Is the green transition the next stock market El Dorado?

Artificial Intelligence stocks gather the strongest interest of investors, since investments in this space follow an exponential rise. But also the green transition will require investments of the order of $4 trillion. on an annual basis in the coming years. Are we in front of us, the next stock market El Dorado?

To date, estimates of the amount of investment required in the European Union’s energy infrastructure to achieve the agreed climate targets have been estimated at around 800 billion euros by 2030. However, according to a report by the European Round Table for Industry, published in the Financial Times, the green transition that aims to achieve net zero CO₂ emissions by 2050 requires a total investment of 2.5 trillion euros. Which will be directed to electricity grids, energy storage and carbon capture facilities.

To better understand the differences in amounts, it is enough to remember that from 2010 to 2018 the total investments in electricity networks in the countries of the European Union had reached 32 billion euros. That is, the increase in resources required is spectacular. Since on the one hand the goals have been upgraded and on the other hand there are now more and more developed technological applications and methods that offer better solutions.

The size of the investments that will be required at the global level is literally a “game changer”. According to a recent report by BlackRock, which is the largest institutional investor on the planet, managing more than $10 trillion. and has revenues of $17.8 billion, by 2035 annual investments of $4 trillion will be required.

And here the difference with the past is sky-high. Global investments for the green transition had risen to $33 billion in 2004, and would exceed $1.8 trillion in 2023. That is, a doubling of investments is expected from 2024 and for the next ten years. And the burden falls mainly on Southeast Asian countries, which remain inactive in meeting agreed environmental targets.

If the financing of the green transition in the EU stayed at the rates of 2018, then by 2050 there would be a financing gap of around 60%, in relation to the requirements of the European goals. If the corresponding global financings were to remain at previous levels in 2018, then the investment gap would exceed $18 trillion.

Investments in the green transition have many different characteristics. There are low-risk investments such as those directed to basic energy infrastructure. There are medium-risk investments directed at the development of proven technologies and applications.

And there are the high-risk investments directed at new experimental and developing technologies. So, it is obvious that the financing, depending on the degree of risk and priorities, will be distributed between the state funds, which are estimated to cover close to 40%, the classic investment – stock exchange funds, as well as the funds that will come from venture capitals and private equity funds.

State participation will follow the model of the White House program, known as the IRA (Inflation Reduction Act) that was passed in 2022 and activated investments of at least $6.6 trillion. in the renewable energy sector and at least $11 trillion. in the field of energy infrastructure.

However, the interest of investors is not focused on the participation of the states, which will be based on the issuance of government bonds and taxes. It focuses on the participation of the private sector and in particular institutional investors.

According to the BlackRock survey in which 200 institutional investors from 15 countries participated with $8.7 trillion. funds under management, 46% respond that the green transition is an important part of their investment priorities for the next 3 years, 52% that it is one of several investment priorities and 2% that the green transition is not a priority, as we see in following chart.

According to the same survey, 10% of institutional investors worldwide will significantly increase their positions in green transition stocks over the next period of time, 46% will increase them to a lesser extent, 34% will leave their position in stocks unchanged of this category, 9% will follow a policy of slightly reducing exposure to these stocks and 1% will abandon them. In other words, at a rate of 56%, institutional investors will increase their positions in shares of the wider sector of the green transition.

As we can see in the following chart, 65% of institutional investors in the US and 55% in the EU will increase their positions in green transition sector stocks.

The most conservative and safe way to invest in the green transition industry is through buying ETFs. There are ETFs that invest in government green bonds that support the green transition such as the EGVA (Invesco EUR Government and Related Green Transition UCITS ETF Acc)or in green shares such as the iShares Global Clean Energy UCITS ETF (ICLN)the Invesco Solar ETF (TAN)the First Trust Nasdaq Clean Edge Green Energy Index Fund (QCLN)the Invesco WilderHill Clean Energy ETF (PBW)the First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index (GRID)the ALPS Clean Energy ETF (ACES) and First Trust Global Wind Energy ETF (FAN).

Green equity ETFs invest in solar park shares, wind energy shares, hydropower plants, geothermal units, as well as biomass. They simultaneously invest in energy transmission and storage stocks, as well as digital technology stocks that support the green transition.

Green Transition stocks along with their AI and Biopharma counterparts are perhaps the cream of the crop for the next day. With their many “pros” and fewer “cons”. And they certainly deserve our attention.