Aniket Shah: The Energy Transition: Roadblocks, Solutions, and Investment Opportunities

Summary

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

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

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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.

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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]

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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]

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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]

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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]

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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.

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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]

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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.

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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.

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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]

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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.

Transcript

[A]

Get ready for cfa Institute Live 2025 with free power packed webinars designed to inspire and inform. Led by industry experts, these concise sessions tackle game changing topics like how AI is transforming investment strategies in emerging markets. Don't just show up, show up ready. Gain the insights you need to drive meaningful conversations this May in Chicago. Claim your spot [e-mail] hello everyone and welcome to the Sustain Story. I'm Debra Kidd, your host for today's episode. Today we're going to talk about the current and future state of the energy transition, types of climate solutions on the horizon, and what the implications are for investors who want to manage the financial impact of climate change on their investments. So as we know, transitioning away from our dependency on fossil fuels is critical to achieving the global goal of Net Zero, where any greenhouse gases emitted are offset by the removal or storage of those gases in order to avoid the most damaging climate change effect. This transition requires massive, rapid transformational change and many policymakers, asset owners and corporations believe that the investment industry has a role to play in this change. At CFA Institute, we see our role as providing education and support for those who choose to invest for Net zero. I encourage listeners who are interested in learning more about Net Zero investing to visit our Research and Policy Center's Net Zero Investing page where we provide a variety of resources on the topic. With that said, I am pleased to welcome Aniket Shah, Managing Director and Global Head of Sustainability and Transition Strategy at Jefferies Group and an Assistant Adjunct professor at Columbia University School of International and Public Affairs. Aniket, thank you for being here today.

[B]

Sure Deborah, thanks. And it's really great to be with you and to be with your listeners. The CFA Society and CFA Institute are organizations that I respect greatly and I think play a profound role in not just the financial markets but in our broader economy. So really great to be with all of you. I was very lucky to get involved in this topic 15 years ago almost to the day. I sent an email after graduating from Yale in 2009 to a wonderful economist at Columbia University named Jeffrey Sachs, who at the time was directing the Earth Institute, which is this major research center with a thousand climate scientists, economists, agronomists, political scientists and more working together on climate change. And I was a lost and confused 21 year old with a deep interest in economics and sustainability. Having studied that as an undergraduate and Professor Sachs responded to my email, he responded to a blind email and said come and meet with me and see if you want to come and be my research assistant. So at 21 in October of 2009, I went to go 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. And Deborah, once you start thinking about that and learning about it, you can switch it off. And so I've been, It's been a 15 year journey across academia, across public policy, and for the past several years in the financial markets, trying to educate and inform and guide different actors in the economy to think more clearly and act more clearly on the intersection of economics and sustainability and earth science. And so that's been my journey and it's been a lot of fun and I feel like I'm just getting started.

[A]

That's a great story. I love that story. I suspect a lot of college professors will be getting many more blind emails in the future. But back to today. You wrote in a recent research paper that more than 70 trillion in global capital is aligned with the transition to net zero by 2050, which is a sevenfold increase since the 2015 Paris Agreement. But you've also said that despite this, the world's dependence on fossil fuels hasn't waned. Demand for coal, gas and oil hit record highs in 2022. And from 2000 until 2022, the world achieved only a 4% reduction in carbon dependency, with fossil fuels still supplying 82% of primary energy. Aniket, what are some of the roadblocks that you're seeing and hearing about that need to be overcome to increase that 4% reduction?

[B]

