Every three months, and over the course of about four weeks, listed companies release their quarterly results. These help financial analysts and portfolio managers assess if a company is delivering as expected, then work out if it’s still on track.
As specialist climate investment professionals, we couldn’t help but notice the usual suspects’ relative weakness in the wind value chain. Cyclical and policy headwinds as well as other issues all contributed to the most striking development of this earnings season that impacted some key players. Let’s take a deeper look at the results:
Orsted (November 3rd) – the largest offshore wind developer experienced much lower than planned wind speeds that cost the company roughly DKK 1 bn of adjusted EBITDA (some 3% below expectations), which led to speculation about how wind speeds could evolve over time.
Vestas (November 3rd) – the largest onshore wind turbine manufacturer experienced very weak margins due to cost inflation, higher energy costs, logistics challenges and component shortages, along with much weaker than expected order intake. Customers are waiting to better understand how clean energy tax breaks in the ‘Build Back Better’ bill will fare in the House and Congress. Over the past decade, fiscal incentives have been paramount for wind to take off in the US and the lack of clarity is causing a temporary buyers’ strike.
SiemensGamesa (November 5th) – the largest offshore wind turbine manufacturer fell in line with Vestas before reporting results that were actually more resilient than feared. Due to its greater exposure to offshore wind, and somewhat smaller exposure to US onshore wind, global investors are most likely to ‘hide’ in SiemensGamesa to retain exposure.
TPI Composites (November 8th) – this leading manufacturer of wind turbine blades faced much lower margins due to all of the above, including production issues in Mexico and weaker orders, similar to Vestas.
Q3 2021 results have reminded us all that secular tailwinds can be more than offset for a time by cyclical issues of cost inflation, tight supply chain and logistics constraints. Policy issues like lack of visibility regarding the US PTC extension, weather issues when the wind doesn’t blow as planned or specific issues like production lines not hitting their nominal cadence can also play a key role.
None of these companies were in the top 40 equities across our three portfolios as of the end of October. Indeed, our selection in the clean energy space is predominantly through the solar value chain (First Solar, Solar Edge, Enphase) along with onshore wind producers like NextEra Energy.
Longer term, we remain convinced that wind energy has a key role to play to decarbonise our economies:
Despite a mixed result at COP26, more countries made net zero pledges. According to the IEA, reaching net zero by 2050 means installing wind capacity of around 390 GW a year by 2030 (compared to 114 GW in 2020) and needs to stay near this level at around 350 GW to 2050.
Wind energy costs have fallen dramatically over the past decade – 50% for onshore wind and 38% for offshore. The secular drivers behind additional cost reduction remain firmly in place: turbine size, capacity factor and lower cost of capital according to IRENA. Costs can drop further with emerging technologies such as floating wind farms that are further offshore and capture higher wind load and speeds.
The market structure for wind turbine manufacturers is favourable, with three large international players (Vestas, GE and SiemensGamesa) and two dominant domestic players in China (Goldwind and Envision). This top 5 accounts for about 65% of the total wind power installed in 2020.
Over the last 2 weeks, our investment team has shared their views on what was at stake, what we thought was achievable, and what we hoped would be achieved. Surely, our readers must have felt growing frustration with the Glasgow show where self-appointed saviours of the world and their useless hangers on kept talking without achieving anything valuable. The more than 400 private jets and the constant partying inspired the ‘Glasgow is the new Davos’ article. Over the last 2 days, the youngest member of our team, who was in Glasgow, reported on the hopes and frustration of those people who will live with a world at ‘2 degrees plus’.
Fundamentally, we never believed that 1.5 degrees would be set in stone in a way that would give no way back to the main countries in the world. Yet we hoped that below 2 degrees would become a firmly committed 1.5 degree objective with proper mechanisms, including a worldwide carbon price. Paris COP21 defined the framework and the broad objective to stay below 2 degrees and Glasgow was supposed to provide the road map. We are nowhere near this today. It became clear in the last few days that no major breakthrough was in preparation as all major politicians, including the British PM who nominally hosted the conference, deserted Glasgow.
