How to invest in Europe’s energy transition

Jhe Russian-Ukrainian war remains an ongoing humanitarian crisis and has had far-reaching and far-reaching repercussions, particularly in the energy sector. As much of the Western world strives to break free from dependence on Russian oil and natural gas for the foreseeable future, Europe is doubling down on energy transition commitments in its pivot away from Russia.

Analysts predict that this transition will lead to “a capital spending super cycle that’s only just begun,” writes Roger Mortimer, portfolio manager of the KraneShares Global Carbon Transformation ETF (KGHG)in a recent post.

With energy costs soaring in Europe, green technologies and alternatives have become an attractive option where once price was a sticking point. The “REPowerEU” plan which was launched in Europe on March 8 commits to greater installation and use of solar and wind energy as well as a broad call for green hydrogen.

Estimates of annual investment in this transition in Europe are around $185 billion, a six-fold increase in investment over the past five years.

Image sources: KraneShares website

“In the multi-year rebuilding of Europe’s energy infrastructure, traditional energy producers and renewable companies can win – and energy security and energy transition goals can co-exist,” says Mortimer. “The transition period will be marked by persistently high energy prices – benefiting incumbent fossil fuel players, but also improving the relative economics of renewable energy-based systems, accelerating their development and that of associated industries like green steel”.

Companies in which KGHG invests include RWE, a German power utility (3.02% owned in the fund) which is well positioned to potentially benefit from increased spending. RWE plans to invest nearly $33 billion to triple its capacity by 2030, with Goldman Sachs estimating that its earnings potential will be double the average of other European utilities over the next five years.

Skyrocketing energy costs are going to have very real impacts on industries and consumer purchasing power, creating an even greater sense of urgency on multiple fronts for European leaders to move from energy dependence Russian to greener alternatives.

“Europe’s urgent need for energy independence is also the catalyst that should trigger a global acceleration of the energy transition, allowing key decarbonization actors and processes to move faster, reducing costs,” Mortimer writes. “This is a game-changer for the energy transition, as reaching cost parity faster will likely accelerate global adoption.”

KGHG invests in leading companies working on decarbonization

the KraneShares Global Carbon Transformation ETF (KGHG), which launched last month, seeks to capture the true potential of the carbon transition by focusing on companies in sectors that have traditionally been among the most polluting but are on the verge of switching to renewable technologies. Those companies that are on the verge of disrupting their industries would benefit greatly from being leaders in the transition, as the cost of carbon emissions will only become more expensive, reducing the bottom line as demand decreases for violators. strong emissions.

“KGHG invests in industries and businesses that are essential to establishing the domestic energy supply. These industries are expected to see unprecedented demand for their services as Europe races to establish energy independence,” Mortimer writes. “They include renewable energy generation and areas such as green hydrogen, where the EU has committed to more than triple the previous import target.”

KGHG is an actively managed fund that invests globally across market capitalizations and sectors in carbon emission reducers that are taking active steps to reduce their own carbon footprint or that of other companies. It also includes companies in the supply chain of companies that reduce carbon emissions and companies that grow their business with others that significantly reduce carbon emissions. The fund has an expense ratio of 0.89%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Mary I. Bruner