Take a Diversified Approach to the Energy Transition
January 20, 2022
Watch Time 7:41 MIN
Jenna Dagenhart: Following COP26 and Build Back Better, there's been a lot of attention on the energy transition. Joining us now with more is VanEck Portfolio Manager Shawn Reynolds. Shawn, what are some initiatives that came out of 2021? And where are most clean energy investments focused right now?
Shawn Reynolds: I think one of the biggest things to come out of 2021 is the fact that this is not a short-term phenomenon. And we often get asked, what inning are we in with regards to the energy transition? I always kind of say that's the wrong kind of analogy to have—a baseball game. It's not going to be nine innings. We're in a marathon here. So, we kind of just finished mile two, is the way I like to think about it. That first mile you're sprinting out of the blocks. You're very excited, very agitated. Now we're kind of settling in and we've got a long haul to go, but that long way to go is a lot of opportunities.
Shawn Reynolds: So, I think that's the second thing, that the opportunity set is growing bigger and bigger. That's the realization. When we first started talking about this a little over a year ago, we used the number $110T as the amount of capital that need to be invested in renewable resources to hit some of the Paris Accord goals of net zero by 2050. Well, that $110T, when we first ran it out, got a lot of eye rolling associated with it. Right now, that seems to be fairly conservative. And in fact, if you think about where that investment is going, it needs to grow in different sectors than kind of the traditional solar, wind and batteries that we've been talking about for the last year.
Jenna Dagenhart: And there's a lot that has to happen during this marathon, as you put it, as we transition from a fossil fuel to a metal economy. Does this make us more dependent on China?
Shawn Reynolds: Well, the fact of the matter is the United States has been dependent on foreign nations for its energy since the Industrial Revolution. If you go back to the 1970s and the Arab oil embargoes, we've tried to wean ourselves off of Middle Eastern oil since then. And we got very close to it with the advent of oil shale here in the United States in the last decade.
Shawn Reynolds: But the truth is we're handing this off to other nations now with regards to metals and that nation, the one that really sticks out is China. In fact, if you think about how big China is relative to say Saudi Arabia, Saudi Arabia is 10% of the oil market. China with regards to the key metals, such as copper, cobalt, lithium, even things like rare earths, they process and dominate those markets from about 30% market share to 90% market share. And so in reality, we really are handing our dependence on energy off to China.
Jenna Dagenhart: What's your outlook for greenflation as demand for materials accelerates and the transition continues?
Shawn Reynolds: Well, that's also one of the big kind of surprises or realizations that come out of 2021, that there's lots of discussion about inflation, but most of that discussion is about typical or traditional inflation driven by monetary policy, the cycles of the economy, fiscal policy. But what we think people are starting to come to realize is that this dependence on metals in particular—where is it coming from, how long it's going to take us to access this, what's the cost of access going to be—that feeds into inflation as well. And that's a realization that's starting to pop up, and that is somewhat structural, not cyclical related. And so that greenflationary aspect is a really important point of how we see things kind of flowing out over the next year or even decade.
Jenna Dagenhart: Ultimately, how will this green transition affect more traditional energy markets in the short term, as well as the long term?
Shawn Reynolds: I mean, that's a really, really good point because we often say, “transition means transition”. And in essence that you can't decarbonize supply before you decarbonize demand. And we're seeing the effects of this today in places like Europe in China, where they're actually going through an energy crisis. You have natural gas prices, electricity prices in Europe that are multiples above where they normally are. You're talking about two and a half, four and a half times as much as they were at the beginning of 2021 and reached as high as say seven times as high as they were in beginning of 2021.
Shawn Reynolds: So you have to address all of these energies kind of equally as we go forward through transition. You can't leave one of them behind. And certainly, as you look at 2020 versus 2021, 2020 was a great place to be for renewable energies. But in 2021, you really wanted to be in traditional. Who knows what 2022 holds or what the future holds, but it does seem like a diversified approach to it is the way you really want to think about it.
Jenna Dagenhart: Finally, what are some ways that investors can gain access to these themes? How can they register for the marathon if you will?
Shawn Reynolds: Well, I think the most obvious way at VanEck is through our flagship fund, the Global Resources Fund, which does take this diversified approach to resources. So it definitely has a lot of renewables and alternatives embedded in it. It also has a lot of green metals. Actually, it has a lot of agricultural sustainability involved in it, but it also continues to have a decent exposure to some of the traditional resource names, particularly has some fossil fuels in there.
Shawn Reynolds: Now, if you're totally averse to having fossil fuels in your portfolio, you can look at our Environmental Sustainability Fund, which is solely focused on environmental sustainability and those companies who are making a deliberate impact on environmental sustainability. So no fossil fuels whatsoever, a lot of alternatives, a lot of innovative technologies that are addressing some of the harder to decarbonize industries.
Shawn Reynolds: So definitely if you are interested in that area, in a diversified and kind of holistic approach, looking at the environment as a whole. Then we have a number of ETFs that look at slices of those two different portfolios and they focus on green metals solely, which we have an ETF called Green Metals, GMET is the ticker. And then we have a future of food ETF as well, which ticker is YUMY.
Jenna Dagenhart: Great, well, Shawn, thanks for being with us.
Shawn Reynolds: Thank you.
Jenna Dagenhart: And thank you to everyone out there watching. Once again, that was Shawn Reynold's, Portfolio Manager at VanEck. And to learn more from VanEck's experts, you can visit VanEck.com/subscribe.
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September 23, 2022