So success or failure? Probably the latter
Before answering, let’s bear in mind that many hopes expressed were unrealistic, and compromise defines this process. Yet, the situation is so serious that a dose of daydreaming is necessary.
In 2015, ahead of the Paris Agreement, the CAT estimated current policies would lead to warming of 3.6°C, and the submitted targets (NDCs) would lead to 2.7˚C. Six years later, the warming from current policies has now come down to 2.7°C. If governments were to achieve all their submitted NDC pledges and long-term targets, temperature increase could be limited to 2.1°C. Adding all the net zero targets announced and discussed at Glasgow, this would even lead to 1.8°C.
Put in even simpler terms, to achieve a 1.5°C increase, we need to cut emissions worldwide by half this decade and be at net zero by 2050. The current carbon budget is now less than 10 years in the current trend.
Politicians and delegates will of course spend the next few days trying to convince us that the conference is a qualified success. They already won a free trip to COP27 in Egypt next year as a reward for (partially) failing. Some vague wording ‘encouraging the parties to do more’ is a guarantee of a great suntan next year!
Why finance and science will help more than governments
Despite feeling a bit deflated today, we remain resolutely optimistic for 3 reasons:
Despite our dislike of greenwashing by financial institutions, we believe that investors will be key to the decarbonisation of the economy. We saw their financial commitments scaled up in a way that made governments look bad. By forcing asset managers and pension providers to redirect their savings towards increasingly ‘clean’ products, investors will not only debunk hypocrites but will force governments to act more forcefully by showing them where business is headed. On this front, Mark Carney led GFANZ members to make some impressive promises, committing $130 trillion in private finance to tackle climate change between now and 2050. True, the proof will be in the pudding and we will judge investment companies based on what they do not what they promise. Governments must help by de-risking investments in developing countries and hard-to-abate industries in order to ensure this private investment is distributed appropriately.
Science is on our side. New technologies are emerging that are designed with ‘zero carbon’ in mind and old tech improves quickly, as we wrote this week. What’s more, ‘Big data’ is making it possible to analyse emissions and various environmental impacts and revive accountability for governments and industry. Incoming standards board the ISSB is eagerly expected to help raise consistency in financial and company disclosure. Soon, independent research will be in a position to check on official claims and enable individuals to not only change their behaviour but also make governments and companies more accountable. Our investment team is already able to calculate precisely the ‘temperature’ of our portfolios1. And when we publish a figure (soon hopefully), we want to be sure it’s based on science and can be monitored over time. We believe in science and building a more comprehensive climate data ecosystem.
We believe that we are most probably moving towards a form of world carbon price, which is key to accelerating clean energy adoption. Companies that have already embraced an internal carbon price will race ahead of their competitors, making the right decisions while those resisting change will gradually fail and disappear.
The Glasgow Climate Pact
What was decided
Despite its shortcomings, the Glasgow climate pact* does include provisions which have never been agreed to on such an international scale. One such agreement was the understanding that countries across the globe must do more to prevent planetary warming from exceeding 1.5 degrees above pre-industrial temperatures. To do this, the pact asks governments to strengthen emission targets by the end of next year, rather than every five years, as previously required under the Paris Climate Accords.
For the first time ever, the agreement also mentions the role fossil fuel plays in the climate crisis, calling for “accelerating efforts towards the phase-down of unabated coal power and inefficient fossil fuel subsidies”. Many wanted phasing out of coal use as the language used, while a lack of clarity on what “unabated” and “inefficient” actually mean is disquieting. The methane pledge we discussed here was also toned down in the final document, which now ‘invites parties to consider’ further actions to reduce by 2030 non-carbon dioxide greenhouse gas emissions, including methane.
