Podcast Summary: "Aniket Shah: The Energy Transition – Roadblocks, Solutions, and Investment Opportunities"

Released: August 26, 2024
Hosted by: CFA Institute on "The Sustainability Story"

Introduction

In this episode of The Sustainability Story, hosts Deborah Kidd, Nicole Gehrig, and Paul Moody engage in an insightful conversation with Aniket Shah, Managing Director and Global Head of Sustainability and Transition Strategy at Jefferies Group, and Assistant Adjunct Professor at Columbia University. The discussion centers on the current and future state of the energy transition, exploring the challenges, solutions, and investment opportunities associated with shifting away from fossil fuels toward a net-zero future.

Aniket Shah’s Journey and Background

[02:06] Aniket Shah:
Aniket shares his personal journey into the field of sustainability and economics. Starting as a young graduate from Yale, he reached out to Professor Jeffrey Sachs at Columbia University's Earth Institute. This pivotal moment marked the beginning of his 15-year journey across academia, public policy, and financial markets, focusing on the intersection of economics, sustainability, and earth sciences.

“At 21 in October of 2009, I went to work as Professor Sachs' research assistant at the Earth Institute and really got to see and begin to understand all of the complicated linkages between economics and the Earth system.”
— Aniket Shah [02:38]

Current State of the Energy Transition

[04:11] Deborah Kidd:
Deborah highlights Aniket's recent research indicating that over $70 trillion in global capital is aligned with the transition to net-zero by 2050—a sevenfold increase since the 2015 Paris Agreement. Despite this significant investment, reliance on fossil fuels remains high, with fossil fuels supplying 82% of primary energy globally as of 2022.

[05:11] Aniket Shah:
Aniket delves into the paradox of increased investment and persistent fossil fuel dependency. He explains that while there is immense enthusiasm and capital flowing into low-carbon solutions, certain regions continue to ramp up fossil fuel usage.

“The OECD, so the high income world has actually peaked emissions around 15 to 20 years ago... by the way, have started their decline of emissions, but countries like China, India, Indonesia are much lower in terms of economic output per person and are relying heavily on fossil fuels.”
— Aniket Shah [05:40]

Roadblocks to the Energy Transition

Aniket identifies several key challenges impeding the energy transition:

1. Geographical Disparities:

   • High-income countries (e.g., US, Europe) have started reducing emissions, while emerging economies (e.g., China, India) continue to increase their fossil fuel consumption.

2. Pacing and Timelines:

   • Investments in research and development or early-stage deployments have long-term payoffs. Current progress may seem slow, but significant impacts are expected in the coming years.

3. Grid Infrastructure:

   • A major bottleneck is the inadequate grid infrastructure, which hampers the deployment of clean energy projects. Thousands of clean energy initiatives await grid connection in the US alone.

4. Climate Warmer Scenarios:

   • Aniket offers a cautiously optimistic outlook, noting that warming scenarios have improved from potential 4-5°C to 2.5-3°C by 2100 due to ongoing investments and initiatives.

“We're probably at around 2 1/2 to 3 degrees of warming by 2030, by 2100, we're going to be at 4 to 5 degrees Celsius if it wasn't for all of this investment and enthusiasm.”
— Aniket Shah [10:47]

Keys to a Successful Energy Transition

[11:31] Aniket Shah:
Aniket outlines three essential components for a successful energy transition:

1. Long-Term Planning:

   • Countries and regions need comprehensive, long-term strategies to achieve net-zero goals by mid-century. Successful examples, like China, demonstrate how government-directed approaches can accelerate renewable deployment.

2. Carbon Pricing:

   • Implementing a price on carbon is crucial to incentivize companies and consumers to shift toward lower-carbon alternatives. An increasing number of countries are adopting carbon pricing mechanisms.

3. Investment in Research and Development (R&D):

   • Continued investment in early-stage R&D is necessary to develop and scale the technologies required for net-zero emissions. While progress is being made, an estimated 30-40% of total emissions still lack viable technological solutions.

“If you can get those three—long-term planning, increase investment in research and development, and a price on carbon—you start, the system can start moving on its own.”
— Aniket Shah [14:10]

Investment Opportunities and Climate Solutions

[15:39] Deborah Kidd:
Deborah emphasizes the role of investors in capitalizing on climate solutions, framing them as part of a technology revolution driven by long-term trends and shifting demand.

[16:18] Aniket Shah:
Aniket highlights the burgeoning landscape of climate technology companies, noting that between 12,000 and 15,000 early-stage climate tech firms have emerged in the past decade. Key areas of innovation include solar, wind, electric vehicles, batteries, hydrogen, and carbon removal technologies.

“There are anywhere between 12,000 and 15,000 early stage climate technology companies that have been established in the last 10 years in order to address climate change.”
— Aniket Shah [16:45]

He expresses particular interest in carbon removal technologies, which are critical for addressing residual CO₂ emissions.

Scaling Up Capital and the "Missing Middle"

[18:38] Aniket Shah:
Aniket discusses the concept of the "missing middle"—the phase where early-stage technologies require significant capital to scale up. He points out that while initial investments are plentiful, scaling up remains underserved due to higher risks and lower perceived rewards.

“The scaling up capital is not anywhere to be found. And that's a real problem... We need more capital in this area, and investors are going to have to find the opportunities that make sense from a risk-adjusted perspective.”
— Aniket Shah [19:25]

Role of Government Subsidies

[21:26] Aniket Shah:
Aniket underscores the pivotal role of government subsidies in supporting climate ventures, using Tesla as a prime example. He argues that government intervention is crucial in bridging funding gaps that the private market cannot address alone.

“Government subsidization is something that is good for long term investors... Government is really important. They participate in ways that purely market participants can't.”
— Aniket Shah [21:45]

He also highlights that governments are already subsidizing fossil fuels, suggesting that redirecting subsidies toward renewables is both feasible and necessary.

Climate Adaptation Investments

[24:02] Aniket Shah:
Beyond mitigation, Aniket advocates for increased investment in climate adaptation. As global temperatures rise, adaptation strategies will become essential to manage the economic and social impacts of climate change, such as extreme weather events, droughts, and migration.

“We're also going to have to adapt to climate change because the world is going to get hotter... It's going to have all sorts of economic implications of migration, impacts on insurance, impacts on how we think about risk analysis.”
— Aniket Shah [24:16]

He encourages investors to allocate more time and capital to adaptation alongside mitigation and carbon removal efforts.

Conclusion

The conversation between Deborah Kidd and Aniket Shah offers a comprehensive overview of the current landscape and future prospects of the energy transition. While significant investments and innovations are driving progress toward net-zero emissions, substantial challenges remain, particularly in scaling up clean technologies and enhancing grid infrastructure. Government intervention through subsidies and carbon pricing emerges as a critical factor in overcoming these barriers. Additionally, recognizing the importance of climate adaptation alongside mitigation provides a holistic approach to addressing climate change. Investors play a crucial role in financing the transition, balancing risk-adjusted returns with sustainable outcomes.

“With the progress that we have made so far, we are going from four or five degrees to two and a half to three degrees. We have another degree to go.”
— Aniket Shah [10:47]

Listeners interested in Net-Zero investing and sustainability are encouraged to explore CFA Institute’s Research and Policy Center’s Net Zero Investing page for additional resources.