Taming the energy transition beast

In late 2023, MUFG – facilitated by KangaNews – hosted its inaugural conference in Sydney focused on transition and access to global capital, as part of the MUFG N0W series of regional events. The scale and scope of the energy transition task means it will shape and even define capital markets in the coming years, in all areas and types of finance.

The event provided guests drawn from major companies across Australia with a unique opportunity to hear about the energy transition from all sides of the financing arena, from equity and debt providers to infrastructure sponsors, corporates and MUFG’s own global experts. Shareef Omar, head of ESG finance, Oceania at MUFG, said the purpose of the event was “to demystify the complexities and challenges of the energy transition, and the implications it will have on global capital flows for corporates and sponsors”.

Policy change has put the energy transition firmly on the Australian capital markets agenda and there can be little doubt that 2023 will be looked back on as the year in which the local financial sector woke up, en masse, to the scale of the challenge and the opportunities involved.

Introducing the Sydney event, Drew Riethmuller, MUFG’s head of global corporate and investment banking, Oceania, noted a BloombergNEF estimate that financing Australia’s goal of reaching net zero emissions by 2050 is likely to come with a price tag of roughly US$1.9 trillion. He added: “To limit warming to 1.5 degrees above preindustrial levels, we must ramp up renewables and other lower-carbon solutions, and implement a just and orderly transition. The task of decarbonisation is complex and multifaceted, and will require significant amounts of capital.”

David Dyer, partner at McKinsey & Company and leader of McKinsey Sustainability in Australia and New Zealand, described the task from a historical perspective. He explained that it took about 65 years from the start of the second industrial revolution for coal to become the dominant fuel used by humanity – at about 50 per cent of the total – while it took about 45 years, starting during the interwar period, for oil to go from providing about 10 per cent of our energy systems to about 50 per cent.

The aspiration with the energy transition is to make renewables the dominant source of energy in 25 years. “It is a faster transition than we have previously experienced and it is a more comprehensive one,” Dyer added. “In the past, all we have really done is add things. This is the first time we have ever tried to substitute out an energy source. It is going to be an extraordinarily large, unprecedented physical transition and one that has to happen at incredible pace.”

McKinsey estimates the global investment requirement of the energy transition to be US$9.2 billion per year – a number Dyer says is front-loaded and represents a US$3.5 trillion increase on current financing levels. The estimate is based on the Network for Greening the Financial System’s pathway to 1.5 degrees of climate change and incorporates required investment in the power industry, mobility, buildings, hydrogen and offsets, as well as other major sources of greenhouse gas including methane and nitrous oxide – thus incorporating transition to agriculture and waste systems.


Intergovernmental bodies, governments, regulators, companies and investors have sharpened their pencils on 2050 and later targets to increasingly shift to actionable transition pathways with interim targets. Investment cannot wait if significant emissions reduction is to be achieved in the next half-decade.

On a global macro level, Ehsan Khoman, MUFG’s director and head of ESG research, EMEA, argued that something has to give on the investment front even in the absence of a credible commitment to decarbonisation.

Renewables are not being added fast enough to offset underinvestment in carbon-intensive infrastructure, Khoman argued – while heightened focus on energy security and cost will not allow both to continue indefinitely.

“Given the structural nature of the capacity constraints of today, we believe we are in the early stages of an energy and commodity super cycle,” Khoman continued. “We define this as a capex cycle in which the physical constraints on growth create physical pricing pressures. In other words, essentially, demand is beginning to catch up with physical capacity constraints, creating better returns in the physical than the financial economy and effectively redirecting capital back into the physical economy.”

This set of circumstances most closely mirrors the economic environment of the late 1970s – a period in which the global commodity index soared by nearly 800 per cent in just more than five years. Three years into what Khoman believes will become the 2020s super cycle, the most recent commodity price peak – in 2022 – saw the index up by less than 350 per cent from the start of the decade.

“It isn’t just an energy transition – it is a resources transition,” added Andrew Bedford, director and energy transition technical lead, Asia Pacific at MUFG. He noted that Australia already leads the production of a number of resources that are essential to the process. A typical electric vehicle battery, for instance, requires 20-60 kilos of lithium, 14-plus kilos of cobalt and 40 kilos of manganese.

But the tendrils of the energy transition reach further and deeper still. Investment in generation goes hand in hand with transmission and distribution, including new technologies and new ways of managing the demand for power. “An obvious way to reduce emissions from power is to reduce absolute demand for it, and energy efficiency really ticks that box,” Bedford continued.

“The transition investment we are talking about in the buildings and real estate sector is primarily into demand management systems.”

He added: “Even when energy generation, and transmission and distribution are resolved, there is the energy storage story. A massive number of technologies are emerging in this space, too, including hydrogen – which really is just a way of storing energy over a longer duration.”

Bedford’s team has conducted analysis of where venture capital investments are being directed in the energy transition space, uncovering a raft of allocations to all areas of energy, power and cleantech. However, the clear focal point is new generation technologies with a focus on enhancing areas that are already delivering at scale – particularly solar.


This hints at perhaps the main theme of the MUFG event. This is that while the pace and breadth of technological development is dizzying, the focus of capital markets should be on investable, deliverable solutions – options that can already be delivered, at scale, in a cost-effective way or where the investment is what is needed to deliver marketability.

