This article first appeared in Wealth, The Edge Malaysia Weekly on July 25, 2022 - July 31, 2022
The European Union recently announced details of its REPowerEU plan to wean itself off Russian fossil fuels and strengthen its overall energy security. First proposed in March, shortly after Russia invaded Ukraine, the plan builds on the EU’s much broader “Fit for 55” package of policies announced in July 2021 to deliver the European Green Deal — a massive, system-wide transformation of the EU economy to cut greenhouse gas emissions across all 27 member states to net zero by 2050.
However, as it condemns Russia for its ongoing aggression in Ukraine, the EU has found itself in the awkward position of continuing to rely on Russia for tens of billions of euros worth of oil and gas imports under existing contracts. Russia provided the EU with 39% of its natural gas and 25% of its oil in 2021, according to Eurostat data. The invasion of Ukraine has inflicted lasting damage on Russia’s relationship with Europe and is likely to drive a profound and lasting shift in Europe’s energy policy.
Other major economies are facing similar tensions. This is well illustrated by China’s continued build-out of coal power capacity following its energy crisis last year that shut down factories and production lines. This investment in coal is happening even as it invests heavily to expand its renewable energy capacity and critical support infrastructure. Its 14th Five-Year Plan for the energy sector announced in March emphasises the need to balance energy security needs and affordability of energy access with environmental sustainability.
Malaysia is a significant actor in this conversation on balancing short-term and long-term needs as an oil-exporting nation. While the short-term needs of countries will benefit our balance of payments, it is imperative that the long-term trend of energy transition is recognised and planned for by policymakers.
To this end, the Securities Commission Malaysia has launched its Sustainable and Responsible Investment (SRI) Roadmap for the Malaysian Capital Market. This serves as a guide to the country’s efforts to accelerate the growth of sustainable investments. The roadmap contains 20 recommendations mapped out to five overarching strategies aimed at driving the development of a vibrant SRI ecosystem for Malaysia. These include expanding the range of SRI instruments, the number of issuers and investors as well as other related ancillary services, while strengthening disclosure and governance of SRI.
Hence, despite the latest disruptions, investments in renewables and other energy transition technologies will continue and even accelerate, as government support for the adoption of renewables, electric transport and other low-carbon technologies help to meet longer-term strategic goals of energy security. Last year, energy transition investment rose further to a record US$755 billion, driven by surging investments in wind and solar installations and electric vehicle sales, according to the latest estimates by financial data provider Bloomberg.
While the current macro environment is challenging for risk assets, the utilities sector and companies that are exploring new, still unprofitable ventures and projects that are positioned for the low-carbon transition are likely overlooked as sound investments. Coupled with the rising interest rates that spell headwinds for fixed-income assets, investors will do well to hold a long-term view of their investment portfolio, focusing on investment themes that are driven not only by structural changes, but also national security interests.
Michael Lai is executive director of wealth advisory (wealth management) at OCBC Bank (M) Bhd
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