 trillion a year needs to be invested in renewable energy until 2030 – including investments in technology and infrastructure – to allow us to reach net-zero emissions by 2050”. 

So, how can investors look to capture this potential growth in portfolios? 

[Editor’s Note: Investors should understand the features, benefits and risks of sustainability ETFs before investing in them. Emerging clean-energy trends, such as carbon emission trading schemes, can be volatile and potentially have higher risk for investors. Other trends, such as green hydrogen, are at an early stage in their development and should be considered speculative].

1. Putting a Price Tag on Carbon

Carbon emission trading schemes can be found around the globe, each operating with its own rules. But all of them have the goal to reduce carbon emissions by regulating heavy polluters through tradable permits called carbon allowances (or credits). 

The largest, most robust scheme is the European Union Emissions Trading System which was established in 2005. It strictly enforces carbon emissions in the region by reducing the number of carbon allowances available each year. 

With shrinking supply and significant fines for companies that do not comply to the scheme, carbon allowance demand and prices are on the rise, according to Global X analysis.

At the end of 2022, the European Union announced sweeping changes to its scheme which will further tighten carbon allowance supply. These favourable dynamics, paired with the “feel good” factor of investing in an asset working to actively facilitate the transition to a cleaner economy might be an opportunity for some Australian investors. 

2. Uranium could be the Key to Powering the Energy Transition

The intent to transition to cleaner energy is a positive one, but the challenge is developing and building the infrastructure needed to facilitate the change. In Global X’s opinion, nuclear power has emerged as key in the short to medium term to help solve this for several reasons: 

• A single uranium pellet, slightly larger than a pencil eraser, contains the energy equivalent of a ton of coal, three barrels of oil, or 17,000 cubic feet of natural gas – making nuclear power one of the few sources of electricity that combines large-scale power output and low greenhouse gas emissions, with costs comparable to those of traditional fossil fuel power stations. [1][2] In addition to the power density advantage of uranium, nuclear power also ranks among the cleanest methods of producing electricity, as measured by greenhouse gas emissions.
• Nuclear power contributes approximately 10.4% of the world’s energy supply and approximately one-third of total low-carbon electricity. Capacity is set to increase dramatically in the coming decades, with projections anticipating a 17% rise from current levels by 2035, and another 71.5% by 2050.[3]
• While uranium demand is projected to increase, supply is likely to drop as existing stockpiles deplete and production remains below global requirements – meaning uranium prices could rise over the medium term, in Global X’s opinion.

Despite these upsides it is worth noting a few considerations before investing in uranium and nuclear power. Previously, nuclear technologies – such as weapons – have caused political, environmental and social issues. In light of these concerns, the United Nations Treaty on the Prohibition of Nuclear Weapons (TPNW) was enacted in 2017 to ban nuclear weapon activities, with the ultimate goal to completely eliminate them.[4]

Thankfully, uranium energy technologies have advanced and become more stable in recent decades to address concerns around the safety of nuclear power.

3. Energy Alternatives for a Cleaner Future

While nuclear power is a proven source of energy for the interim, there are numerous longer-term alternatives which are being heavily invested in by businesses and governments around the globe to reach net-zero carbon by 2050. 

Green hydrogen, which is hydrogen generated using renewable energy sources, does not produce carbon emissions and has the potential to power everything from cars to houses. 

Demand for green hydrogen is on the rise. Once an initial investment in specialised infrastructure is complete, the cost of producing this fuel is comparable to fossil fuels. Global X expects that cost to continue to decrease over time.  

You need not look further than Australia’s own backyard to see the tangible effects of climate change policy. Already this year, the Federal Government committed more funds and resources to environmental initiatives including $70 million for a green hydrogen hub in Queensland. 

Green hydrogen is just one of the many transition technologies that  present a potential investment opportunity. Solar, wind and battery tech are becoming more advanced and are set to make up an increasing share of global energy market. According to the International Energy Agency, earnings from these clean energy sources will outpace that of coal by 2040. 

As adoption accelerates, the critical minerals such as lithium, copper, rare earths and cobalt (to name just a few) which are required to build and run clean energy could see an increase in demand in Global X’s opinion. But supply may struggle to keep up – meaning the price of these materials could potentially rise.

Gaining exposure via ETFs

For Australians with a medium to longer-term investment horizon, entering this area of the market now may be a consideration. 

Considering the numerous pathways one can pursue to invest in the decarbonisation transition, it can become an onerous task to individually identify stocks which will give investors desirable returns. 

By selecting an Exchange Traded Fund (ETF) aligned with one or more of these trends, investors can add exposure to sustainability trends to their portfolio. In the case of carbon allowances, individual investors cannot directly access the primary carbon allowance market, meaning ETFs are one of the few ways to gain exposure.

DISCLAIMER

The information provided in this document is general in nature only and does not take into account your personal objectives, financial situations or needs. Before acting on any information in this document, you should consider the appropriateness of the information having regard to your objectives, financial situation or needs and consider seeking independent financial, legal, tax and other relevant advice having regard to your particular circumstances. Any investment decision should only be made after obtaining and considering the relevant PDS and TMD.

Global X Management (AUS) Limited (AFSL Number 466778)