As the energy transition has grown to prominence as an investment theme, the number of strategies targeting it has exploded. Still, most of them invest heavily in the same areas: renewable energy assets such as wind and solar, sometimes electric vehicles and batteries.
Jennison Associates managing director Raj Shant argues this scope must be broadened. The PGIM Jennison Carbon Solutions Equity Fund, which Shant helps oversee, targets the less obvious opportunities within energy transition that he says investors risk missing if they exclusively focus on high profile assets like windfarms and solar panels.
"Really traditional climate products in some senses only look at the tip of the iceberg," says Shant. "With an iceberg, the bit you can see above the sea level is only about 10% and 90% is below. With traditional climate products, the focus ends up being very much wind, solar, renewables and batteries - the most visible 10%."
This is where the PGIM Jennison Carbon Solutions Equity Fund differs from its peers, as it makes allocations to a wider range of investments linked to energy transition. Sometimes this can involve making allocations other funds cannot, with Shant giving the example of investing in certain fossil fuel assets as ‘transition fuels.'
These are defined as fossil fuels that are much cleaner than others (such as gas versus coal) and can be considered as contributing to decarbonisation because they release less CO2 per unit of energy generated. An example holding is Cheniere Energy, a US provider of liquified natural gas.
"Fundamentally this strategy is built around the idea you can generate long-term outperformance of the broader market because the companies genuinely helping to find solutions to these problems should benefit at the revenue level and the profits level over a multi-year period," explains Shant.
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