Not even the torrential rain and overflowing banks of the Seine could put a dampener on a very flamboyant and unapologetically French display for the opening ceremony of the 2024 Olympics. With can-cans, Les Misérables, ballet, heavy metal, a reconstruction of the Notre Dame and a ménage à trois, it was an attention-grabbing show.
This week there will be plenty of things capturing investors’ attention, although notably less camp and kitsch, as hordes of FTSE 100 and 250 firms report half-year results. One sector gaining particular attention will be oil and gas, with two of the FTSE 100’s largest constituents – BP and Shell – set to report, which is particularly interesting given the new Labour government backdrop. It has already signified plans to improve the UK’s decarbonisation goals, whilst also shaking up the oil and gas industry through the creation of the Great British Energy Company.
Earlier this month, Shell announced its withdrawal from its green fuel facility in Rotterdam, indicating a shift away from some of its sustainable energy initiatives. This move has drawn significant criticism from environmental organisations and investors. If Shell or BP were to escalate their actions further, it could lead to conflicts with the new government. Both parties will need to navigate a careful balancing act to prevent the departure of some of the biggest companies in London, as Shell CEO Wael Sawan has previously warned about the possibility of moving the firm from the London Stock Exchange to the US.
Many of these businesses have spent huge amounts on trying to adapt to the clean energy future and, in reality, the decarbonisation process will require sustained capital spending for at least the next 20 years. Transforming the energy system will require enormous investment in new technologies as well as in the re-engineering of legacy infrastructure. Likely key beneficiaries include the enablers of this transition, such as companies within the renewables supply chain and grid infrastructure and utility companies.
The transition will not be linear and we expect a volatile, lengthy journey. Decarbonisation has to be balanced with energy security and affordability while also meeting increasing energy consumption demands due to population growth and improvements in living standards. While many declare traditional energy to be ‘dirty’ and uninvestable, we prefer a holistic perspective and recognise oil and gas sources still have a role to play as they pass the torch to the next generation. In the short to medium term, as supply decarbonises, a mixture of traditional energy sources and renewables can best ensure access to clean, reliable and affordable energy.
We remain confident that the long-term factors supporting clean energy earnings growth are strong; however, many energy transition stocks continue to face short-term cyclical challenges. These include downward pressure on valuation multiples due to rising interest rates and tightening financial conditions, along with temporary political uncertainty in a year marked by significant global elections. This has been compounded by ongoing outflows from sector ETFs that have impacted many clean energy sub-sectors.
Although the persistent volatility and underwhelming performance in the sustainable energy sector can be frustrating, our fund managers are increasingly noticing promising and positive developments within the field. Private equity shops have taken notice of the dislocation in prices of public market clean energy businesses and have been snapping up many of them at large premiums. Falling costs and improving technologies for consumer products will lead to positive future earnings growth. In addition, we have also started to see some stabilisation and support in company valuation multiples. The long-term fundamental factors driving earnings growth from the energy transition are stronger than ever and we are pleased to note these positive changes.
There are many exciting opportunities to invest in line with this long-term theme across the Ravenscroft fund range. Our underlying fund managers are investing in businesses working towards solving some of the world’s most pressing challenges – including our move to a clean energy future.
