If 3-year budget plans are difficult to make, it’s almost impossible to guess what could happen in the decades to come. In 2021 the FED and ECB were still talking of “transitory” inflation, only to use an opposite language only one year later. Nobody can foresee how the energy transformation process will evolve by 2050, however there are times along the way when we are comforted that the direction is the right one. The year 2023 is one such time.

The IEA published its 2023 Energy Report, stating that this year the investments in solar will exceed those in oil. Out of the 2.8 USD trillion that are going to be invested in energy sources the renewables, starting with solar panels, will account for 1.7 while fossil fuels will take the remaining 1.1: renewable investments will thus grow by 24% in 2021-23 vs +15% for fossil fuels.

Even in China, a country that is going to pollute more and more by 2030, renewables managed to pull ahead in 2023: the installed power from renewable sources reached 50.9%, more than fossil sources.

Another example comes from Tesla, although in this case it’s more of an equality: the cost per mile of the Model 3 reached the same level of the hugely successful Toyota Corolla. Of course, this is taking into account the government subsidies for electric vehicles.

Thus, the march towards a decarbonized world continues and, to help green fuels complete the overtaking of fossils, Europe issued in mid-June a new package on sustainable finance and the European Taxonomy.

Among the most innovative points of the package are the recommendations on transitional finance, that should help clarify which activities are to be considered as appropriate for a sustainable transition. This can be measured for example by the amount of taxonomy-aligned investments, so that big utilities whose investments are substantially targeting renewables can be easily distinguished by oil companies, whose green investments in 2022 were globally less than 5% of the total.

Another innovation is the introduction of new rules for ESG rating agencies. The sprouting of ESG data providers, whose wide-ranging methodologies end up in very different ratings for a given company, is one of the usual complaints of ESG-minded investors. A greater transparency by data providers and the prevention of potential conflicts of interest will lend more credibility to investment portfolios and allow end investors to have more confidence by reducing the fear of greenwashing.

That’s not all: the package sets new standards for the accounting of sustainability data by companies (CSRD) and issued new criteria for the economic activities that contribute to non-climate environmental objectives such as marine waters, circular economy, pollution prevention and control, biodiversity protection and restoration, etc. However there’s also a point as controversial as the introduction of gas and nuclear in the Taxonomy: the Defence sector. According to the new guidelines the investments in weapons and defence technologies are not in contrast with PAIs; indeed they are considered essential for the security of the EU, for peacekeeping and thus for the social sustainability! A rhetorical expedient arising from necessity, as what would be the purpose of weapons if no one had them?

The path that is shaping up in 2023 seems to go in the right direction. It’s important, though, not to lose credibility along the way by coercing temporary needs into the final goal.

With Next Generation EU, Repower EU and the Green Deal, the EU aims at becoming the first continent with net zero emissions by 2050. To reach the objective, Ursula Von der Leyen knows that Member States’ contributions are not enough: private investments are also necessary. To incentivise the latter, on one hand they have created the Taxonomy which defines the green business activities, and on the other hand they have introduced the SFDR, to categorise (article 6, 8, 9) the investment funds based on the level of “green” of their holdings. Two powerful instruments, when used together: companies have to align more and more to the European Taxonomy, and funds have to become greener and greener, going from art. 6 to art. 8, and from art. 8 to art. 9, to follow on the EU’s target.

In fact from 2019 to 2022 the sustainable funds (mainly art. 8 and to a lesser extent art. 9, that initially where simply called ESG) have grown exponentially and have now overcome the traditional ones (art. 6). The proliferation of art. 8 funds, a result of the limited restrictions to the investment universe compared to a traditional fund (the STOXX 600 ESG has 585 constituents, as opposed to 600 for the main index) has been accelerated by cosmetic adjustments to the existing art. 6 funds. This has negatively impacted the perception of investors, who have started to claim that many of such funds were simply “greenwashing”. Hence the need for a deeper distinction between art. 8 and art. 9 funds, ie between those who apply some ESG principles and those have to demonstrably quantify the sustainability of their own investments.