Sure, you have highlighted what is the central conundrum when it comes to the energy transition globally, which is on the one hand, there's extreme enthusiasm around new solutions. There is extreme enthusiasm around the investable opportunities when it comes to the energy transition. Just to put some numbers on that, last year $2 trillion roughly was invested in low carbon solutions globally. That's up from $350 billion in 2015 that the year that the Paris Agreement was signed. So on the one hand, you've seen a six fold increase in the amount of capital that is going to the energy transition. You're seeing dozens of countries setting up net zero laws and rules. You're seeing hundreds of companies and investors signing on to these global agreements and global goals around net zero. And yet at the same time, despite all of this, the world remains stubbornly addicted to fossil fuels. And if you are an analyst of the energy transition, you have to somehow reconcile those two stories at the very same time. What's happening is really interesting to go and explore. The first thing that's happening is that there are parts of the world that are decarbonizing and are decarbonizing quite quickly and there are other parts of the world that aren't. It should be of no surprise to listeners on this call that are on this podcast that the oecd, so the high income world has actually peaked emissions around 15 to 20 years ago. So US and Europe have already started their decline of emissions, but by the way have started that decline after having used fossil fuel based energy for the past 200 years and have having already gotten to a very high level of per capita CO2 emissions. At the same time you see countries like China, India, Indonesia that are much lower in terms of economic output per person that are relying heavily on fossil fuels. And so China hasn't peaked emissions yet. And India and Indonesia and other countries like this are very, very far away from peaking emissions. So the first thing that's happening is that you're seeing some parts of the world decarbonizing and other parts of the world carbonizing. And I think that's an important thing for everyone to listen to, understand is that there's a geographical element to this. The second thing that you are seeing when it comes to this stubborn addiction and at the same time this incredible excitement is a question around pacing. So a lot of the investments that we are making now, whether it's in research and development or the early stages of deployment, we're only going to see the impacts of that 1, 3, 5, 10 years from now. And so I actually think that the story will get better, but we're just too early in the story right now to see the impacts of, for example, the hundreds of billions of dollars that are going into the Inflation Reduction act in the United States in clean manufacturing and clean energy. We're only going to see the implications of that later on in this decade and early in the next decade. So the second is that there's a timing element of that that we also have to appreciate. The third thing that I think we have to appreciate is that we are now hitting some of the blockages of deployment of clean energy, which frankly the world isn't very well prepared for. And we at Jefferies believe that the number one blockage to the faster deployment of clean energy is the grid infrastructure and the grid system, which has been a major, major challenge when it comes to the deployment of clean energy. We have here in the United States thousands of clean energy projects that are awaiting permission to be connected into the grids but for a whole host of reasons which we've explored in many notes, are not being able to be to be done. So there are real bottlenecks that the world is now trying to deal with. The good news is that progress is being made, but we're still in the very, very early days when it comes to the energy transition. And I think the final point I would like to make, and this might give some comfort to folks who are listening and may not for others, is that what has happened over the last 10 years is that warming scenarios of 4, 5, 6 degrees Celsius by the end of the century, which is what business as usual scenarios were when the Paris Agreement were signed, those scenarios now are likely off the table. So now the question is we're probably at around 2 1/2 to 3 degrees of warming by 2030, by 2100, we were going to be at 4 to 5 degrees Celsius if it wasn't for all of this investment and enthusiasm. So we, with the progress that we have made so far is going from four or five degrees to two and a half to three degrees. We have another degree to go. So again, one can look at the same facts and be incredibly optimistic or incredibly pessimistic. And on half the days I wake up being optimistic and on other days I wake up being pessimistic. And that's just sort of where we are.

[A]

That actually is very encouraging. I think we hear a lot of the negative talk about progressing toward abating climate change. So it's very encouraging to hear that side of the story. What do you think is necessary for a successful transition? Like, what does that look like? It's kind of hard to imagine not having a reliance on fossil fuels. So can you talk a little bit about what you see the future state looking like?

[B]

