SDG 7 and Hydrogen : a new investment thematic?

As the world struggles to control climate change and CO2 emissions, the search for alternative sources of energy is accelerating. Renewables (solar, wind and hydro power) have made good progress in terms of both capacity and efficiency, driving down costs. However, one of the biggest challenges is how to store the power generated from those renewable sources.

Hydrogen could be a key part of the answer, creating a boom in innovation around this technology. Hydrogen has the chemical properties to store energy for later use. Hence, the “decoupling” of power generation and consumption is one of the big challenges facing green energy.

On the face of it, hydrogen seems like the holy grail of energy. It is easy to make, as you simply pass an electrical current through water to split it into hydrogen and oxygen – a technique known as electrolysis. If the electricity comes from renewable sources, then this process is essentially emissions-free. When the hydrogen is burned or passed through a fuel cell, the only by-product is water.

So, why hasn’t this wonder fuel taken off? There are practical issues relating to storage and transportation, but the number one hurdle is cost. Electrolysis is energy intensive, meaning that ‘green’ hydrogen is not yet commercially competitive with fossil fuels. At the moment, the cost of ‘green’ hydrogen production can be 3-5x greater than ‘grey’ alternatives. While it is possible that companies and consumers will pay more for ‘green’ hydrogen given its environmental benefits, it is unlikely that ‘green’ hydrogen can reach its full potential unless costs continue to fall and become economically competitive. As the cost of renewable energy comes down and installed capacity increases, hydrogen could become more financially viable

To ensure development and eventual adoption of hydrogen-producing technology and hydrogen-supporting infrastructure, support from the public sector will be critical. We are seeing increasing signs that such support will be forthcoming. The European Commission’s European Green Deal stated that it aims to deploy some 1%-2% of annual GDP (around €270bn per year) to support the bloc’s energy transition. This initiative will lead to increased investment across all low-carbon technologies, including clean hydrogen production and fuel cells. The new US president Joe Biden also name-checked the sector as an area that will be part of his clean energy plans for the country.

So the real question is: Is now the time to invest in hydrogen?

Over the past few years, there has been an enormous shift toward increased public and political awareness of environmental sustainability, as well as rising pressure on institutions such as pension funds or assets managers to include “green companies” in their investment portfolios. These sustainability and ESG issues will help drive interest in low-carbon options and financing of green projects, including hydrogen.

However, there is debate over the depth of this sector, as there are only a handful of small companies operating in this field. Those that exist tend to be early-stage businesses with a high degree of uncertainty about future profitability. Furthermore, hydrogen-related stocks have exploded over the past year, trading at very high multiples, but the reality has yet to match up to expectation. This reminds of the solar sector in 2007 when we had a bubble and many pure plays were small in size, and now 15 years later, many of them do not exist anymore. There is no true visibility yet when it comes to barriers to entry and competitiveness of these companies.

The more mature opportunities currently available tend not to have pure exposure, but on the other hand we can more straightforwardly assess how they will yield high returns from their hydrogen-related operations.

Looking further down the value chain, companies closer to hydrogen applications, such as electrolyser developers and fuel cells catalyst manufacturers, could also be compelling investments as their costs fall and demand grows for low- or zero-emission technology in the transport and industrial sectors

Investing in hydrogen remains thus highly speculative and it is unclear how significant hydrogen will ultimately be to the global energy picture.

At FIA Asset Management, ESG investments lie in our DNA. For years, we have been investing in financial instruments striving to make an impact on environmental and social issues. As investor in among others clean energy and solar energy instruments, we are also looking at investments in hydrogen. By investing in Hydrogen, we would target various United Nations Sustainable Development Goals, such as obviously  SDG 7, but also SDGs 12 and 13.

As explained earlier, financial instruments available today on Green Hydrogen are scarce, as the topic is still at a very early stage. For example, the only ETF investable today is L&G (Legal & General) Hydrogen Economy ETF, which seeks to gain exposure to the full hydrogen value chain. Launched in January 2021, it looks at companies with a minimum market cap of $200 million, including electrolyser manufacturers, hydrogen producers, fuel-cell manufacturers, specialist mobility providers, fuel-cell component suppliers, key industrial and utility companies.

FIA AM may consider this ETF a potential future investment, but as of today, it has a very short track record and a Due Diligence still needs to be performed before any other consideration.

Globally, the question remains pending: even if the topic looks attractive as an ESG Investor, it is still very immature. The market is currently tiny, and there is a lack of viable attractive financial instruments today.

By Christophe Bogaert, Senior Portfolio Manager & Charles Lamoulen, Head Portfolio Management at FIA Asset Management