The regulation of art. 9 funds is however complicated, the rules have many gaps and they are subject to multiple interpretations, bringing up absurd consequences: some funds have to say that they have sustainable investments not taxonomy-aligned only because of lack of appropriate data, and a long/short fund cannot short non-sustainable companies because the investment universe must comprise only “sustainable” assets.

In addition the EU is tightening even more the rules for art. 9 funds to avoid them being associated to the “greenwashing” rage. Rather than clarifying the rules, the European Commission has increased the uncertainty surrounding them, pushing many investment houses to demote spontaneously their own art. 9 funds to art. 8 before January 2023, when the investment composition disclosures came into force. According to the Financial Times, in the last quarter of 2022 BNP Paribas, Blackrock, Amundi and Pictet have done so for about 175 €bn, shrinking the art. 9 funds assets by 40%.

The complexity of the regulation is so appalling, even at government level, that according to an end-of-March article of the Financial Times the European Commission is thinking about scrapping art. 9 altogether, citing sources close to the issue.

When you’re about to make a revolution, you go into uncharted territory: there are many obstacles and you can make many mistakes. But if the idea is good (who would argue that a greener world is not a good idea?), you have to persevere. Scrapping art. 9 funds would remove the main tool at the EU disposal to bring investors on board the energy transformation process. The investments in non-sustainable assets could last for a long time, the 2050 target would become utopic and Europe would lose credibility going back to have, as in the past decades, only a subordinate role at global level.

The US Inflation Reduction Act, approved last August and providing 369 USD bn at the disposal of green policies, has called for an EU response with Von der Leyen announcing “our European IR Act”.

Even though at the beginning the US bill has been seen favourably by the European Commission, with the same Von der Leyen congratulating the strong intervention towards climate change, the following scrutiny of its protectionist implications worried the EU members, that requested a joint EU-US task force to make them disappear. In the US IR Act, in fact, the tax credits benefit the products built predominantly within the US or countries that have specific commercial treaties with them, such as Canada or Mexico. One solution could be for European companies to move a substantial part of their business to the US, but that would jeopardize Europe’s attempt to regain the spotlight in the financial markets, missing the opportunity just on that one issue (the energy transformation) that it’s building its credibility upon.

Germany and France have not lost time in demanding more flexibility for state aid, something that would create resentment among countries financially more fragile, as pointed out by De Croo, Belgian Prime Minister, and Margrethe Vestager, European Commissioner for Competition.

As the joint task force proved to be ineffective, Von der Leyen announced at Davos the Green Deal Industrial Plan, intended to promote the development of net-zero technologies that are rapidly growing: a plan to re-assert its global leadership in this field.

Among the four pillars of the plan, investors focus on the first two: simplified and fast authorizations to accelerate the approval of objectives such as wind and solar farms, and a faster credit availability for strategic projects. The latter concerns the deregulation of state aid, that will have to be carefully balanced to avoid internal conflicts within EU member states, as well as a new sovereign fund, immediately criticized by the German Finance Minister who pointed out that loans within the Next Generation EU are still available but remain unused by many member states (Italy’s not one of them).

Among the net-zero technologies supported by the plan, we find batteries, solar panels, wind turbines, heat pumps, green electrolyzers, and carbon capture and storage facilities, in addition to the commodities necessary for their production.

The back-and-forth between US and EU on the development of green technologies will give a push to the companies involved in the sector. If the US IR Act provided a boost to their “renewable” companies, leaving the European ones a little behind, hopefully the EU answer will close the gap. Indeed, since the beginning of the year the sector has been performing very well: companies involved in building renovation and automation jumped by over 15% on average, the hydrogen pure plays by more than 25%, some companies active in the carbon capture by 30%, those producing power inverters and solar panels by 20%. However, wind companies remained behind, as well as big utilities that in this sparkling beginning of year have been mostly negative.

And so Europe, after the Russian invasion of Ukraine and the need for energy independence, responds with new impetus to the latest green challenge. Perhaps some compromise will be needed given the disparities between some member states, but when facing new difficulties the answer is always the same: promote and support with stronger urgency the energy transformation.

