Friend-Shoring and the Energy Transition: What It Costs Investors

In our recent piece, “ESG’s Blind Spot: China, the Energy Transition, and What Investors Need to See,” we argued that the frameworks many investors use to assess sustainability were not designed to capture the industrial forces actually building the energy transition. China became central to solar, batteries, electric vehicles, grid equipment, and critical mineral processing through scale, infrastructure, and industrial policy.

The question is what happens when policy begins to push in the opposite direction.

“Friend-shoring” entered the policy vocabulary in 2022, when then U.S. Treasury Secretary Janet Yellen called for supply chains to be diversified across trusted countries. The objective was resilience: reduce exposure to concentrated suppliers without retreating entirely from global trade. Four years later, the label matters less than the logic. Investment screening, strategic subsidies, bilateral mineral agreements, stockpiles, and government-backed financing are increasingly shaping transition capital flows. For investors, that shift means weighing the value of more resilient, strategically aligned supply chains against the higher costs of building them.

China Built the Transition. Policy Is Trying to Rewire It

The International Energy Agency’s 2026 Global Critical Minerals Outlook found that, excluding rare earths, China’s average market share rose to 72% in 2025. That dominance spans most key energy minerals, creating a strategic dependency that governments increasingly view through energy, economic, and national-security lenses. Recent export restrictions have made that vulnerability more immediate.

This expands the argument from our earlier pieces: policy can reshape the investable landscape before conventional sustainability metrics register the shift.

Australia Shows What Friend-Shoring Looks Like in Practice

Australia is a useful case study: mineral-rich, capital-intensive mining sector, closely tied to Chinese demand, and aligned with Western security partners. Its critical minerals strategy seeks like-minded investment to build more resilient supply chains.

In October 2025, the United States and Australia signed a critical minerals framework to support diversified mining and processing through financing, offtake support, permitting, potential price mechanisms, and national-security review of strategic asset sales.

Australia has also tightened scrutiny of foreign ownership. In May 2026, Treasurer Jim Chalmers ordered six shareholders to divest holdings in rare-earths developer Northern Minerals, citing the national interest amid concerns over Chinese-backed control.

This is friend-shoring in practice: governments are shaping where minerals are mined, who finances and owns strategic assets, and who secures processing and offtake.

What Friend-Shoring Changes for Investors

For institutional investors, friend-shoring changes the economics of the transition.

Government support can improve project bankability through grants, loans, guarantees, stockpiling, offtake agreements, or price support. But diversification comes at a cost. The IEA estimates that refining projects outside dominant suppliers can face capital costs 20% to more than 150% higher, with operating costs about 50% higher on average. It calls the difference a “mineral security premium,” the price of reducing exposure to supply disruption.

This premium buys resilience, but it can also create duplicated capacity and new policy dependencies. IMF research shows trade and foreign direct investment shifting along geopolitical lines, with cross-bloc flows weakening more than within-bloc flows since Russia’s invasion of Ukraine. For investors, the question is not only where demand grows. It is which projects policy favors and which relationships remain investable.