Yeah, I would say there are a few key components of a successful energy transition. The first is that countries and regions need to have long term plans around how they are planning to get to net zero by 2050 or 2060 or 2070. There is an element here, Deborah, of government planning that is required, which is quite anathema, frankly, to how we in the west think about running our economies here. But it is why parts of the world that have been very successful at the energy transition and of deployment of renewables, deployment of electric vehicles, countries like China, for example, have been able to succeed because there is a much clearer and more sophisticated, I would say, approach of the government in directing the energy system. So that's first and foremost a long term plan or Long term set of plans that would guide investment at the national and subnational level is absolutely needed by sector in order to achieve net zero. The second thing that's required is, is a price on carbon. This will provide the economic incentives in order for companies and for consumers to make the switch over to lower carbon alternatives. And we're going to see more and more carbon pricing happen over the next five, 10 and 15 years. We've already seen a significant increase of the number of countries in the world that have introduced some type of carbon price. The European Union has of course had carbon pricing for many decades now. China has as well. Japan, India is announcing its carbon pricing plans. Indonesia, many countries in the Middle East. The United States I would argue has its own form of carbon pricing through subsidization that came through the Inflation Reduction Act. But some form of putting a price on carbon is absolutely not necessary. So that's number two. The third part of a successful energy transition is investment in early stage research and development. The reality is, is that we still don't have all of the technologies that are needed to get to Net Zero by 2050 or 2060 or 2070. The International Energy Agency tracks this very clearly every year. The good news is that the percentage of emissions for whom we do not have technological solutions or for which we do not have technological solutions is shrinking. So in other words, we are making progress. But there's still around 30 to 40% of total emissions for which we need more and better and cheaper technology. That will come through government research and development and corporate research and development. But we will need more money and more effort going into R and D. So that's number three. And we're seeing more efforts around that space than ever before. But I would like to see more there. To me, if you can get those three, those three things right. Long term planning, increase investment in research and development and a price on carbon. You start, the system can start moving on its own. And you know, here what's really important is that for most of the people who are listening to this podcast, they're investors, they're actually looking for what are the best risk adjusted investment opportunities in order to put their capital or their client's capital behind. To think that they will take reduced return in order to achieve net zero is just, to be honest, it's a crazy. It's just so against how a private investor operates or how a company operates. They are responding to policy incentives and they are responding to customer demands. And so as much as we can get the right policy in place through Long term planning and the right customer demands through a carbon pricing, I think we will have a more and more successful energy transition.

[A]

I'm glad you mentioned the motivation and the focus on risk adjusted returns and investment opportunities because I agree there's often a misconception about the nature of climate solution investments, but in fact these are what you've referred to as another technology revolution with long term trends and shifting demand that investors can capitalize on. What are some of the most interesting or promising developments in climate solutions that.

[B]

You'Re seeing today, Deborah? That we're seeing progress across the entire suite of solutions needed for climate change mitigation. I was looking at a database the other day that we've put together and believe it or not, Deborah, 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. These are companies in solar, in wind, in electric vehicles, in batteries, in hydrogen, in, you know, you name it, in a long duration storage in batteries, in every part of the solution set. We are seeing more and more companies being established. And they're being established because the technologies are progressing very quickly. They're being established because policy incentives are being put in place in order for companies to, to make money, to make profits in this. And they're being established because consumers are demanding and voters are demanding a more climate friendly environment. So there are areas that I'm particularly interested in. I'm really myself interested in the carbon removal space, for example, because even if we bring emissions down to zero, we're going to have to remove excess CO2 from the atmosphere that has been built up over the last 200 years. And whether it's direct air capture or marine carbon removal, ocean based carbon removal, or things like enhanced mineralization or enhanced weathering, we're seeing solutions everywhere. And the price points at which carbon removal are coming down is also amazing. So that's an area that I'm following very closely because I think it has less, it gets less focus than it should. But again, I'm seeing progress happening in every part of the technology suite needed to get to net zero.

[A]

You mentioned earlier that the third part of a successful energy transition is investment in early stage research and development. Are there enough early stage investment opportunities to absorb the amount of capital that investors are ready to deploy into climate change solutions?

[B]

That's a great question. We for many years struggled to get investors interested in these topics. Now investors are indeed interested, companies are interested. Now the question is, is there enough to put your money into What I would say is that there are pockets of the energy transition right now which the markets are not serving well. And they're not being served well, Deborah, not because market participants don't know about them, but there are certain parts of the energy transition that where the risk adjusted rewards are just not seen as commercially interesting enough. And therefore market participants are not putting in money there. But in fact that is where money needs to go. And largely where that is is what we call the missing middle. There are a lot of companies that have created new technologies, they have done first of a kind deployment of that technology, and now they're looking for scale up capital. They're looking to go from having one or two CCS equipment up on smokestacks to having one or 200 or one or 2,000. And that requires a lot of capital because you're building factories, you're building equipment manufacturers, you're trying to develop the entire supply chain. You have to create a sales force. And so it's a lot of capital and a lot of risk. And that missing middle, that scaling up capital is not anywhere to be found. And that's a real problem. And again, that's not because market participants are stupid. They look at those opportunities and they say large risk, not huge rewards. I'm not going to go there. And so that's really blocking the scaling up of climate solutions. So if I was somebody listening to this podcast right now, that's the area that I would be focused on the most. It wouldn't be the early stage climate tech side. I think there are a lot of very smart participants there. It wouldn't be on the infrastructure side either. On the low risk, you know, just building out plain vanilla renewables. I think we also have enough market participants there between financial participants and strategic participants like utilities. What we need is the scaling up capital. And you know, goodness knows that there's a lot of opportunity there. It does require more capital. And those investors are going to have to find the opportunities that make sense from a risk adjusted perspective.

