At the start of 2022, not many could have predicted the conflict we are seeing unfold in Ukraine. Its magnitude has shocked and moved people around the globe. With huge corporations such as McDonald’s closing doors on Russia for good, and the West showing a united front, it is fair to say that the conflict is significantly altering the global state of play, with no signs of stopping soon.
Where investors are concerned, the conflict continues to roil markets – with the price of commodities, in particular, rising sharply. As the conflict has exacerbated the twin problems of rising inflation and crumbling supply chains, the prices of vital commodities such as wheat, grain, oil and natural gas have skyrocketed. It is estimated that the global stock markets have shed about $1trn in value; clearly the investment world has much to consider and chief among these considerations is the world of environmental, social and governance (ESG) investments.
Pre-conflict, agreements made at the COP26 summit in Glasgow marked a global shift from world leaders towards renewable energy and net-zero targets. However, the impact of sanctions on Russian fossil fuels, which account for 14% of the world’s crude oil and 17% of the planet’s natural gas, has left a huge deficit in global energy markets that threatens the energy security of many Western countries. In short, policymakers and investors must weigh up the ‘right’ thing to do – hard bans on Russian oil and the energy security of their people, against wider net-zero commitments and efforts to decarbonise the planet.
As such, a debate has emerged in the ESG arena around the short-term and long-term impact that this uncertainty will have on global energy markets. Will investors double down on their financial support of fossil fuels or will they accelerate the shift to low-carbon energy and green metals?
Energy markets have been roiled by the Ukraine conflict
First, it is worth contextualising the high prices we are seeing in global energy markets. In 2021, the average price of a barrel of crude oil sat at about $70. On 11 July 2022, crude oil sat at about $107 a barrel, after exceeding $120 in mid-June, while the price of natural gas has also spiked.
It is abundantly clear that sanctions are taking a hard toll on global energy prices. According to research from HYCM, 69% of investors believe that trade between Russia and the West has been damaged beyond repair – so it is likely that uncertainty in energy markets will remain until a viable long-term alternative is found for countries that rely on Russia’s energy pipeline.
So how are soaring prices impacting investment strategies? That same HYCM survey shows that only 10% of investors have altered their investment strategy since the conflict began.
Investors considering the ESG credentials of their portfolios have a dilemma on their hands. On the one hand, 59% believe the conflict will accelerate the world towards its net-zero targets and that uncertainty in the energy markets will result in long-term investments into clean energy sources and green metals. On the other hand, exactly half (50%) believe that net-zero targets will be delayed by a short-term spate of investment in fossil fuels.
Decreasing the deficit: the short-term case for fresh fossil fuel investments
As investors remain divided, it is fair to say that experts have long warned Western leaders about Europe’s reliance on Russian fossil fuels. Accounting for more than half of Russia’s total daily crude oil exports, the EU has also depended on the Russian supply of natural gas for 40% of its usage. As such, recent disruptions to trade relations have left major EU members such as Germany and Italy incredibly vulnerable to an energy emergency. Indeed, the fact that 68.4% of all energy in the EU is produced from coal, crude oil and natural gas, reflects just how precarious the current situation is and how reliant Europe is on fossil fuels in general.
For investors, this reliance creates an opportunity. With the infrastructure geared towards ‘dirtier’ forms of energy production, predictions suggest that billions of dollars of fresh investment will be made in fossil fuels as the world grapples with the energy deficit.
Indeed, the transition to renewable energy is not an overnight project. In the short and medium-term, we can expect to see investors pumping money into alternative fossil fuel producers in the Middle East, and even Guyana, where there are substantial oil reserves.
Likewise, asset management giant BlackRock has signalled that it will be discontinuing shareholder resolutions on climate change in 2022, arguing that their prescriptive nature could seriously harm global energy security. This reflects an approach that the major players in the investment world are likely to take when navigating the uncertainty ahead, despite the long-term risks to the climate.
Decreasing the energy deficit: investments in clean energy and green metals
What the conflict has starkly shown is that countries must increase their energy independence – and it is clear that the opportunities provided by clean and renewable energy should not be ignored. For nations without the natural resources to do this, leaders are seeing the potential strategic benefits of increasing investments in alternative forms of energy production, such as nuclear, wind or solar power.
Certainly, the shift to renewable energy will require similar levels of investment that fossil fuel companies currently enjoy. As renewables become more popular, and indeed essential, it is likely that the value of fossil fuels will slowly fade.
In its place, investors might decide to pivot towards clean energy technologies and green metals that will be needed to instigate the transition to net zero. For example, copper, nickel, cobalt, lithium and rare earth elements will be vital commodities as the world ramps up its production and use of electric vehicles. Lithium in particular presents investors with an appealing opportunity, as demand is expected to double this decade. All in all, this suggests that early investments in the green revolution could have some serious benefits in the medium and long term.
Given that the course of the conflict in Ukraine remains uncertain, it is impossible to predict how the crisis will affect the global energy markets in the years to come. However, early investments in clean energy production and green metals look like a promising direction for the long term.
Editor’s note: This article first appeared on our sister site Investment Monitor.