On the climate justice front, there was also some important language in the pact. For the first time, the pact made mention of “loss and damage” countries face as a section header in the agreement. This refers to the cost that poorer nations are already facing from the consequences of climate change. The pact “urges developed country Parties to at least double their collective provision of climate finance for adaptation to developing country Parties from 2019 levels by 2025”.
The Santiago network, which was established in Chile at COP25, will be set to work helping developing countries access knowledge related to averting, minimising and addressing loss and damage. It’s not the financial instrument that developing countries asked for, but for the nations that have contributed least to the climate crisis, this is a welcome gesture. As we mentioned in a previous blog, there is a history of broken climate financing promises from developed nations. Let’s hope the promise is kept this time.
There was also the inclusion of rules for global carbon markets. This new rulebook, which has been negotiated ever since the Paris Climate accords, closes various loopholes that existed in this market previously, such as double counted credits. Importantly, credits issued before 2013 will not be carried forward in the new market, putting the focus squarely on future emission reductions.
Concerns remain about poorer quality credits issued between 2013 and 2020, flooding the market and depressing prices. Unfortunately, there is still no hint of a global carbon pricing mechanism that would over time create a level playing field on the cost of decarbonising industrial processes. While it’s not clear what the right carbon price will be, this outcome is not even close to the $100 per ton that has been advised by experts.
While most governments will likely paint this as an overwhelming success (the British PM claimed on Sunday night that ‘the agreement is the death knell of coal’), it’s clear there’s significant room to improve. The UK presidency doesn’t end here, so here are the key missing elements they’ll be thinking about over the next year:
A phase out of all coal generation, supported by finance for India and other developing countries to achieve this.
A plan for phasing out all subsidies for fossil fuels, not just inefficient ones.
More clarity on the carbon market, and a commitment to using the proceeds to fund adaptation in developing countries.
Appropriate loss and damage finance.
A global carbon pricing mechanism
Strict rules outlining the treatment of carbon offsets, and a clear message that offsets cannot replace emissions cuts.
More ambitious targets on cars, which didn’t quite hit the spot as Germany and China, as well as Toyota and Volkswagen failed to sign up to this pledge.
Stronger and accountable targets on methane – an easy win for climate that should be capitalised on.
New and strengthened NDCs being presented in 2022 (not 2025), and the establishment of a body to track new NDCs annually.
The key in moving on from COP26 is that we appreciate what it has achieved and what it hasn’t. No, we’re not on track for a 1.5°C world. No, it has not satisfied developing countries on finance and adaptation. Yes, it is too weak on fossil fuels. But it has upped the game. We just need to make sure that the level of ambition, action and accountability continue to accelerate, rather than stall, as we head home to continue working on our mission at Clim8 Invest.
*Coverage of the Pact is linked from the Washington Post, as we wait for the most updated Pact to be made publicly available.
Thank you for reading our ‘Glasgow blog’ in the last few days.. We tried to express our views with a bit of passion but based on science and what we honestly believe has to be done to stay as close as possible to a 1.5 degree rise.
Clim8Invest Investment team
1Temperature alignment for the equity portion of our portfolios
It’s been a busy week in Glasgow, where I was in the Green Zone. This zone was a side event hosted by the UNFCCC, across the river from the Blue Zone where the negotiations were happening. The idea behind it was a place “where the public, civil society, Indigenous Peoples, youth groups, charities, academics, artists and businesses can have their voices heard at COP26”.
The Green Zone was supposed to make COP26 the “most inclusive COP ever”, according to COP26 President Alok Sharma. But amid the hype, world leaders have again failed to truly integrate the needs of the Global South in negotiations. Far from representing these voices and the voices of the many people working hard to have an impact, instead the Green Zone felt like that science museum you went to as a kid. The one where they showed you robots, a piano staircase and space boots, and told you that this is what the future looks like.