According to the UN the world population reached eight billion people on November 15th, 2022. The demand for food rises, deforestation gets worse, biodiversity decreases, terrains are drier and drier: all things that contribute to higher GHG emissions in the atmosphere. The UN estimate the whole food value chain represents 30% of global emissions, 40% of which come from agriculture and cattle breeding, fertilisers and pesticides; one third from changing use of soil; and the rest from the supply chain: cooking, refrigeration, packaging, transportation and waste, the latter amounting to one third of produced food. In addition, agriculture uses 70% of drink water and livestock farming 80% of farm terrains, contributing only for 20% of calories and 37% of proteins daily intake. And over 50% of antibiotics are used in agriculture and breeding, with an increased bacterial resistance as a result.

Without a change in our diet and our eating habits, where red meat outweighs fruits and vegetables, the Paris target is unattainable. And such changes would have a general health benefit considering the 2 billion people overweight or obese and another 2 billion suffering malnutrition.

Europe, with the program Farm to Fork, part of the Green Deal, was the first to start a re-thinking of the whole food value chain. Among the objectives by 2030: the reduction by 20% of fertilisers, 50% of pesticides and 50% of antibiotics; bring to 25% the farms dedicated to organic farming (it is now 7.5%); convert 10% of them where animals could prosper in the wild enhancing biodiversity; make 30% of lands and seas protected areas (only 26% of lands and 11% of seas are currently protected) and halve the food waste.

Member States don’t want to force people to eat as they think they should, but they can influence their decisions: mandatory labels about nutrition values and source of the food, avoid advertisements on low price meat that mask its quality, and use of a differential taxation depending on the product, such as the proposal of adding a 1€/kg tax on meat between 2023 and 2025, with a gradual increase. Moreover, Europe provides 30 billion euros of subsidies for livestock farming: if directed to cellular agriculture and production of vegetable-based food, that money could help with the desired transition. In fact, these two forms of alternative food production would reduce GHG emissions by 90% for a given meat production target, and ensure a limited use of water, pastures and other resources. On April 27th the EU Commission launched the initiative End the Slaughter Age, that demands to end the European subsidies for livestock farming and use the money for alternative ways of producing meat: the signatures collection started on June 5th. Perhaps the threshold of one million signatures won’t be reached within the first 12 months, but certainly it won’t remain an isolated attempt given Europe’s intention to spur sustainable foods.

Other types of incentives could be the carbon sequestration by farmers, include other sectors in the market for carbon certificates, use clean energy to produce food, anaerobic digestion for biogas produced by food waste.

Linked to this transformation are two important social aspects: a healthier treatment of animals and a lower use of child labor, as 75% of it globally happens precisely in the farming and breeding sectors.

The companies affected will be all those involved in the food chain: livestock farms, producers of fertilisers and enzymes, companies that produce and trade the products concerned, restaurants, start-ups of sustainable food, tech companies that produce tools for an agriculture more focused and sustainable, and pharma companies that make tests through the value chain.

Of all those, the transition will favour the companies producing enzymes and flavours and those that realize tests: the former will see their contribution to food production rise from the current 15% for traditional food to 85% for vegetable-based food; the latter will benefit from an increased control and a mandatory label for products sold in supermarkets.

Alternative foods are now more expensive than traditional foods, but we are comparing an industry in its infancy to one that benefits from large-scale production since decades, with optimized processes. It’s easy to see how the new industry will benefit from lower costs over time, as production increases, technologies improve, and for its ability to use 90% less resources.

Over the last few months there’s been much agitation on hydrogen, the cornerstone of the energy transformation: without this tiny molecule the net zero target may not be reached, and only with hydrogen we can de-carbonise the high emissions sectors such as heavy transportation, steel, cement, refineries, fertilisers etc.

Although hydrogen is the most common element on our planet, its molecule (H2) is usually derived by other compounds. Depending on how it is produced, we can distinguish three types of hydrogen. Typically hydrogen is produced by methane, causing CO2 emissions in the atmosphere: this is the grey hydrogen. If the CO2 is captured and put in depleted oil or gas storage, we have blue hydrogen. When it is produced via water electrolysis, using renewable energy such as solar or wind, we have then green hydrogen. Today 99% of produced hydrogen is grey, and the reason is the price: 1.5$/kg for the grey one, while the blue one includes the additional cost of capturing CO2 (estimated at 0.5$/kg) and the green one may cost more than 5$/kg.

