Is hydrogen investing the next big hit for ESG?

Hydrogen investing is making waves, but its long-term prospects depend on smart energy consumption, greater green production levels, and strategic applications.

When looking at the latest investment trends, it can be challenging to determine what’s a fad and what’s here to stay. Now that hydrogen investing has started to sweep the investment landscape — and come up in conversations surrounding ESG — it’s time to sift through the noise. What are the benefits of investing in green hydrogen? Does hydrogen investing have long-term potential for an ESG-focused portfolio?

Here’s what you should know.

Not all Hydrogen Is Created Equal

The Intergovernmental Panel on Climate Change reaffirmed the need to reduce global greenhouse gas emissions in its August 2021 report,¹ emphasizing how carbon dioxide (CO2) and methane CH (CH4) threaten to destabilize global temperatures and disturb the global ecosystem at large. The development of the hydrogen economy first emerged in response to the threats posed by global warming. However, even with the demand for hydrogen (H2) energy solutions growing, hydrogen production is by no means a cure-all clean energy solution.

The sustainability of the hydrogen economy depends on how it’s produced. Natural gas-based hydrogen (“gray” hydrogen) and coal-based hydrogen (“black” or “brown” hydrogen) both involve carbon-intensive processes. Gray and black hydrogen production generate an estimated 900 metric tons² of CO2 emissions, which amount to 2.5 percent³ of global emissions — 40 percent more than Germany’s total CO₂ emissions, to put that percentage into perspective.

“Green” hydrogen, on the other hand, is generated through the electrolysis of water. Most importantly, the production of green hydrogen yields zero CO2 emissions. Investing in green hydrogen means investing in a green, decarbonized product that helps facilitate the decarbonization of other industries. However, according to the International Energy Agency, green hydrogen only accounts for 0.03 percent⁴ of total production as of 2020. Green hydrogen must consume between 10 to 20 percent⁵ of the world’s electricity by 2050 to fulfill the IEA’s net-zero scenario.

Hydrogen Investing in Practice

If green hydrogen is good for the environment and projected to play a vital role in a net-zero future, why does production still lag? To start, hydrogen production is an expensive and electro-intensive process. Industry experts believe that the production of green hydrogen is roughly three times more expensive⁶ than gray and blue hydrogen.

However, the “average green hydrogen project is expected to become competitive with gray by the mid to late 2030s. Large projects with access to very low-cost renewable power could be competitive in the very near future,” Olivier Eugene, AXA IM’s head of Climate explains. “The comparison of green and grey hydrogen is usually done using normalized power and natural gas prices. Still, the shifting prices of those two components, driven by traditional supply-demand interactions and geopolitical events, can paint a different picture at a given moment. The introduction of a cost of carbon would change this cost dynamic, as it would make grey hydrogen more expensive. In its modeling, with a carbon price of $50 per ton in 2030, the Hydrogen Council expects green hydrogen to reach cost parity by 2028 for the best locations and by the early 2030s for average locations.”

Still, green hydrogen production faces obstacles in the form of high production costs and continued reliance on renewable electricity. As worldwide renewable energy capacity grows rapidly over the next decade, green hydrogen will undoubtedly absorb a significant portion of this growth. Whether or not renewable energy and green hydrogen can successfully coexist will depend on the utility of practical green hydrogen applications.

Green hydrogen is most valuable for applications with few, if any, suitable alternatives. New green hydrogen applications have the potential to decarbonize long-haul shipping, steel production, heavy-duty road transportation, and other heat-intensive industrial processes. Since clean hydrogen can be stored, it can play a leading role in managing power grids where intermittent sources might be dominant.

The AXA IM Perspective on Hydrogen Investing

Investors should evaluate green hydrogen holistically to determine whether it’s a viable long-term addition to their ESG portfolio. “When you look at the environmental and social footprint of a given product or value chain, you need to look at it from cradle to grave,” Olivier advises. 

From a carbon reduction standpoint, clean hydrogen will play a critical role in the net-zero energy transition. Also, there are plenty of opportunities to invest in specific green hydrogen applications, the infrastructure needed to produce it, and other sections of the value chain. However, carbon reduction isn’t the whole equation.

For example, green hydrogen production is water-intensive, albeit less water-intensive than coal or crude oil production. Any water issues caused by hydrogen production would be localized — most hydrogen is produced near refineries and the pipeline is short — but that doesn’t minimize its potential impact on the surrounding communities that depend on the freshwater hydrogen production consumes.

Whether or not hydrogen investing is in alignment with ESG is too multifaceted to be boiled down to a simple “yes” or “no.” It’s critical to think about the best applications for green hydrogen and not invest in green hydrogen simply for its own sake. Investments in hydrogen-based fuel cells, for example, could be smart because these fuel cells would be able to power vehicles and container ships that can’t use batteries. Investing in hydrogen passenger cars, on the other hand, wouldn’t be as wise because electricity-fueled vehicles are efficient enough, and the automotive industry is already making considerable strides to be more sustainable. Direct electrification is a better solution and beyond that, burning hydrogen in power stations for natural gas could be very dangerous.

For ESG-focused investors who can take a nuanced view of hydrogen investing, there are plenty of investment opportunities in decarbonized steel manufacturing, automobile production, long-haul transportation, and energy storage. To hear more about AXA IM’s outlook on hydrogen, get in touch with our expert team today.