Investing in the future of energy - what awaits us? Peter Garnry [Interview]

Green energy has become extremely fashionable, but even indispensable. However, its market share is still too small compared to other methods of obtaining energy. What trends can we expect in the future? Saxo Bank's Director of Equity Strategies, Peter Garnry, answers a series of questions about the future of the energy and energy industry in the face of the green transition.

About the Author

Peter potter - director of equity markets strategy in Saxo Bank. Develops investment strategies and analyzes of the stock market as well as individual companies, using statistical methods and models. Garnry creates Alpha Picks for Saxo Bank, a monthly magazine in which the most attractive companies in the US, Europe and Asia are selected. It also contributes to Saxo Bank's quarterly and annual forecasts "Shocking forecasts". He regularly gives comments on television, including CNBC and Bloomberg TV.

Shares of companies from the "green energy" industry

We hear about green transformation everywhere and it is an important topic in the markets as well. However, how would you, as an investor, get involved in the green energy sector?

Peter Garry: The answer is simply some diversification. As with any other industry, it's quite difficult not only to choose the best technology, but also the long-term winner. It is feasible, but it takes a lot of work, and sometimes you have to change your mind over time as your moods change. Basically we have two options to build a diversified portfolio within this sector: the first is to choose a listed fund - ETFthat offers an exposure to renewable energy such as iShares Global Clean Energy. The second option is to look for inspiration elsewhere, such as ours basket of green transformation. However, such a solution requires a bit more work and it is worth emphasizing that our definition of green transformation is not limited to green energy as such.

Check it out: The 5 most profitable ETFs in the renewable energy industry

Speaking of which, how do you define green actions?

PG: The key criterion is whether the stocks have a net positive environmental impact. We live in a world where we are moving towards net zero carbon emissions around 2050/2060, depending on the country. In order for a given action to be considered "green", it must positively influence the achievement of this goal. In our basket of green transformation, we also have companies that operate in an area that can be described as environmental services. These can be companies that help purify water, recycle certain materials, etc., which we believe is good for the planet - and of course we have companies that produce low-carbon energy such as wind, solar, etc.

Why was the green energy sector underperforming the fossil fuel sector in 2021?

PG: First of all, if you look at the last two years from a slightly broader perspective, green energy achieves much better results than its "black" counterparts. The discrepancy that in 2021 we have a strong emphasis on ecology on the one hand and the green transition sector is performing worse than traditional energy stocks on the other hand, should be seen as a short-term transition rather than a trend. Last year was a breakthrough for the green energy sector, which translated into higher valuations, while the Covid-19 crisis had a strong negative impact mainly on the oil industry. As a result, at the beginning of 2021, the oil and gas industry was valued low, while the green industry was valued high. If we add to this the rising prices of raw materials in 2021, which negatively affected the production of green energy infrastructure, such as windmills or solar panels, which are characterized by higher production costs, we will get an answer to the question why black energy has outpaced green despite a strong emphasis on solutions. environment friendly. These factors will balance out over time and therefore should not be seen as anything more than a short-term technical stumble.

Overall, what are the pros and cons of investing in green energy equities?

PG: The historical advantage of the green energy sector is that every great leap in recent human history has been initiated by innovation that has led to some of the largest economic sectors in the world. We are convinced that in the future the environmental challenges faced by our planet will be solved by the largest companies in the world. Like today's largest companies, they played a key role and implemented important innovations in the areas of information technology, mobile technology, energy and transport. When mankind faces a challenge, there will always be someone who comes up with new solutions and makes money from it.

Investing in the green energy sector becomes difficult when we want to move towards a very specific technology or when we have a short time horizon. There are many different sources of energy that can win this race - wind, sun, hydropower, even nuclear or fusion power - but today it is very difficult to predict which technologies will take the lead. At the same time, we witnessed the bursting of speculative bubbles in the green energy industry, including in 2007/2008 and this will be the case again. Therefore, it is in fact an industry in which investors will only benefit from diversification and a long time horizon.