With Biden’s IR Act and the 470 billion dollars coming to renewables via subsidies and loans, as much as 13 bn are earmarked for the production of green hydrogen, filling the 3.5$ cost gap versus the grey one and enabling the former’s development and usage.

On Sep 22nd the US Department of Energy also contributed to the push by making 7 bn available for an hydrogen hub through the United States.

China, very active on this theme, has contributed 20 bn dollars to reach an overall target of 150 bn by 2025.

Europe, on the other hand, keeps increasing the power targets for green electrolysers installed within 2025, from the 6 GW of the Green Deal to the 17.5 GW of RepowerEU. The available resources are now 5.2 bn dollars, and is trying to get 7 bn more by private investors via the new SFDR and Taxonomy regulations.

The main cost for hydrogen is the energy necessary to split the water molecule. About 50-60 kWh are needed to produce 1 kg of green H2 which makes the current technology inefficient given the price of 20€/MWh of electricity that would make the cost similar to grey hydrogen.

The development of renewable energies is therefore even more necessary, as their production costs have already substantially decreased over the last few years to the point that they are now cheaper than the energy produced by fossil fuels, and they are expected to continue to decrease in the future.

It is also essential to prepare hydrogen production sites near wind turbines or solar panels whose energy would be used to produce hydrogen, which would then be transferred where needed. In this way hydrogen could also serve as energy storage, and not only as fuel.

The governments’ acceleration towards decarbonization will increase the world demand of green hydrogen over the next few years. Estimates available on the web are wide ranging, but all in agreement on a growth rate of multiple times from now to 2050.

Such huge growth causes wild ups and downs of the share price of listed companies, that may gain 50% or more depending on the mood, as well as lose it in a matter of days. After all these are companies that have negative cashflows for the next two-three years exactly because of the massive investments planned. While they could suffer from increasing interest rates, all CEOs and CFOs of the companies active in this sector are excited by the opportunities foreseen in the near and far future.

Hydrogen is an explosive element, and should be handled with care: so should the investment in hydrogen companies.

It’s only two months ago that we were considering the Hesitations of ESG investors and how the Taxonomy legislation was viewed as an obstacle to profitable investments. Today the fortunes of ESG stocks look bright again thanks to the Inflation Reduction Act, the Biden plan to push decarbonization and green energy sources.

After 18 months of exhausting give and take, the package – that in January 2021 included a Climate Plan of USD 2 tn – has been approved a few weeks ago at the US Senate after 3 senators agreed to support it. Just about to pass the law (51 in favor vs 50 against) and with a substantial reduction to 740 bn, of which 370 for renewable energies to fight climate change. Even so, the IR Act provides a budget as much as four times higher than the previous climate plan of 2009. According to independent estimates, matching the Democrats’ data, the investments to fight climate change would cut carbon emissions by 40% by 2030 compared to 2005. It’s not quite the 50% initially announced by Biden, but the target may be increase in the next eight years if everything goes according to plan and the energy cost will decrease thanks to wind, solar and hydrogen.

The IR Act approval on July 27th spurred a rally on stocks linked to renewable energy, especially in the US. Solar and hydrogen companies have recorded average performances around 25% in the three following days, reaching peaks of 35% for the former and 60% for the latter on Aug 15th. Stocks like Array Technologies, that were hard hit over the past few months and that have reported better than expectations in the earnings season, have almost doubled in two weeks showing year-to-date performances ranging from -60% in May to +50% in mid-August. In Europe things have been somewhat quieter, with single-digit performances for solar and wind companies and +15% for hydrogen ones. Since the law approval, the S&P Global Clean Energy Index increased by almost 15% in three days reaching +21% on Aug 15th.

This happened in a year that renewable energy stocks exhibited extreme volatility following global geopolitical events: after the negative start, the S&P Global Clean Energy went back to positive territory due to the invasion of Ukraine by Russia, when the S&P 500 was still around -10% at the beginning of March. After the Q1 reporting season, the rates hikes, energy and labor cost increases and supply chain issues have pushed the index back in the red to -20% around mid-May, a loss greater than the general S&P 500. Now with the Biden plan the index is again positive, performing around +12% as of Aug 15th while the S&P 500 is almost at a double-digit loss.

