Energy transition away from fossil fuels is catching on with investors, six years after the shale boom displaced clean technology as the hot, new investment theme.
A recent Preqin report predicted that unlisted natural resources assets under management, which includes investments related to energy transition, will hit $271 billion in 2025, up 28% from $211 billion in 2020 as industries act to decarbonize.
Investments in energy transition can include everything from renewable energy such as solar and wind to battery storage, hydrogen-powered electric vehicles and charging stations. These investments are being sprinkled across alternative investment asset classes, including venture capital, growth equity and infrastructure. While parts of the strategy are new, some managers are targeting high single-digit returns.
Institutional investors have recently had success in pushing companies in their public equity portfolios to prepare for the transition.
On May 26, Exxon Mobil Corp. shareholders, backed by the three largest U.S. pension funds, voted to replace at least two board directors with activist investor nominees. Hedge fund firm Engine No. 1 promoted a slate of four candidates with experience in energy transitions to turn the company's aspirations of addressing "the risks of climate change into a long-term business plan, not talking points," a news release from the firm said.
Among the investors siding with Engine No. 1 were the $458.9 billion California Public Employees' Retirement System, Sacramento, the $299.8 billion California State Teachers' Retirement System, West Sacramento, and the $254.8 billion New York State Common Retirement Fund, Albany.
Regarding the vote, CalSTRS CIO Christopher Ailman tweeted that it was a "watershed moment" and "a bold step to prepare the company for the global energy transition."
On the same day, 48% of shareholders supported a resolution asking Chevron to report an assessment of how a dramatic reduction in fossil-fuel demand will effect its financial position.
Separately, a Dutch court ruled against Royal Dutch Shell PLC, ordering the oil company to reduce carbon emissions by a net 45% by the end of 2030.
Global reliance on fossil fuels also appears to be waning. BP PLC's Energy Outlook 2020 said that it expects demand for fossil fuels could fall by as much as 50% over the next 20 years.
"I've witnessed an unbelievable shift in players investing in the energy transition," said Kirsty Jenkinson, investment director for sustainable investment and stewardship strategies at CalSTRS.
The investment opportunity in the U.S. is becoming clearer, making it possible for investors to build portfolios that can earn meaningful returns while tackling climate change, Ms. Jenkinson said. That opportunity is not only attracting renewable energy managers but those with broader energy or infrastructure mandates, including managers that also invest in fossil fuels and hydraulic fracturing.
The pandemic hit fossil fuels hard with oil and gas prices cratering in early 2020, accelerating investors' movement into energy transition investments. In March, the CalSTRS board approved a 5% allocation maximum to public as well as private sustainable investments and stewardship strategies. CalSTRS is targeting $1 billion to $2 billion in commitments to its new private sustainable portfolio over the next couple of years, Ms. Jenkinson said.