It also seems that we should be careful about the phenomenon referred to as "eco-consciousness" or greenwashing. What is it about?

PG: To answer this question, let me quote Berkshire Hathaway vice president Charlie Munger, who said "show me an incentive and I will show you the result." It is clear that nowadays companies are encouraged to be eco. And that's a good thing, of course. However, it also carries the risk that companies will start to pretend to be green, even though they are not - and the overall management system in this regard is still at a relatively early stage. This is where the concept of eco-friendly lie comes from, that is greenwashing. This is the operation of companies that claim to be green without real evidence. This is a phenomenon that not only investors, but all people should be aware of.

Which Green Transition Actions were the most successful in 2021? 

PG: It was quite a dramatic year for the green sector. Solar energy has suffered relatively hard this year, mainly due to rising commodity prices, which negatively affected all sectors of energy production. The most successful areas of green transformation in 2021 are the green transformation services sector and the battery and energy storage industries, which makes sense as it is linked to the development of the electric vehicle industry.

Despite the strong shift towards clean energy, it still seems that companies in the fossil fuel industries such as mining, gas and oil are considered to be among the best investments. Why is it like that?

PG: As I mentioned before, the correction we are seeing in 2021 between the fossil fuel industry and green energy should be seen as a technical transitional event and not as a future trend. That said, it is not realistic to assume that oil and gas will go out of date in the near future. These raw materials will remain an indispensable element of our everyday life for many years to come.

What do you think will be the next breakthrough in green energy?

PG: In mid-August, I had a discussion with Vestas CEO Henrik Andersen and with our investment director, Steen Jakobsen. We wondered if the windmills are already close to their maximum size. Henrik did not share this view, and he knows the industry better than anyone else, but at some point the wind will reach its limits. The same goes for hydropower - most of the world's best power stations are already used up. With regard to solar energy, there are numerous opportunities to be seized, the path to developing more efficient solar panels is already charted and the potential is huge, even if it is currently under pressure from rising raw material prices. I believe that nuclear energy is also gaining ground and the EU is starting to convince itself to use it as a green energy source because it does not involve CO emissions₂. In my opinion, however, although the work on it has been going on for a long time, fusion energy may be a code that we should break. Deciphering this code would provide us with an energy source of enormous potential.

Macroeconomic approach

From a macroeconomic perspective, reducing the global carbon footprint is important, but can turn out to be very costly. How could this affect governments and ordinary people financially?

PG: Overall, green transition rests on two pillars: the rapid growth of renewables and the electrification of society, which includes many sub-pillars, but electric vehicles are now the main one. Of course, this can affect the way we live, e.g. by using electric cars. However, from a financial perspective, I fully agree with BlackRock CEO Larry Fink, who said that the transition to green energy is the area of ​​economic development that puts the greatest pressure on inflation. So, in this sense, transformation can contribute to an overall increase in prices in society. We are already seeing an increase in inflation, but the energy transformation may push it up even more. Nevertheless, I do not believe that the period of price increases due to the switch to environmentally friendly solutions will be very long. At the same time, we must remember that climate change as such comes at a high price. Droughts, floods, fires and other natural disasters caused by global warming are not cheap. Therefore, although this calculation is difficult, we must remember that it is the relative cost difference of the two scenarios that reflects the real cost of switching to green energy.

Do investors have reasons to be afraid of investing in green energy solutions that are heavily subsidized by governments?

PG: Everything must be profitable in the long run, but as an investor I would like to look at it from the other side. The places where governments subsidize such projects are areas they want to prioritize, and are therefore places to earn money.

Can the "green revolution" contribute to employment growth? Could Britain face a revolution in skilled jobs, particularly in former industrial districts?

PG: The history of economics shows that it is constantly changing and evolving, and there is no doubt that changing energy sources will result in layoffs in some industries and vacancies in others. I believe that the green transition will have a net positive impact on job creation. There will be a need for workers in the oil and gas industry for many years to come, and the skills needed in these sectors should easily translate into work in the green energy sector. There are therefore every reason to see the green transition as an opportunity to create more jobs for skilled workers.