Power Grid Investments - An Overlooked Bottleneck to the Global Energy Transition

While long-term focus on transition aligned investments continues to grow, a central component in the transition towards net zero, electrical grid hardware, still lacks adequate attention from Paris-aligned investors, a report from Storebrand Asset Management reveals.

- Companies producing power grid hardware are a clear Paris aligned investment opportunity from our perspective but they are not receiving the attention they deserve—especially from investors using passive Paris aligned strategies, says Henrik Wold Nilsen, Senior Portfolio Manager Storebrand Asset Management.

Power Grids: The Hidden Backbone of the Green Transition
To meet global net-zero targets, power grids must be expanded and modernized. The current global grid infrastructure cannot handle the growing demand for electricity driven by the energy transition and the rapid increase in electric vehicle usage. In countries like the UK, wait times to connect to the grid exceed ten years, while in the U.S., projects totaling 2,600 gigawatts are in the queue waiting to be connected.

Besides the central role the technology plays in the transition towards net zero, the investment case is backed by current requirements of a higher transmission capacity and upgrades of the surrounding infrastructure. However, due to a reliance on backward-looking metrics used to allocate capital the opportunity is often overlooked by, for instance, ‘Paris-aligned’-investors using systematic approaches.

- This opportunity is not reflected in the traditional metrics used to allocate capital in passive ’Paris aligned’ index strategies, such as Paris-aligned benchmarks. The transition dependence of grid related companies is not captured by either their high reported emissions or their low green revenues, says Lauren Juliff, Climate and Sustainability Product Lead, Storebrand Asset Management.

A need for a nuanced, risk managed approach
Consequently, ‘passive’ Paris-aligned investors are missing out on the transition-linked possibilities which these investments offer.

- This dynamic means that investors relying on ‘passive’ Paris aligned strategies are often missing out on the opportunities associated with the transition, due to a priority focus on portfolio decarbonisation.

- Instead, our approach is to carve out a list of solutions companies and ensure allowances for them in portfolio construction to provide meaningful and diversified exposure to climate solutions companies and themes, concludes Henrik Wold Nilsen

The report can be downloaded in its full length here: Gridlock: The case for electricity grid investments in a ‘Paris Aligned’ portfolio