But beyond the impressive displays, the Green Zone failed to capture the urgency of the climate crisis, and here’s why…
It made us think that the solutions are in the future
For me, the Green Zone was like time travel. The rooms were littered with robotic machines showing the future of food without soil and energy without oil. It’s exciting to see these solutions, and it’s always been fun to play with futuristic games and robots. But the thing is, many of the scalable solutions are already here. We need to phase fossil fuels more aggressively in the short term by scaling up global investment in wind and solar. These are proven technologies that are now cost effective. Instead, the displays are about how the UK is going to crack nuclear fusion and how robots are going to make our food.
Let’s take nuclear fusion, a technology that scientists have been trying to harness for power generation since the 1940s and is perpetually ‘30 years away’. This solution will need billions in additional investment, and was showcased against all odds. While there has been progress on ITER construction, a magnetic fusion device designed to prove the feasibility of fusion, the project is not expected to generate a fusion reaction until 2035. As I learned at the UK Research and Innovation booth, no one in the energy community knows when the fusion breakthrough will come and that the investment would be ‘huge’.
Showcasing the futuristic solutions could distract attention from less glamorous but more ready-to-deploy ones, as well as people’s demand for actionable progress. Waiting is not an option.
The problems are in the future, too
Climate change has already been linked to more than 5 million deaths worldwide per year, with most occurring due to extremes of heat or cold. Migration due to extreme weather is further shaping the planet, and in 2018 the World Bank estimated that three regions (Latin America, Sub-Saharan Africa and Southeast Asia) will generate 143 million more climate migrants by 2050.
This is not just a future problem. While difficult to estimate, it’s thought that of 68.5 million people forcibly displaced in 2017, at least one third of these were caused by sudden onset climate events. At the same time, since the Paris Agreement, an average of 4 people a week have died because of their role in defending land rights.
If we wait until 2030 to make the deep emissions cuts that are needed, people are going to suffer. In fact, people are already suffering. But we didn’t see this at the Green Zone. Instead, indigenous rights groups were squashed into corners with a table and a TV while the ‘Principle Partners’ space hosted huge, cartoonish displays for big corporations.
By contrast, the People’s Summit, running parallel to COP26 and hosted by the COP 26 Coalition has managed to support and host thousands of Global South representatives through a network and events series. They played a significant role in supporting thousands of representatives who’d faced issues, both in attending and being heard at COP 26. Showing the spirit of true inclusion, each People’s Summit event featured a translation system for all speakers, and many of the talks I attended were hosted in Spanish or Portuguese, with translations to English.
The weak inclusion at the Green Zone has been mirrored in the Blue Zone where negotiations are still taking place. Key sticking points include finance for developing countries, which is yet again being denied and delayed, while some wealthy countries are hoping to carry forward ‘hot air’* credits from the Clean Development Protocol under the Kyoto Protocol.
The passion lives on in the streets
Across the river from the Green Zone, activists gathered outside the gates of the negotiating space yesterday in force, tying together blood-red fabric. From the inside, activists at the People’s Plenary stood up to condemn the red lines that had already been crossed by leaders and to show that they would not stand for them to be crossed further. These representatives walked out of the session in protest, carrying the red line out of the conference centre to the streets and out of the gate, where civil society joined its red line and showed yet again that it would not be excluded.
I have mixed feelings as we wait to hear the outcomes of negotiations, with a lot of time spent with activists, whose frustrations and anxiety are reaching a peak at the end of a long two weeks. I am a practical person at heart and I believe in trusting people who have worked hard on this to produce roadmaps and solutions towards net zero goals. The International Energy Agency, the World Resources Institute, UNEP, the UNFCCC… These organisations work hard to give us a picture not only of our world today, but also of the potential future roadmaps, without which the idea of the transition would be even more disquieting.
While a lot of the COP 26 activism (and this article) have focused on the ‘bad guys’ inside the conference centre, it’s important to remember that there are smart and passionate people inside there also, who are working hard for a just outcome.
