Energy: dirtier before cleaner

In the hushed world of lockdown, whilst many in the world moved to remote working and transport fell quiet, a glimpse of a technologically-enabled lower-carbon future emerged.

Equity indices with a lower carbon footprint outperformed carbon-intensive and traditional indices showing that being 'good' could be return enhancing too.

At one point the oil price moved negative and pump prices fell to under £1.00 per litre. It seems a world away now.

The brutal war in Ukraine, consequent sanctions regime, and reduced contractual and physical security of supply is forcing Europe to remap its long-term energy supply chain from cheap piped gas to a greater dependency on nuclear, increased liquefied natural gas (LNG) imports and greater investment in renewables.

In the meantime, the UK and Europe need to get through the winter and that means restarting coal-fired capacity. According to International Energy Agency (IEA) data, European coal consumption will increase +7% in 2022 on top of +14% in 2021.

Energy in Europe will be dirtier, before it gets cleaner, not least because the lead times for constructing 'baseload' capacity (for which renewables are too intermittent) is over a decade for nuclear, for 4-5 years for liquefied natural gas (LNG) import and regassification terminals.

Even if peace breaks out, it will take longer for the sanctions regime to fall away and the pressure to reconfigure the European energy mix will continue.

What are the options?

As extractive industries, world mining and materials stocks typically have higher environmental, social and governance (ESG) risks than other sectors and have been out of fashion even before the 2020 lockdown pummeled their share prices as global activity stopped. But for those wanting to position themselves for continued tightness in the mining and materials, there are a number of options.

• VanEck Global Mining UCITS ETF (LSE:GIGB) focuses on metal and mineral extraction across both developed and emerging markets
• Xtrackers MSCI World Materials UCITS ETF 1C (LSE:XDWM) focuses on the broader Materials sector within world equities.
• For a European focus, consider SPDR MSCI Europe Materials UCITS ETF (LSE:MTRL) which includes the leading UK listed materials companies as largest holdings.

The biggest risk to the Materials sector is the timing and severity of a global slowdown or recession.

Notices

All ETFs mentioned are London-listed ETFs .

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