Energy Transition: Five Key Trends - Jacco Rolvink (Head of Benelux)
Colesco’s Head of Benelux, Jacco Rolvink, describes the major trends driving the transition to a cleaner energy economy
1. The need for a sustainable energy supply chain is growing.
There is global recognition that the replacement of fossil-based energy generation and consumption with sustainable sources of power such as solar, wind and hydro, must gather pace. In Europe, where the EU aims to reach net-zero greenhouse gas emissions across the bloc by 2050, the conflict in Ukraine has highlighted the danger of being dependent on a limited number of energy suppliers and the necessity of alternatives. Specifically, the move away from natural gas has been given renewed urgency.
Over the short term, decarbonising the energy system and weaning households and industry off fossil fuels faces significant challenges, not least in ensuring the reliability of renewable energy supply. Looking forward, mid-market companies have a significant role to play in developing solutions, such as efficient renewable energy storage, that will contribute to the evolution of a global clean energy economy.
2. Energy transition is moving into the mainstream.
The shift toward increasingly sustainable energy is not limited to securing alternative sources of power. There is increasing recognition that energy-related efficiencies and decarbonisation apply to all industries, from very large energy-consuming manufacturers to small asset-light IT companies powering data centers.
According to McKinsey & Company, in Europe, five sectors are responsible for most of the continent’s greenhouse gas emissions, namely transportation, heavy industry, power, buildings, and agriculture. Across all of these, fossil fuel combustion accounts for over 80 percent of emissions.
Every sector has its part to play. Increasingly, companies across the board are judged on their energy use and environmental impact. The difference between energy-efficient environmentally aware market leaders, and companies paying insufficient attention to their climate-related impact is becoming more obvious to clients, consumers, and investors. Those businesses displaying strong sustainability credentials already attract higher valuations. As seeking to have a positive environmental impact becomes a mainstream commercial consideration, businesses that ignore this shift will be marginalised. They won’t survive.
3. Investment in the Energy Transition is ripe for alternative means of financing.
To realise the EU’s Green Deal goal of net-zero emissions by 2050 requires €28 trillion of investment over the next three decades, according to McKinsey. As traditional lenders increasingly retrench from the Leveraged Finance space in the face of regulatory pressure, private debt managers are stepping forward to bridge the funding gap.
In our home market of the Benelux, direct lending has gained momentum over the past five years. After some initial doubts around the commitment and longevity of a few managers, and the risk of placing capital with first-time or foreign funds, investors and borrowers are now increasingly comfortable with this type of flexible, tailored financing.
Thanks to Colesco’s heritage at Rabobank, one of the largest lenders in the Netherlands, we are an established entity. Most of the team has worked together for years overseeing hundreds of transactions of which many in the Energy Transition space. Looking forward, our deal pipeline draws from our long-standing relationships with sponsors and mid-market businesses of which many are frontrunners in sustainability or finding sustainable ways to operate.
4. A defined ESG strategy is critical to realising a positive environmental impact.
Managers like Colesco, which show a clear commitment to environmental, social and governance issues are best positioned to support businesses engaged in the energy transition. The two go hand in hand.
At Colesco, investing in the energy transition is a fundamental part of our overall strategy to growing a sustainable society. Among our climate-related priorities, we are committed to UN Sustainable Development Goals regarding affordable and clean energy (SDG 7) and climate action (SDG 13).
Managing ESG risk is a prerequisite for any manager. But the benefits of deploying an ESG strategy go further than that. It is a value creation driver indicative of a well-run company and fundamental to generating sustainable, consistent returns. At Colesco, we are open to supporting businesses across any sector where we see an ambitious management team who are committed to reaching an agreed set of ESG goals, and have the potential to do so.
For Colesco, ESG applies not just to deal selection, but throughout the lifespan of a transaction. Through ongoing dialogue with investee companies, we monitor progress toward a specific set of KPIs.
5. As risks and opportunities arise, expertise is essential.
Beyond rising global temperatures, another obvious energy-related threat to economic growth is rising energy prices. However, not all impacts are equal or obvious. As an investor, you need to understand first, the vulnerability of a sector as a whole to price rises, and then be able to differentiate between companies within it to determine their individual viability.
For instance, a Netherlands-based energy heavy manufacturer may be a market leader in terms of operational efficiency, but still be obliged to increases its price per unit due to increasing energy costs. In contrast, a rival in France, where the government has pledged billions of euros to small and medium-sized businesses in energy-related financial support, may operate less efficiently but still maintain a lower, more competitive price position. As a direct lender, you cannot take a one size fits all approach. We know that financing plans must be flexible and bespoke.
A second prevalent risk as the energy transition gathers pace is greenwashing. Investors need to understand the extent the company to which they are committing capital is truly engaged in decarbonising the economy. A tried and tested ESG screening and monitoring methodology is critical to making that assessment. Our ESG tool was developed by Rabobank and references a database of tens of thousands of companies against criteria refined over decades. Significantly, it also rates companies against their sector peers to compare performance. It is market leading.