The prices of these companies are evidently influenced more by expectations on a far future than to objective valuations. Depending on the investment case, analysts justify the prices assigning a greater or lower probability to revenues from future contracts. We are seeing again the same environment that led to the excesses of January 2021 (coinciding with the USD 2 tn infrastructure plan by Biden) and its following unravelling until May 2022.

It's not easy to navigate these wild fluctuations, but two considerations can be done: on one side, the IR Act shows once again the willingness by world governments to reduce the GHG emissions over the next three decades; on the other side, any company with excessive valuations has a high intrinsic risk even if it operates in a sector with strong growth. If we add that many of the companies in the decarbonization business are continuously expanding with negative cashflows and substantial investments, it’s easy to see that even a minor setback could derail the growth story and put the company in danger. So if investors cannot stay out of a secular growth trend, they still should avoid stocks with outlandish multiples and avoid specific themes that appear to be overheating.

Hesitations have begun to surface. After only four months from the start of the Russian invasion of Ukraine, the roar for renewables’ revival appears to be fading, if not dead already. Articles suggesting that ESG investments are now out of fashion are starting to appear. Surveys report that investors consider the Taxonomy as an hindrance to finding investment opportunities. And redemptions from ESG funds seem a real risk in the second half of the year: the darker the green, the higher the potential redemptions. Investments such as hydrogen are seen as too long-term until they become profitable, given the high costs and the lack of earnings for the next two years or more. Rising rates all but strengthen this perception.

To support this thesis, we have as well news coming from Germany, Austria, Italy, Belgium and other European countries that, to face the energy emergency, not only postpone the closure of nuclear plants but re- open the infamous coal-powered power stations.

Is this the end, then? The oil companies generous dividends are enticing for many. With sky-high oil prices and record cashflows, who wouldn’t want to invest in oil companies? Even defence stocks, since the start of the war, have prompted ESG funds to tweak their screenings, separating manufactures of generic weapons from those of prohibited non-conventional weapons.

The world of finance seems to focus more on a short-term horizon than on long-term investment returns. Driven by the need for positive performances in three, six months or one year, funds look for loopholes not to miss opportunities that could make their clients happy.

The European energy transformation will last thirty years. Maybe more, but the direction hasn’t changed. On the contrary, the targets are revised up every time there’s an external shock: from the Green Deal to Next Generation EU when the Covid-19 pandemic started, to Fit for 55 and finally Repower EU after the invasion of Ukraine. Incidental circumstances are like market trends: a bear market can last one or two years, but if one were to bet systematically on a down trending market, in the long run they would probably only lose money. Europe is firmly convinced of this structural change: as Ursula von der Leyen underlined, Europe should take the current crisis as an opportunity to push ahead, rather than going back to the dirty fossil fuels. Oil companies know that, too, and will use the huge cashflows generated by the current oil price to accelerate on a transformation that is unavoidable.

The same holds for governments that now fall back to coal-powered stations: in Germany the announcement came from Habeck, the minister for Economic Affairs and Climate Action, a member of the Green Party. A supporter of clean energy forced to such a decision by the sudden 40% reduction in Russian gas supplies, that made untenable an already difficult situation. Untenable today, that is: but what will happen when the emergency will end?

The point is that if private investments don’t go along with public incentives, certainly the energy transformation will slow down. Finance must give its own contribution during this difficult period, and the returns will come, even for those energies that are now unprofitable.

Going back to the case of hydrogen, for example, we could say that ten years ago even residential solar panels was unprofitable. In Italy it would have costed 30 thousand Euros and the energy savings alone were not enough to offset it. With public incentives, however, one would have gained almost 90 thousand Euros in 20 years.

Green hydrogen is similarly unprofitable today, given its costs, but thanks to ever more ambitious targets set by EU in terms of green electrolytes (from less than 1GW today to 6GW in the Green Deal, to 17.5GW in the RepowerEU by 2025), one can hope in considerable public incentives.

