Why the energy transition will reduce companies’ return on equity

The energy transition requires massive additional investment, a significant portion of which will have a low return on equity. Spontaneously, the private sector would not make these low-return investments. There are then two scenarios: Governments intervene massively to finance or co-finance these investments. But this will be difficult, because the return of inflation, which is very likely to be permanent, will drive up long-term interest rates (nominal and real) and make it difficult to increase public investment and fiscal deficits; A second solution is then for governments to regulate the private sector to make energy transition investments, whatever their financial returns. There would then be a decline in companies’ return on equity and therefore probably also in their market valuation.