This article was written by Sujeet Banerjee, Product Manager of Sustainable Indices at Bloomberg.
2022 was a tumultuous year for the low-carbon energy transition. Geopolitical conflicts, inflation, supply chain problems, the rising cost of debt, and the fear of looming recession have created a new and challenging investment environment.
One certainty in this tumult: the era of low energy and commodity prices that many thought would last for years to come has come to halt. In this article, we explore three key trends from the transition to a low-carbon economy as redefined by recent events.
Trend 1: For the first time global energy transition investment has matched fossil fuels; a shift in investment toward clean energy that is unlikely to be reversed
Across public markets, notable energy transition investments were made, including equity financing of climate technology, and growing sustainable fixed-income issuance. As per BloombergNEF, in 2022, global energy transition investment totaled $1.1 trillion, up 31% from the prior year and for the first time the figure has reached trillions in par with the investments in fossil fuels. China is the most significant contributor, accounting for just under a half of global energy transition investment. The U.S. is a distant second.
Climate-tech companies raised $119 billion from global public equity markets and private investors in 2022. To capture this trend, Bloomberg and Goldman Sachs designed the Bloomberg Goldman Sachs Global Clean Energy Index to track the performance of global equities that have significant upside exposure to the clean energy sector.
In the fixed-income world, a deepening pool of sustainable bond issuance—both corporate and sovereign—is allowing investors to direct capital toward energy transition. Green bonds, where the proceeds are used for environmental activities like clean energy, remain the most popular sustainable debt instrument, with $572 billion issued in 2022. The Bloomberg US Green Bond Index tracks the universe of 203 US Corporate Green bonds.
Trend 2: Energy security concerns lead to the reshoring of the energy supply and have accelerated the transition efforts
Energy is no longer just a sustainability issue but also a significant security issue for many nations, as many have been driven away from Russian gas and coal supplies while increasing their focus on deploying clean technologies and reducing consumption. More broadly, most major economies aim to accelerate their transition with more solar and wind, carbon capture, and backup power technologies like nuclear, renewable natural gas, batteries, and hydrogen.
Our thematic baskets and indices capture these trends. Popular climate-focused indices include the Bloomberg Electric Vehicles Index, Bloomberg Hydrogen ESG Index, and Bloomberg Bio-Energy ESG Index.
Trend 3: Demand growth for energy transition metals is certain, but supply isn’t
Commodities and electrification metals, in particular, are critical to the energy transition’s success. As mentioned in a previous blog, the theme also extends to commodities. As per BloombergNEF’s 2023 Transitional Metals Outlook, metals worth $10 trillion (in 2022 real dollars) are needed between 2022 and 2050 to reach net-zero emissions goals by 2050. Supply for most metals required for the transition is constrained.
The Bloomberg Electrification Metals index tracks the performance of the six primary electrification metals. The Bloomberg Transitional Commodities index tracks the performance of a broad set of commodities needed for the transition to sustainable energy production. Both of these indices use an innovative weighting methodology. Instead of solely relying on historical data, the index weights are determined using forward-looking assessments by experts on projected supply & demand and their relevance to the energy transition.
Looking Ahead
Delivering energy that’s cheaper, cleaner, and more secure is a monumental challenge. We expect the coming decades to be a period of ingenuity in the energy sector, requiring a broad spectrum of indices to help navigate the transition to a low-carbon economy.
Visit I<GO> on the Terminal or browse our website to find out more about Bloomberg’s Sustainable Indices and request a consultation with an index specialist.
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