Energy transition: Accelerating investment opportunities

New technologies are accelerating the renewable energy transition while reducing environmental impacts. The renewable energy sources of today and the future require new and smarter technologies as well as the rapid creation of new infrastructure. We hope you find the perspectives from across our specialist investment managers insightful, thought provoking, and even encouraging.
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Foreword

As you read this, be it on screen or old-fashioned paper, sitting down with a cup of tea, hot from the kettle, with perhaps a slice of cake or piece of fruit, you are in the midst of the global energy transformation. Energy powers everything in the room in which you sit and is critical to the production of most of the things that fill that room.

The source of energy—its reliability, affordability and impact on climate change—puts us at the heart of complex and urgent challenges. The first industrial revolution brought prosperity to many as we drew upon an ancient store of carbon laid below ground over 300 million years ago. The trees and other plants that covered the earth for eons were buried under rock at great pressure to form coal, oil and gas. Happily, in the evolutionary arc of change, this   was before microbes came along, so this precious store of organic material did not decompose. It was transformed under pressure, and we stumbled across it in an extraordinarily recent stage in human history.

We started tapping into those sources of energy just 300 years ago, and now around 80% of our world energy supply is taken from that extraordinary Carboniferous Period, well named for the familiar carbon element.

Although this may be an ancient source, we’ve transformed our world in a short time through its use. Now there is a mighty task ahead. Many scientists tell us, and world governments agree, that we need to shift to low and net-zero carbon in a little less than 30 years.

Arguably, this is currently humanity’s greatest challenge. Meeting this will likely require all sides to pull together. The invisible hand of the market can play its part clasped with the visible hand of policy. Both are informed by, and reliant upon, innovation to bring forward the technology we need. Civil societies will buttress both the policy measures of their governments and also provide the bulk of the finance needed as they channel their savings to pay for vitally important financial goals.

It is a complex, global partnership at work, in which investors have a critical role given the capital needed to fund this transition. It also provides us with a tremendous opportunity. This opportunity is financial, as meeting the demands of the energy transition brings new potential for generating the risk-adjusted returns that sustainable investment demands. As a fiduciary, we must make decisions that have a foundation in economics and that seek to ensure the best outcomes for our clients.

This new collection of papers from our Franklin Templeton Institute will help us navigate this transition in the global financial markets that is transforming our understanding of how we ensure those risk-adjusted returns are generated. It’s important to point out this piece represents a cross section of our specialist investment teams, all of which have autonomous investment processes and decision-making—this breadth of investment perspectives is one of the strengths of Franklin Templeton. We write this with humility, as we all are navigating quickly changing environments. As such, we can’t cover every aspect of energy transition, or even cover each technology or proposed solution at stake fully. Without hesitation, we face headwinds, but we cannot turn around—we choose to tack into the wind.

We know this requires stewardship of not only financial but also natural and human capital. In simple terms, it reflects the potential for reframing our strategies around people, planet and prosperity. This approach is set out with clarity in the preamble to the 2015 Paris Agreement, which provides the Climate Action framework and action plans of the United Nations’ Sustainable Development Goals, agreed to the following spring by 196 governments. Those signatures to the treaty—and it important to note the Paris Agreement is an international treaty—provide the license to operate.

I hope your tea has not gone cold as you read this. Put the kettle back on and settle in to reading how finance is working to be part of the solution across asset classes in our global portfolios.

We look forward to discussing these pieces with you, and welcome your feedback.