Today as high as 80 percent of all global energy demand comes from fossil fuels. This includes primarily oil, natural gas and coal. Investors are increasingly looking for options that integrate environmental, social and governance (ESG) factors, thus providing sustainable investment avenues.
In fact, the total value of funds that have integrated ESG factors into their investment process has quadrupled since 2014 to $485 billion as of April 2019, according to data provider EPFR Global and the Wall Street Journal.
All across the board from hedge funds and sovereign wealth to private equity, exchange traded funds (ETFs) and mutual funds, investors and financial asset managers are beginning to plan for both profit and loss affected by climate change over the long term. Interestingly enough, a drive to earn the highest returns while minimizing risk has become the impetus for investing sustainably, more than any conscientious objections to fossil fuels. Large funds such as BlackRock Inc., that manages over $6 trilllion in assets, have launched their own sustainable equity ETFs and are actively identifying clean energy investment funds that are potential winners in the future.
Investing in Clean Energy
While investment based on new models for clean energy and mitigating climate change poses risks, it is increasingly being adopted by funds worldwide that are eager to adapt and to also benefit from the shifting tide towards clean energy.
Investments in clean energy fuels have surged in the last three years, particularly in the Asia-Pacific region, but also worldwide.
Global Energy Consumption
Energy consumption has grown considerably due to both economic and population growth in the Asia-Pacific region. Today China is the world’s largest energy consumer, followed by the United States and then large emerging economies such as India and Indonesia, according to data compiled by Bloomberg over the last forty years. Almost all this energy is fueled by fossil fuels that release carbon dioxide into the earth’s climate.
Demand for Oil in Emerging Economies
Oil demand worldwide has surged to meet growing population demands in Asia, rising by 1.2 million barrels per day (mbd) every year for the last 28 years, according to data from International Energy Agency’s New Policies Scenario (IEA NPS). There are roughly 1.1 billion cars around the world today that are all powered by oil. The number of cars on the road in the future is expected to rise by as much as 80 percent by 2040. Oil as an asset class will continue to provide positive returns in these regions. While geopolitical factors such as OPEC control over oil pricing and distribution and lobbyists continue to exert strong influences over oil consumption, other polluting fossil fuels such as coal may be on the way out in the next two decades as harnessing natural gas and renewable energy sources continue to expand.
As electric vehicles (EV) become more mainstream, technology becomes more efficient leading to less energy waste and clean energy options become more viable, the demand for oil and gas is expected to go down in the next 20 years. The demand for electricity for transportation is expected to increase at 7.2% compound annual growth rate (CAGR) from 2017 to 2040 as compared to oil at a 0.6% CAGR over the same period of time.