Today, residential solar panels in Italy cost around 10 thousand Euros and with current electricity prices one could save up to 1500 Euros per year. Even without considering the incentives for building renovations, it’s an investment that returns 3x in 20 years: a respectable 7.2% per year. The same will happen with hydrogen, that EU will support until it will be strong enough to become profitable per se.

Those who invest in the energy transformation, announced as the biggest revolution after the industrial one two centuries ago, cannot simply look one or two years ahead but should have more foresight and conviction that a more sustainable future is possible. Otherwise, we know already how it will end.

Nowadays they speak of sustainable or ESG investments as if they were something very different than the market as a whole. In the ESG world there’s a range of instruments, some of which are so similar to the overall market that it’s difficult to understand the difference, if any.

Let’s have a look for example at Europe, where ESG and sustainability are much more advanced: by comparing the Stoxx 600 versus the Stoxx 600 ESG in the last two years we can see no performance difference. Only 15 out of the 600 stocks of the main index are excluded by the ESG index.

The flood of investments into ESG vehicles pushed all companies to pay more attention to environmental, social and governance factors to avoid being excluded by the investors’ portfolios. As a result, what a couple of years ago was an ESG European equity fund is slowly morphing into a common European equity fund, and this can be guessed also by the number of existing vehicles that ‘change’ to ESG: one may think that their investment strategy is not changing substantially after all.

Is this what an investor would expect when we talk of sustainability? Or would he expect something about solar, wind, hydrogen energy sources, electrification, batteries, waste recycling, digitalization, building renovation, gender and diversity parity, etc? Perhaps we should make an effort to differentiate more the generalist funds that include ESG principles (so-called art. 8) from the specialist funds that aim to make an impact (so-called art. 9) according to the SFDR.

After the Russian invasion of Ukraine one of the topics was the comeback of sustainable investments; however we have seen that the Stoxx 600 ESG followed closely the Stoxx 600. Even more selective benchmarks such as the MSCI Europe ESG Leaders have behaved similarly to the generic MSCI Europe, while some difference can be seen in one of the most selective indexes, the MSCI Europe SRI. Still, these are small differences compared to those themes that will help us attain the net zero objective by 2050, such as alternative energies, well represented by the S&P Clean Energy index.

 Performance 24 Feb - 9 Mar 2022
MSCI Europe Index-4.12%
MSCI Europe ESG Leaders-3.66%
MSCI Europe SRI-1.84%
S&P Clean Energy23.54%
Source: Bloomberg

The alternative energies theme is the heart of the energy transformation chased by Europe, and that has become a priority with the invasion of Ukraine as it’s the only way for our continent to reach independence from the Russian oil and gas and, at the same time, reduce CO2 emissions. But it’s not the only theme. Other sectors, such as the building renovation, didn’t perform as well in the period shown in the table. On the contrary, one could say that while renewable energy has dropped on average by 50% from January 2021 to the invasion (as measured by the S&P Clean Energy), the building renovation companies has seen an extraordinary 2021 with average performances of +50% thanks to the incentives of the Next Generation EU program, which aims at trebling the renovations from 1% to 3% p.a.

Today the huge difference between MSCI Europe and S&P Clean Energy is almost halved, while building renovation dropped by 25% in 2022. The reasons are the same that are affecting all companies in these times of market turbulence: increase of commodities (energy in particular) prices, rising rates, supply chain issues and delayed projects delivery. And those multiples inflated in the wake of reform euphoria get deflated by the fear generated by all these issues.

As we highlighted more than once, art. 8 and art. 9 funds tackle the issue of energy transformation at different speed, but the former are slowing down versus a broad market more and more ESG-aware and compliant. The latter, on the other hand, continue on their path driven by specific themes, which however may rise and fall at different times.

With the new Repower EU program unveiled on May 18th, Europe keeps pushing on energy transformation: additional investments for 300 bn to step up the targets already upsized with the Fit for 55. The three main targets involve short term needs (diversification of gas sourcing), medium term goals (pushing on renewable energy) and one that will depend on the habits of European citizens and their ability to use energy more efficiently. Lacking this voluntary effort, the possibility of an energy rationing could prove a more powerful incentive.

