Opportunities for institutional investors from the energy transition

Along with big risks comes the need for solutions and companies that provide those solutions, said Edward Lees, co-lead and portfolio manager at BNP Paribas Asset Management, when speaking at the Canadian Investment Review’s Investment Innovation Conference in November.

Although in the current environment the coronavirus has been top of mind, climate issues have not gone away, he said. “In fact, they’re looming large in the background and we’ve seen a lot of headlines to that effect this year.”

The coronavirus has demonstrated that it’s important to act early when faced with an existential threat. “You don’t want to let that fester. But when you do, and I think this is the silver lining of the coronavirus experience that we’ve had this year, the world can really pull together and make dramatic changes in a very quick order in ways that it didn’t think [were] possible before. . . . And I think those are very useful lessons to remember as we will get ready to tackle ultimately the much larger challenge of climate change.”

The world’s population is growing and that means more demand for resources such as energy and water. Further, the growing population will mean increased emissions and use of resources. And studies have shown that the world is using resources at a rate that would require 1.6 earths to support it sustainably, Lees said.

Politicians are taking note of climate issues, he added, sharing examples of various jurisdictions that are putting emissions-reduction targets in place and targeting environmentally friendly initiatives, like green hydrogen, when spending.

Lees noted that the big push toward environmentally friendly policies will create a structural growth story for many companies operating in the space involved in finding environmental solutions.

Companies involved in finding solutions will see inflows and browner incumbent industries will be disrupted, he added. “There’s capital flows both ways and these are things that will create opportunities for investors when you’re on the right side of those capital flows.”

When looking at various themes for investment, there’s an opportunity for alpha through both stock research and picking, but also in understanding the macro-environment, Lees said.

“Increasingly there have been a lot of inflows in this area and a lot of passive money, a lot of [exchange-traded] fund flows. That can stretch the valuation of companies that are lower on the quality scale.”

Along with increased excitement about an area, more investors who may be less educated will come in. “I think that increases the importance of making sure that you take an active approach and that you embrace active management. You have people that are really looking at the companies, to make sure that they make sense.”