Jul 23, 2020 Sustainability

Hydrogen could save the climate – and energise investors

As a future energy source, hydrogen has caught stock brokers‘ imagination. As individual stocks in this sector are highly volatile, investors should aim for a broad mix. Funds can be a good solution.

  • To slow climate change and associated temperature rises, we cannot avoid moving away from fossil fuels such as coal, oil and natural gas.
  • Hydrogen can fill the gap, but we will need to build completely new infrastructure. Many countries are investing billions to promote development in this area.
  • Hydrogen is also becoming an important topic on the stock market. As individual shares are highly volatile and many companies have yet to prove themselves, it is advisable to diversify broadly.
4 minutes to read

According to Hydrogen Council forecasts, hydrogen could meet about one-fifth of the world's energy needs by 2050.

Scientists on the Intergovernmental Panel on Climate Change all agree: if humankind wants to slow down global warming and thereby climate change, it must reduce emissions of greenhouse gases such as carbon dioxide (CO2) as quickly as possible. Therefore, the first step must be to curb use of fossil fuels such as coal, oil and gas: a process known as decarbonisation of the economy. Along with renewable energy sources such as solar, wind and geothermal power, hydrogen has an important role to play in achieving his goal.

A versatile energy source

Not only could hydrogen replace gasoline and diesel as a road vehicle fuel, it could also be used for shipping and aircraft. It might one day be used to heat our homes or to store surplus electricity from solar and wind power plants. Finally, hydrogen use in industrial processes – for example, instead of coke in steel production – is also under consideration. The Hydrogen Council believes that[1] by 2050, hydrogen could meet almost one-fifth of the world's energy needs. Companies from around the world have joined forces within this organisation to promote hydrogen use.

No wonder the stock market has lit on the subject. Companies that produce fuel cells, electrolysis plants and hydrogen itself are under the spotlight. Political forces, which in many countries are driving development of a hydrogen-based economy, provide further impetus. Germany, for example, adopted a national hydrogen strategy in early June and has provided subsidies totalling nine billion euros to make[2] this energy source marketable.

From grey to green

The European Union, for its part, has set itself the goal of creating production opportunities for up to ten million tonnes of[3] so-called green hydrogen by 2030. This is because practically all of the approximately 70 million[4] tonnes of hydrogen produced worldwide each year at the moment comes from gas or coal. This "grey" hydrogen is anything but climate-friendly. Green hydrogen, which is produced from water using electricity delivered by electrolysis, is completely different. Here, water is split into its two component parts of oxygen and hydrogen - with no CO2 emissions, provided the electricity is generated using wind or solar power.

The key question is: what will hydrogen cost in future? For green hydrogen, which up until now has been expensive, to establish itself as an alternative energy source, costs must fall significantly. There have been two positive developments here. First, electricity from renewable sources has become considerably cheaper in recent years, which makes electrolysis cheaper. Second, electrolytic plants are now so mature that they operate much more efficiently than they did some years ago. The cost of electrolysers - as the devices that break water down into its basic components of hydrogen and oxygen are called - has itself fallen by 60 percent in the last ten years and, according to EU forecasts, is likely to halve again by 2030.[5]

Broad diversification is essential

Investors who want to bet on the megatrend of hydrogen are spoilt for choice throughout the value chain. This starts with  green hydrogen producers and the plant construction companies that they require, continues with providers of infrastructure such as pipelines, filling stations and storage facilities, and extends to manufacturers of fuel cells and to energy supply solutions such as green fuels.

As is the case with electricity from renewable sources, the cost of producing hydrogen is expected to fall rapidly in coming years.

Share prices in the hydrogen sector are highly volatile. Selecting promising individual stocks remains a challenge.

"As is always the case with products or technologies that are on the brink of breaking through in the market, investment opportunities and risks sit side by side," explains Tim Bachmann, fund manager of DWS Invest ESG Climate Tech. The fund invests worldwide in companies whose solutions help to slow climate change or mitigate its effects. This includes the hydrogen sector. As hydrogen shares are highly volatile, Bachmann advises only using them as one component in a broadly diversified portfolio.

Use expert know-how

The political will and the financial means are there to help hydrogen achieve a breakthrough in the fields of mobility, energy and industry. Now all that remains is for investments to bear fruit. The opportunities for investors to participate in this market of the future are as diverse as this green energy source‘s potential applications. However, tracking down tomorrow‘s winners remains a major challenge. Here, it can be helpful to use expert know-how and not to put all your eggs in one basket.

Performance in the past 12-month periods ESG Climate Tech LD

Period

Net

Gross

21/07/19 – 21/07/20

16.62%

16.62%

01/10/18 – 21/07/19

3.36%

-8.28%

Past performance, [actual or simulated], is not a reliable indication of future performance.[6]

As of: End of July 2020; Source: DWS International GmbH

Risk information DWS Invest ESG Climate Tech LD

  1. Market-, industry- and company-related price losses
  2. Exchange rate fluctuations
  3. The unit value may fall below the purchase price at which the customer acquired the unit
  4. Due to its composition / the techniques used by the fund management, the investment fund has a significantly increased volatility, i.e. the unit prices may be subject to considerable downward or upward fluctuations even within short periods of time

Key Data DWS Invest ESG Climate Tech LD

  • ISIN: LU1863264153
  • Category: Equity funds

  • Appropriation of income: Retention

  • Currency: Euro
  • Fund assets: EUR 123.11 million
  • Issue surcharge: 5.00%
  • Flat rate: 1.500%

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1. Source: https://hydrogencouncil.com/en/study-hydrogen-scaling-up/

2. Source: https://www.bundesregierung.de/breg-de/themen/energiewende/wasserstoffstrategie-kabinett-1758824

3. Source: https://ec.europa.eu/energy/sites/ener/files/hydrogen_strategy.pdf, page 6

4. Source: https://www.iea.org/reports/the-future-of-hydrogen

5. Source: https://ec.europa.eu/energy/sites/ener/files/hydrogen_strategy.pdf, page 4

6. The gross value development (BVI method) takes into account all costs incurred at fund level (e.g. management fee), the net value development additionally includes the front-end load; other costs may be incurred at investor level (e.g. custody account costs), which are not included in the presentation.

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