Daniel Timms, head of asset management, Australia and New Zealand at Igneo Infrastructure Partners, argued: “Any carbon exposed company in transition is going to require capital to reduce this exposure. We are in the business of deploying capital and achieving investment returns for our clients, and investing in transition companies can tick both of those boxes: the technology to effectively transition exists today, in many cases is already economic, and has strong demand from equity and debt providers.”

Igneo owns 27 portfolio companies across Australia, New Zealand, North America and Europe, and has committed to having a decarbonisation transition plan in place for each of them by the end of 2023.

“Each time we look at a new investment, we will assess it from a transition risk and opportunity perspective,” Timms explained. “Our investment philosophy is that we don’t exclude, we improve.

This means we will invest in hydrocarbon exposed businesses if we see a credible path to decarbonise it. Investors shouldn’t be rewarded for divestment as a means of reducing their portfolio emissions; they should be rewarded for driving decarbonisation of their businesses.”

Capital markets equity and debt investors are singing from the same hymn sheet. Siong Ooi, managing director and co-head of debt capital markets – loans and bonds, Asia Pacific at MUFG, said: “From a debt perspective, it is absolutely critical to have a credible transition plan or strategy. This has to be fairly detailed and actionable. Investors have to believe they are being shown something the borrower will be able to execute.”

Morgan Stanley executive director and head of Australian power, utilities and energy transition, Matthew McFarlane, added: “Technology investment needs to be market and customer led – and I think, with some of the newer technologies, the customer isn’t quite there yet. Notwithstanding the best of intentions from developers, governments and others, the economics, frankly, don’t stack up on some of these technologies today. On the other hand, once the customer demand is there I believe capital will follow quite quickly.”


Khoman, meanwhile, argued that financiers have a role to play in facilitating marketability. Suggesting that the global economy “is today effectively facing a scaling problem, not an innovation problem, in the journey to net zero” he suggested that 90 per cent of the abatement needed could be delivered by technologies that are proven but only 10 per cent from technologies that are commercially viable. “Our challenge, effectively, is to work out how to scale things that work to things that work at scale,” Khoman concluded.

Santos’s strategy aligns with this line of thinking. The company is targeting net zero scope-one and scope-two emissions by 2040, with interim targets of 30 per cent emissions and 40 per cent emissions intensity reduction by 2030. Its climate transition action plan sets out what projects the company is pursuing to get there.

A dynamic approach is needed, according to Santos’s chief financial officer, Anthea McKinnell, with projects entering and leaving the mix as they go through the “review and development funnel”. This refines and prioritises the most compelling opportunuities, and drives periodic updates to the plan.

“We don’t have all the answers yet, but it is important to have a plan,” McKinnell explained. “We are starting off with a strong foundation in the form of nature-based projects, and carbon capture and storage. The latter is proven technology and we know it works: we have been reinjecting into reservoirs at Bayu-Undan and the Cooper Basin for many years. This is a really solid foundation to build out adjacencies, aggregation strategies and expansion opportunities.”

For instance, Santos is trialling a direct air capture unit in the Cooper Basin. McKinnell also noted that hydrogen production can potentially be leveraged to deliver synthetic methane, which fits a need for the company’s Asian customers: a zero carbon alternative to traditional LNG.

At the point where a technology needs a push to help build a business case, other types of sponsor or financier are involved. For instance, Bedford explained, government groups or agencies are often involved in building out projects.

“Hydrogen is a classic example,” he said. “Hydrogen and ammonia have been known about and produced for hundreds of years – certainly in ammonia’s case – but we are now trying different production methods using new technologies. This type of development often needs a bit of support to reduce risk. But our clients are investing in or developing these projects, so we are working with and supporting them.”

This is where a common language can help – a language Australia is developing in the form of its sustainable finance taxonomy. Nicole Yazbek-Martin, head of taxonomy at the Australian Sustainable Finance Institute, explained that the purpose of a taxonomy is to bring rigour into the sustainable finance market, not to tell anyone where they should be investing, Yazbek-Martin commented: “Governments are pouring in significant amount of subsidies and using other policy tools and levers. This creates a conducive environment that either reduces risk or increases return on investment. The taxonomy creates transparency about the areas where we should be channelling capital to create the best bang for buck.”


Speakers at the MUFG event agreed that the opportunities should make the task worth confronting in Australia. “The challenge for Australia is how to make the most of its natural advantages,” Bedford suggested.

This might include, for example, refining new economy metals within Australia. This will not be straightforward, though. Bedford explained that China has already established a dominant position in this space – it can refine for approximately half the cost of somewhere like Australia, and it has already built out scale.

Even so, Dyer added: “We are very, very optimistic about the potential for Australia to benefit and prosper through the energy transition. We have unique natural endowments of minerals including copper, lithium, nickel, manganese and others in extraordinary quantities, access to some of the world’s lowest-cost wind and solar, natural gas – which will be critical – and the reservoirs that could be used to sequester emissions or even re-import carbon.”

The country is also fortunate in its established infrastructure and relationships, Dyer continued, including a long and enviable reputation as a reliable supplier to partners like Japan, South Korea and others in the region and beyond. “Realising Australia’s potential requires turning these endowments and relationships into competitive industries, so the country can provide the clean energy and materials the world needs to transition.”