There’s an interesting balance in being both an activist and in the investment world and it’s important to consider in full how to bring together passion and anger with real action and realistic solutions. At COP 26 we brought all of this together and asked it to co-exist in the same space for two weeks, from 8 am to midnight every day. Are we surprised that there’s conflict? No, we shouldn’t be, in fact I think we should encourage it. Conflict allows us to recognise how complex this really is, and to somehow, slowly work our way closer to the right answer. If we took either governments, or civil society out of this picture, neither would function, so let’s embrace them both. Take the energy from the streets, and the spirit of compromise for future from the conference, and bring them together for imperfect but immediate action.
We hope to update you soon with more of the technical detail of the agreements, and the outcomes when they arrive. Briefly however, I’d like to share some of the key issues that climate activists are concerned about:
Developing countries want loss and damages finance for climate effects, where they feel that emissions reductions failures by developed countries have contributed to the climate events in the Global South.
Developed countries want to carry forward ‘hot air’* carbon credits from the Kyoto Agreement to be carried into a new mechanism, giving them false rewards for emissions reductions they didn’t make and allowing them to further delay action.
Developing countries want a share of the levies from the carbon market to go towards an adaptation fund for climate change.
Attaching a time-frame to climate finance that has been promised.
*’Hot air’ refers in carbon markets to a carbon credit which has been issued not because of deep emissions reductions, but because a country adopted a weak climate target that it easily overachieved. A report estimated that 72% of credits released to date are generated by non-additional projects, i.e. ones that would have happened regardless of their ability to sell credits.
Transport has seen huge technological advances in the fight against climate change. From chic Teslas to heavy duty electric buses, electric vehicles have become widely available and it is clear that the transition away from combustion engines is well underway. But is it moving fast enough?
Transport is responsible for one quarter of global CO2 emissions, roughly 45% of which comes from passenger vehicles, from tiny 2-wheelers to fuel-intensive Hummers. According to the IPCC, “transport demand per capita in developing and emerging economies is far lower than in Organisation for Economic Co-operation and Development (OECD) countries but is expected to increase at a much faster rate in the next decades due to rising incomes and development of infrastructure”. In plain English, this means that rising living standards in emerging countries is driving unprecedented demand for transport services. If nothing changes, based on 1990 levels this would result in a 70% rise in transport-related CO2 emissions by 2050.
This is why a growing number of mainly OECD countries are banning petrol and diesel cars, part of a broader set of measures that are supported and tracked by the forecasting document Inevitable Policy Response. It examines current policy commitments and uses modelling to understand not only what policies are needed to achieve net zero, but also to predict what is likely to be implemented in the medium to far term. Importantly, this helps to show investors and industry that there are incoming regulatory packages that are likely to affect their earnings.
Of their top ten policy forecasts, regulating to support Zero Emission Vehicles (ZEV) is high up on the list, with predictions that policies will include internal combustion engine (ICE) vehicles sale bans coming into force in major economies by the mid 2030s to 2040. The UK, for instance, has banned the sale of pure ICE vehicles from 2030 and diesel or petrol hybrids from 2035. ZEV subsidies and obligations on car manufacturers are also coming into force. Importantly, the 2035 bans on fossil fuel vehicles are likely to stimulate the electric vehicle market further and precipitate further policy action globally.
We are puzzled however not to see the ban on helicopters, private jets or super yachts higher on the agenda. Indeed, Oxfam has found that the wealthiest 1% were responsible for 15% of CO2 emissions over the last 25 years. Many self-proclaimed ‘climate-friendly’ billionaires’ carbon footprints are unsurprisingly high, with the vast majority coming from their transport habits, which staggeringly account for over 95% of their total CO2 emissions. And given that the number of billionaires has increased at an impressive pace in the last few years, this means more private jets, super yachts and… carbon offsets too. Yet more evidence perhaps of “do as I say, not as I do”.
