Three reasons for investors to focus infrastructure exposure on the energy transition

For more than 200 years, the global economy was dependent on fossil fuels for its energy needs. This is rapidly changing. Renewable energy, driven by the so-called 'power trio' of decarbonisation, affordability and energy security, are becoming a critical factor in meeting future power needs – and, as such, the global energy transition represents a potentially unparalleled and attractive investment opportunity.

The International Energy Agency (IEA) estimates that around $4.5 trillion per year needs to be invested into the energy transition from the early 2030s, an almost three-fold increase from 2023, itself a record year. This investment is on a global basis, with almost universal support for evolving a decarbonised, cheap and secure energy system.

Even in the US and despite a shifting political climate, there has been broad, widespread and largely bi-partisan support for renewables investment over a number of years, given that the sector is a key engine for job creation and that it increasingly delivers energy cost competitiveness.

Despite this, a question we often get asked is, 'why invest solely in the energy transition?'. The assumption inherent to the question is that an investment into a wider infrastructure mandate – including exposure to energy transition assets, as well as other sectors such as utilities, transport and digital infrastructure – could offer a broader opportunity set.

Given that investors' capacity to allocate to alternative assets is finite (on average representing around 14% of portfolios  according to Schroders research ), and is therefore a scarce resource whose value must be utilised to its full potential, we believe maximising investment in the energy transition is crucial for a high-performing portfolio, for three key reasons.

1. Energy transition allocations are highly differentiated compared to all other investments you hold in your portfolio

Historical analysis of annualised returns and risk (volatility) during the decade from 2014 to 2024 show that the overall, long-term risk and return characteristics of energy transition infrastructure largely align with those of broader infrastructure portfolios. This in itself is an interesting observation, contradicting the widely held belief that diversified infrastructure portfolios must be less risky due to their diversified nature.

The analysis is also limited by assessing aggregate risk and return independently. It doesn’t capture the dynamics of specific, underlying risk exposures within energy transition infrastructure and how these can translate to long-term return potential.

Intuitively, the risks associated with energy transition infrastructure are highly diversifying, exposing investors to a unique mix of risk premia compared to non-energy infrastructure sub-sectors and other asset classes:

• Inflation Risk : Returns are typically linked to inflation, helping to maintain the real purchasing power of a portfolio.
• Positive Power Price Risk : Energy transition assets benefit from increases in electricity prices, while for other asset classes and non-energy infrastructure these are a major cost input.
• Resource/Weather Risk : Few other parts of a portfolio are as meaningfully impacted, positively or negatively, by meteorological factors as renewables assets.
• Technology Risk : Each renewable technology and asset, whether it is a solar park or a wind farm, carries specific risks – and so diversification opportunities.
• Geography/Policy Risk:  Policy and regulation supporting the energy transition are rapidly developing in most regions around the world, providing a favourable investment climate.

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