The Nobel Prize in economics and the link to the energy transition

The annual announcement of the Nobel Prizes is always a moment for reflection, highlighting the seminal ideas shaping global policy and markets.

The 2025 Nobel Prize in economics recognizing work on innovation-driven economic growth and its implications for structural transformation, could not be timelier. As asset managers, we see the global energy transition as a key test of these theories, a challenge that is less about incremental change and more about a fundamental re-engineering of the global economy.

The decarbonisation of the economy is fundamentally an exercise in ‘innovation and creative destruction’. The work of this year’s winners of the Nobel Prize in economics provides useful insights for investors seeking to navigate the inherent volatility and potential opportunities of the climate change-triggered energy transition.

Innovation and renewal: The economic engine behind the 2025 Nobel

The 2025 Nobel Prize in economic sciences has been awarded to Joel Mokyr, Philippe Aghion, and Peter Howitt for explaining how innovation, not just capital or labour, helps drive sustained economic growth. Their research offers a powerful reminder for investors: progress depends on continuous renewal, not stability.

Joel Mokyr, an economic historian, traced modern prosperity to the moment when knowledge became cumulative, when society built on previous ideas rather than starting with a blank slate every time. For centuries, societies invented sporadically but stagnated because discoveries stayed isolated. The Enlightenment (or the ‘birth of modern thinking’) and the Industrial Revolution changed that by linking the ‘know-how’ with the ‘know-why’, in other words the practical skill with scientific understanding, and by fostering open institutions that encouraged inquiry and exchange. That cultural shift towards a society being open to new ideas and change helped turn innovation into a self-sustaining process.

Aghion and Howitt’s work highlights the potential to profit from innovation and research, and that market free reign without interference does not necessarily lead to the best outcomes.

Philippe Aghion and Peter Howitt built a formal model behind the process of ‘creative destruction’. This concept refers to a cycle of innovation where new technologies, goods, firms and ways of working replace old ones. Each breakthrough brings short-term winners and losers but also sets the stage for the next disruption. This perpetual churn of entry, competition, and reinvention should drive productivity and prosperity over time. Aghion and Howitt’s work highlights the importance for example of the potential to profit from innovation and research, and that allowing the market free reign without interference does not necessarily lead to the best outcomes.

For markets and policymakers alike, one message is that growth potentially thrives when institutions protect innovation while allowing outdated firms and ideas to exit. Patent policy, R&D support, education, and competition can all help sustain this balance.

For investors, arguably one parallel is clear. Value creation doesn’t come from defending incumbency but from backing transformation. The same forces that propel economies, innovation, adaptation, and renewal, aims to shape long-term portfolio returns.

If societies stop rewarding and supporting risk-taking and experimentation, stagnation can return. Growth belongs to those who keep reinventing.

Innovation and renewal through the energy transition

Arguably, the global energy transition is one of the most ambitious acts of creative destruction in modern history. The world is shifting from a fossil-fuel-based system built over two centuries towards a new climate change-triggered net zero emissions economy. This transformation is particularly visible in three core activities: power generation (and industry), transport, and heating, each revealing the tension between innovation, policy, and incumbency.

Across the economy, activities once dependent on fossil fuels are being reimagined through a dynamic of creation and displacement arguably akin to the one Aghion and Howitt modelled. Falling costs in clean technologies, from renewables and battery storage to electrified transport and heating, are reshaping markets and redirecting capital. The decline of coal power, the rise of electric vehicles, and the slow but emerging shift toward heat pumps and the potential opportunities for green hydrogen all reflect the same structural forces: technological breakthroughs, economies of scale, and policy signals that either accelerate or delay change. The feedback loop between scientific understanding and industrial capability, what Mokyr called the fusion of ‘know-why’ and ‘know-how’, can define the winners. Where that loop is strong, as in battery technology or advanced renewables manufacturing, competitive advantage compounds.

Yet barriers remain: high upfront costs, lagging infrastructure, and policy uncertainty continue to slow adoption, especially in harder-to-abate sectors such as aviation, shipping, and heavy industry. Here, we would argue, the Nobel winners’ warning about institutional design is most evident. Innovation alone is not enough without frameworks that enable diffusion, competition, and the orderly exit of legacy systems.

Innovation flourishes when new entrants can challenge incumbents, when policy frameworks reward experimentation and when capital flows toward the new rather than protecting the old. The creative destruction driving the energy transition is multi-decadal but punctuated by critical inflection points, moments when cost parity, regulation, or consumer preference flips the system.

The history of energy transitions is sobering: Past shifts, from wood to coal to oil or gas, took decades even when better technologies existed. This time, climate imperatives compress the timeline. Falling renewable costs show how innovation, scale, and policy can accelerate change, while the stalled progress of carbon capture and nuclear energy underscores a key Nobel insight: invention that cannot evolve into a commercial solution, or comes with a backdrop of no institutional support, can lead nowhere. Progress depends not only on “knowing how,” and “knowing why” but on the systems, institutions, frameworks and culture that turn knowledge into sustained growth-positive innovation.

In an energy transition context, clear carbon prices, firm phase-out timelines, and support for enabling infrastructure can make clean technologies decisively profitable over old ones.

The work by the 2025 Nobel winners seems to us to support the case for credible, systemic action. Creative destruction is inherently disruptive and non-linear which requires more than incremental policy making. Innovation can stall when policy signals are weak or inconsistent. In an energy transition context, clear carbon prices, firm phase-out timelines, and support for enabling infrastructure can make clean technologies decisively profitable over old ones. Governments must also manage the politics of transition—helping affected workers and regions adapt while ensuring competition keeps incumbents from blocking progress.

The energy transition, innovation and renewal through an investor’s lens

For investors, the energy transition can mean a long-term reallocation journey away from fossil fuel exposed assets. In that long-term sense, success will come from anticipating and building resilience to disruption by, for example, identifying legacy exposures and backing adaptable companies. We think that thoughtful contribution to public policy debates and developments can play a role too. Effective stewardship now means advocating for credible carbon pricing, grid upgrades, and R&D ecosystems that accelerate diffusion, while directing funds toward enablers such as storage, smart grids, and green materials. We believe, the energy transition is more than a climate goal, it can be a great engine of economic growth. The transition is not linear; it is disruptive and is therefore important to bring people along on the journey. The real question is not if creative destruction will reshape markets, but who will lead it.

The 2025 Nobel Prize reminds us that prosperity stems from innovation that continuously destroys and renews our economic structures. The energy transition is arguably one of this generation's defining examples of creative destruction. For investors, the energy transition presents a strategic consideration: how to increase capital toward clean energy technologies and away from fossil fuel–linked assets, while ensuring resilience within investment portfolios against shocks throughout the journey. Aghion and a different set of colleagues wrote: “Capitalism is a spirited horse: it takes off readily, escaping control. But if we hold its reins firmly, it goes where we wish.” Asset managers are one of the riders, holding those reins through their capital allocation decisions.

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.