While the short-term goal is to reduce Russian dependency by two thirds by the end of the year, the medium-term goal is to be completely independent by 2027. This will be achieved by increasing the target for renewable energy from 40% to 45%, that for green hydrogen electrolyzers to 17.5 GW by 2025 (the original Green Deal target of 6 GW looked already ambitious), and with a greater energy efficiency coming from building renovations and transports electrification (more details here).

For an art. 8 ETF that follows a generalist index is difficult to follow all these themes: hydrogen and solar pure players, for example, are small and medium sized companies not included in the Stoxx 600 ESG. There are of course ETFs that follow some of them, with the added issue of managing the volatility in the various market environments. The alternative is to invest in actively managed funds, that can be themselves art. 8 or art. 9 with different shades of green.

According to Morningstar, less than 5% of mutual funds were art. 9 at the end of 2021, while art. 8 funds represent almost 40% and some of them, as we discussed in the past, have simply “migrated” their prospectus from their pre-SFDR life.

It’s up to the investor to choose the theme(s), the vehicle(s) and the shade of green.

There are times when one has to get in the game to avoid vanishing into nothingness, come up with changes to get another chance. But the structures built over time are so deep-rooted that a remarkable thrust is needed to shake them up.

Europe has been in the shadow of US and China for some time now: growth is lacklustre, unemployment is higher than on the other side of the pond and, if we look at investments, no European company is among the world’s top ten. Why on earth a foreign investor should look at Europe? And within the continent, Italy is among the countries that have struggled in the last 20 years to keep pace even of a sluggish Europe.

With the Next Generation EU, Europe has come up with that diversion needed to increase growth, create new jobs and become again the main character among the world’s powers. It’s not a coincidence that Europe is leading the way in the green transformation, for example with the Taxonomy that Ursula von der Leyen announced as the world’s first handbook to distinguish what is green from what is not.

Italy will have a leading role in this revival, as it is the biggest beneficiary of the European Recovery and Resilience Facility with EUR 191 bn of financial support from now to 2026. Just a few days ago Ursula von der Leyen tweeted that the “first disbursement of #NextGenerationEU funds to Italy” had been made, with congratulations for the reforms implemented or approved so far. In fact this is the first payment subject to the assessment of the milestones and targets fulfilled for 2021, and it’s on top of the pre- financing of 25 bn of last August. It’s also one of the first assessment-linked disbursements at European level, after those granted to Spain (December), France (March) and Greece (April).

It's a substantial payment of 21 bn that brings the total so far to 46 bn destined to the six “missions” of the plan. If investments totalling 12 bn have been made in 2021, more than twice as much (27 bn) are targeted for 2022.

Almost a third of this, slightly less than 9 bn, are destined to the digitalisation of the public administration, national health service and companies, to the optic fibre network (the “Piano Italia 1Gbps”) and 5G infrastructure.

Almost 4 bn to improve the energy efficiency of towns and schools and to strengthen the 110% ecobonus for building renovation, while 1.5 bn will go to renewable energy, hydrogen and sustainable mobility. The investments for wind and photovoltaic projects are only 60 million euros, but those are technologies now self-sufficient and less in need of public investments. Agrivoltaic systems, more recent, will get 108 million euros. The high speed railway network will get 3 bn and research and education will get 6 bn (more details here, or in italian).

About two thirds of the total financing will be loans and one third grants. Italy is one of the few countries (along with Greece, Romania, Poland and Portugal) that have requested loans, given the economic incentive of paying less than on their own sovereign debt. The possibility of requesting loans up to 6.8% of the Gross National Income makes Italy, that used this possibility in full, the country with the most funds at its disposal: 191 bn euros, as mentioned above, which gives a clear idea of the gargantuan scale of the reforms and investments needed to modernize the country.

Should one wonder how much such reforms will contribute to the economic growth, EU studies indicate that, depending on the timing of the implementation and the productivity level, Italy’s GDP will grow by 1.5% to 2.5% by 2026 in real terms, creating about 240 thousand jobs in the process. Not a small increase for a country that had grown by 1% p.a. between 2015 and 2019.

It’s easy to imagine that companies linked to digitalisation and energy efficiency will get a lot of business in the near future, even with some caution due to bottlenecks caused by raw materials sourcing and costing, in particular for energy.

