On July 4, U.S. President Donald Trump signed the “one big beautiful bill” into law. The bill provided unwavering support for nuclear and fossil-based energy, while undermining support for renewable power and clean energy manufacturing.
Whether it be political narratives, the capital-intensive nature of the sectors or a provincial focus, some North American investors seem to believe that the great energy transition is, well, not so great anymore. This is a mistake, and also an opportunity.
Three forces are driving the transition, and they are not going away.
First, there has been a precipitous spike in power demand globally driven by population growth, AI and other electrification needs.
Second, national security concerns are growing alongside shifting world orders and geopolitical tensions. As a result, securing sustainable energy autonomy is essential.
Finally, resource and ecological limitations eventually become economic limitations, and the energy transition provides a path to future growth.
Trends in energy consumption support the breadth of the transition. Global electricity demand is now growing at 4% each year — more than double the rate of fossil fuel demand. At this rate, we will need to double the current electricity system in just 20 years — think about that!
According to the International Energy Agency’s World Energy Report, investment in clean energy will hit a record US$2.2 trillion this year. And for every dollar invested in oil and gas in 2025, two will be directed to clean energy.
Most countries have embraced the transition as a massive growth opportunity. Even some of the most fossil-reserve-endowed countries in the world, like Saudi Arabia, UAE and Brazil, are investing heavily in renewables for future energy and economic security.
It is not just government support, corporations such as Microsoft, Google, Amazon and Brookfield Asset Management, to name a few, have all entered into substantial low carbon power offtake agreements in the past 12 months. So, while the current U.S. government seems to be moving back toward traditional energy sources, investors should know large corporations and foreign governments are leaning into the transition.
From an investment perspective, sentiment is also creating a valuation opportunity. Energy transition companies are uniquely prone to excessive hype and cynicism. Whether it be regional policy shifts, like we are presently seeing in the U.S., or rapid technological change, pricing inefficiencies exist and much of it is sentiment driven. This is particularly true in parts of the market that operate outside the spotlight.
Many of the most compelling opportunities aren’t the headline-grabbing names, but the enablers — the picks and shovels of the transition like STMicroelectronics NV and Johnson Matthey Plc. These companies are often buried within broader sector classifications, receive limited analyst coverage and are underrepresented in major indices. As a result, they can be mispriced relative to their fundamentals.
For investors with a long-term view, the volatility and mispricing in the space can be an attractive feature. Combining the long-term outlook for the transition with a value discipline has enabled some energy transition managers to produce attractive historic investment returns.
That all said, diversification benefits might be the most compelling reason to include an energy transition strategy in client portfolios. Energy transition companies are mostly concentrated in four of the 11 general industry classifications: industrials, utilities, materials and IT.
Even in IT, only a small group of sub-sectors qualify as clean technologies, mostly hardware like power management semiconductors and solar equipment. There is little exposure to software, consumer-facing businesses, financial services and of course traditional energy that often dominate allocations in equity portfolios.
Energy transition portfolios can also look different geographically. There are no perfect indices for the energy transition, but the Mackenzie Greenchip Universe provides a reasonable proxy for the opportunity.
Over the past 18 years the team has built a universe of more than 1,700 energy transition businesses. Of these, only 257 are U.S.-based, or about 15%. Even by market cap, U.S. companies only represent 37% of the universe. This compares to a 64% U.S. allocation in the broader MSCI ACWI Index.
Another proxy for energy transition sectors is the Bloomberg Goldman Sachs Clean Energy Index. Over the past five years it has had a correlation factor of only 0.75 to the MSCI ACWI.
The energy transition is a multidecade structural shift in how we power the global economy. It is supported by strong economic drivers that will supersede political sentiment. Energy transition securities are unusually exposed to emotional sentiment and often mispriced, something value managers can take advantage of. These strategies offer unique diversification characteristics that can benefit investor portfolios.
The Mackenzie Greenchip Team believes that there’s a strong case for all investors to have at least some exposure to the historic energy transition.
John Cook is senior vice-president, portfolio manager and co-lead of the Mackenzie Greenchip Team.