[A]

Given that the risk profile for certain climate investments may not be compelling enough to attract private capital, what role would you say government subsidiation should play in funding these ventures?

[B]

There's a great story around this when it comes to this. At one point, Debra, there was this really small unknown car company called Tesla and it was about to go bankrupt. Nobody wanted to lend them any money, nobody wanted to invest any money in them around 15 years ago, and the US Department of Energy came in and provided them emergency rescue financing through an office called the Loan Program Office, the lpo. Tesla got this rescue financing and of course the rest is all history. It's now a multi hundred billion dollar company which fundamentally change the trajectory of the electrification of transportation. I use that example just to say that government is really important. They participate in ways that purely market participants can't. I highlight the Department of Energy's LPO because of its role in Tesla, but also because that this body now has literally hundreds of billions of dollars thanks to the Inflation Reduction Act. It is looking for places to deploy and they are very actively and aggressively going out and trying to find companies and projects to lend to and then get equity investments through their connections on Wall street to also invest in. And I think we should get, we should all be very excited about that and we should all support that because yes, there will be examples like Solyndra, there will be examples when US Government comes in or European governments or the Chinese government and they back companies that don't make it. But there will also be examples of entire industries and sectors and great companies that get built because of government subsidization or government support. So I, you know, I am someone who believes very much that net net government subsidization is something that is good for long term investors. It's another variable that we need to add into our calculus of what to invest in. Some investors won't like it and others will. I'll also remind folks who are listening that, you know, the government does subsidize fossil fuels. So it's not that we're, you know, we're that, that people who are involved in the energy transition are saying we should just subsidize renewables or low carbon because we are subsidizing fossil fuels already. So that's what I would say about that.

[A]

Besides the topics we've discussed today, what else should investors be thinking about as they decide where to allocate capital in response to climate change?

[B]

Yeah, one of the things, Deborah, that I've been advocating to our clients here at Jefferies is that investors need to allocate more time and more capital into climate adaptation investments. So our discussion today has focused on the mitigation side. We focused on technologies whether it's solar, wind or batteries, electric vehicles that will decrease CO2 emissions. We also spoke briefly about carbon removal, which is companies and technologies that will remove excess CO2 from the atmosphere and store it. But the reality is, is that we're also going to have to adapt to climate change because the world is going to get hotter. There will be parts of the world that will have more extreme weather events. There will be parts of the world that will have more drought. There will be parts of the world that will become harder to live in, and that's going to have all sorts of economic implications of migration. People will move from one part of the world or one part of a country to another. It's going to have impacts on insurance, it's going to have impacts on how we think about risk analysis and so on and so forth. And so we've been advocating to our clients that in addition to investing in mitigation opportunities, which takes up, I would say, 99% of the discussion on climate change, we should also be focused on adaptation and, of course, removal, as we discussed. And I focus on that a great deal in my work here at Jefferies. And I hope more and more investors and banks and corporates will spend more time thinking about adaptation as well.

[A]

Yeah, absolutely. That's an important topic. I think there's kind of a tendency to view the world as it is and maybe a future state of climate change, which is kind of apocalyptic, but the reality is in the middle there that life will be different, and the way that we navigate that will also be different. Well, Anica, it has been a pleasure talking with you today. I'm sure that our listeners learned quite a bit from this. So thank you. Thank you for being here on the sustainability story.

[B]

Thank you, Deborah, for having me, and thank you for all the work that you and the CFA Institute do.