The long journey that will bring us to the final objective, being the first continent with net zero emissions by 2050, has begun. Perhaps it’s a real objective, perhaps it’s only a diversion created on purpose to boost the sluggish economic growth and reduce the unemployment too often close to double digits. Or perhaps it’s a bit of both, because both targets are commendable and they can coexist. Certainly this looks like the last chance for Europe, and for Italy, to win the trust of investors.

Man can assume different personalities, which we often simplify in two opposites: the Good and the Bad, like in the case of Dr Jekyll. When he’s inspired, Man can create timeless masterpieces such as the Gioconda, the Coliseum or the Divine Comedy; when he’s angry, he sows destruction, atrocities and terror.

As never before, these two extremes now emerge within Europe.

The war against Ukraine, while humanely terrible, has brought to the forefront in Europe two opposite needs: the Bad has called for an arms race, the Good for an alternative energies race. The latter seen as the only chance to get energy independence in the future.

In the last month we often heard talking of the NATO pact and, in particular, of the 2% of GDP guideline for defence spending by each NATO member. Today only few are at target, but after the start of the war against Ukraine many promised to reach or even exceed that threshold. Germany, among the first, three days since the start of war announced EUR 100 bn defence spending, almost twice as much as 2020. Italy approved an increase of the defence budget up to 2% of GDP and Macron included a similar increase among his re-election program: EUR 50 bn within 2025. If the single countries rush for a new arms race, EU itself approved the creation of a 5000 men army and a specific defence budget to be able to intervene in full autonomy if need be. Even before the war, on Feb 15th, EU has proposed a tax reduction on weapons produced on the continent.

One should wonder whether sustainable investments, that typically exclude arms- producing companies from their investable universe, are going in the right direction. It’s true that according to SFDR only exposure to controversial weapons is subject to disclosure, but the unripe world of ESG investments tends to neglect such subtle distinctions.

It’s the other arms race, the one of investments in renewable energies, that is going in the same direction of that ESG world and sustainability closer to the common feel.

The current war has highlighted once more Europe’s energy vulnerability due to its dependence from foreign countries, namely Russia. Additionally it showed the need to be fast and achieve energy independence as soon as possible, without further delays.

Once again, the first to move in the race was Germany, budgeting EUR 200 bn to accelerate the transition according to its Minister of Finance Christian Lindner. This, however, was after the coalition partner Greens staged protests fearing that the 100 bn defence spending would go to the detriment of the environmental budget. A thought that crossed the mind of a few investors, too.

The Bloomberg news about a second Eurobond to finance defence and energy, although later denied, prompted a rally for the companies of the two sectors. From Feb 23rd to the beginning of March renewable energy companies such as Orsted, Vestas or Nel bagged returns around 40-50% while the S&P Clean Energy index jumped by about 20%. After all, if the first Eurobond of March 2020 linked to the Next Generation EU program was followed by the best nine months for the renewable energy companies whose price grew by multiples, why there couldn’t be a second wave of repricing?

The strong rally of the first week of war, as opposed to the decline in the rest of the markets, suggest that investors wandered away from these investments despite no changes in the EU’s or world’s governments plans on the subject. Of course a few critical points emerged: the increase of commodity prices, the supply chain issues, the delay of projects and the interest rates rise that penalise growth and utility companies. However their prices may have discounted bad news too much, as if the expected growth were in jeopardy. Speaking of growth, one of the reasons why investors shied away from renewable investments last year is the increased competition in sectors such as wind and solar, but it’s easy to guess, given the need of energy from these sources, how much the demand would outstrip the supply.

If now investors don’t explicitly bet on alternative energies companies, at least they don’t ignore them anymore even though the critical points mentioned above have not disappeared. Actually the current war may only exacerbate them. The renewable investments may even overheat, and their volatility increase, if EU will actually go for a new Eurobond given the heightened sensibility of investors to this theme.

As we have always maintained, the energy transformation is often based on new technologies, sold by companies that will produce earnings only in a few years’ time because today is the moment for heavy investments. The journey will last 30 years and we’re only at the beginning: let’s keep calm and carry on.

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