Investors should diversify energy holdings among fossil fuels and renewables as oil spikes and the power grid undergoes big transition, UBS says

• Investors can't afford to shun traditional fossil fuel companies as oil prices spike higher, according to UBS.
• The bank believes investors need to own both fossil fuel and renewable energy stocks to navigate the ongoing transition of the electric grid.
• "Though we are committed to the transition to green energy, this will not happen overnight," UBS said.

Soaring energy prices following Russia's invasion of Ukraine highlight the necessity for futher investment in America's traditional fossil fuel companies and infrastructure, according to a note from UBS.

That means investors shouldn't shun the fossil-fuel sector completely. Rather, they should take a diversified approach and invest in both renewable energy stocks along with oil and gas companies as the electric grid undergoes a transformation.

"Though we are committed to the transition to green energy, this will not happen overnight," UBS said.

Energy independence has never been more important following Russia's attack, as it highlights the leverage the country has over the European countries that rely on its gas, like Germany. Removing that leverage would allow countries to boycott Russian energy and further cripple its economy in the hope that the country will end its war with Ukraine.

A combination of both renewables and fossil fuels will be required to achieve that energy independence as quickly as possible, and investors can benefit from taking a similar approach, even those that are ESG-focused.

"This does not mean investors need to abandon their principles. Instead, they can direct funds toward sustainability leaders within the fossil fuel industry, including companies that use the least environmentally harmful extraction techniques and are stepping up spending on renewables," UBS said.

After gaining exposure to traditional oil stocks, investors should set their focus on the current generation of renewable energy companies that operate wind and solar plants, along with battery and grid systems that are needed to enable energy storage capabilities.

"While renewables have the drawback of intermittency, since the wind doesn't always blow and the sun doesn't always shine, advances in storage are mitigating these shortcomings," UBS explained.

Investors should also keep an eye on innovations in the renewable energy space that could surpass the efficiencies reached by current methods, according to the note. That includes potential developments in green hydrogen, carbon capture and storage, and biofuels, UBS said.

"We believe investors can play a role in overcoming the energy challenges that have been intensified by the Russian invasion. This can best be done, in our view, through a diversified approach that embraces the most responsible fossil fuel firms, renewable innovators, and pioneers of the next generation energy solutions," UBS concluded.