By Liz Su, senior portfolio manager at Boston Common Asset Management
Emerging markets are at the centre of a structural shift in global energy and industrial systems. While this transition is supported in some countries by climate policy, it is increasingly driven by economic strategy, industrial competitiveness, and long-term cost advantage.
For emerging markets, the energy transition is both a response to structural vulnerabilities and a pathway to stronger, more resilient growth. Two converging forces define this shift: repricing of energy risk and industrial rewiring.
Fossil fuel dependence is increasingly reflected in macroeconomic outcomes, fiscal dynamics, and financial market performance. Recent energy market disruptions have accelerated, not initiated, this transition, with impacts now visible in capital allocation, policy direction, and corporate investment.
The mechanisms through which energy shocks affect emerging markets are becoming clear. For example, the effective closure of the Strait of Hormuz, which accounts for roughly one-fifth of global oil and LNG trade, triggered surging oil prices, insurance costs, and volatility across currencies, sovereign bonds, and equity markets.
Shocks like this are transmitted through three primary channels.
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First, inflation and fiscal pressure: fuel subsidies designed to shield consumers create immediate budget strain, tightening fiscal space at a time when sustained investment is required.
Second, external balances and foreign exchange: rising import bills increase demand for foreign currency, placing pressure on exchange rates and financial conditions.
Third, growth and margins: higher energy prices compress margins in energy-intensive sectors and reduce corporate investment capacity.
In this context, emerging markets account for the majority of future energy demand growth and infrastructure investment. Clean energy systems are an increasingly important share of capital spending. In 2025, global energy investment exceeded $3.3trn, with two-thirds directed toward clean technologies.
Policy responses across emerging markets reflect a shift from vulnerability to strategy. Domestic renewable generation, once installed, improves energy security by reducing reliance on global energy chokepoints.
It also functions as a balance-of-payments tool: each unit of renewable power displaces dollar-denominated fuel imports, improving current account dynamics and reducing external financing needs. Countries with higher renewable penetration are less exposed to energy-driven inflation, currency pressure, and tightening financial conditions.
The economics of the transition have turned decisively favourable. A large majority of new renewable projects are now cheaper than fossil fuel alternatives, and renewable energy has already generated significant global cost savings.
Once installed, renewable electricity provides near-zero marginal-cost power for 20-to-30 years, creating a durable input-cost advantage for energy-intensive industries. This is becoming more visible in deployment, with renewable capacity additions, grid investment, and storage buildout accelerating across major emerging markets.
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Energy shocks have historically accelerated structural change, and the current disruption is no exception. The scale of the 2026 energy disruption exceeds that of earlier oil crises, and it has occurred at a time when alternatives such as solar, wind, and battery storage are cost-competitive with fossil fuels in most markets. Policy responses are already reflecting this shift, with governments accelerating plans for renewable deployment, grid investment, and energy diversification.
At the same time, the transition is not linear. Near-term energy security concerns are leading to continued reliance on existing fossil fuel capacity, particularly in power-constrained systems.
This reflects a sequencing dynamic rather than a reversal. Short-term supply security is being managed alongside longer-term structural investment in lower-cost, more resilient energy systems. In this context, cost advantage and long-term planning are critical differentiators.
For investors, these dynamics are translating into a multi-year capital cycle across grid infrastructure, electrification, energy efficiency, and storage.
The energy transition is already underway in emerging market economies, where its effects are increasingly visible in earnings growth, capital allocation, and return dispersion. The question is no longer whether these forces are in motion, but how quickly they will translate into capital allocation decisions, corporate strategy, and long-term economic outcomes.