But let’s park the cynicism for a moment. There are many reasons to be optimistic about a very low carbon future for transportation as technologies are maturing:
Passenger cars: The technology is mostly there for electric vehicles, while rapidly declining costs and smaller batteries are allowing more EVs to be sold cheaper and with much higher range, making them more attractive to consumers (IEA 2020). EVs are already cheaper to run than ICE vehicles, particularly for short range daily driving of 50-80 miles, which is more than enough for most people. You really don’t need a 500 mile EV!
Two and three wheelers: While they’re not that common in the UK (let’s blame the weather), small passenger vehicles are an important and low-carbon mobility solution in many emerging economies – and one of the easiest to electrify. Given that 40% of global car sales in the next ten years will happen in emerging economies, it’s significant that 750 million electric two and three wheelers are currently on the world’s roads, and that this continues to grow.
Road freight: Heavy goods vehicles are a challenge to electrify, but solutions are developing and being deployed relatively fast. Battery Electric Vehicles (BEVs) are likely to be an important solution, particularly for light and medium goods vehicles. They’re even viable with existing charging infrastructure, although this still needs to be scaled up. BloombergNEF predicts that BEVs will become economically attractive in urban cycles by the mid-2020s, particularly where there are low battery costs and modest driving ranges. For heavy duty vehicles operating over longer distances, hydrogen and biofuels are currently the main viable commercial alternative to diesel. Electric Highways have also been considered to assist in the electrification of heavy vehicles.
Shipping: Green maritime transport could take a number of routes. Adding wings on container ships or tankers is a very elegant (and visually attractive) short-term solution, but the more promising long-term option would be the use of green ammonia fuel.
Air: While we can praise Bertrand Picard’s historical performance with Solar Impulse, maybe on a par with the likes of Louis Bleriot (English Channel) and Charles Lindbergh (North Atlantic), the future of air transportation most likely lies with green fuels. Hybrid concepts using hydrogen as a fuel for propulsion and with fuel cells for electricity are beyond the drawing board. Renewable biofuels can be used as an alternative to jet kerosene in order to lower CO2 emissions.
In our view, the technological solutions to decarbonise transport are here. Bringing them to cost parity and scale with traditional fossil fuels is where the challenge is. This would need significant capital to finance R&D budgets and build manufacturing plants, but also incentives to accelerate the transition in the transport sector. Some private initiatives such as John Kerry’s First Movers Initiative will support sectors such as aviation and freight in getting purchase agreements for technologies that are not yet affordable on the wider scale.
As Michel de Montaigne once wrote, “travel shapes the youth”. We would humbly add “Let the young shape how they want to travel”.
It’s disappointing that men have been over-represented at COP26, especially since climate change disproportionately affects women, mainly in southern parts of the globe. With so many female leaders spearheading influential movements that address the real experience of climate change, it’s clear that progress on gender equality and climate must go hand in hand.
Across developed countries, presidents and prime ministers alike are framing climate change as an existential threat to all human life. For them, reality is starting to catch up with scientific projections. They can see how climate change will affect them. And this is inspiring them to act.
On the other hand, people in the global south, especially women, have been facing existential threats for decades, and not just from climate change. Since being introduced in the early 2000s, critical Millennium Development Goals and Sustainable Development Goals targets are still being missed, especially on gender equality. In fact, since 2019 we’re 0.6% further away from gender parity, with distance covered to parity falling to 68%. At the current rate, it will take 135.5 years to reach gender equality, up from 99 years in 2019 (Global Gender Gap Report 2021). While the politicians at COP26 talk about about 2030, 2040 and 2050, when it comes to gender, women aren’t due to reach equality globally until the astonishingly far year of 2157 – and ten years beyond that for women in politics.
It’s clear that gender equality and climate change have been interdependent for decades, both in the way women experience the effects of climate change and in the role they play in combating it, both as leaders and citizens.
In the global south, women are disproportionately affected by climate change for a number of reasons. UN figures show that 80% of people displaced by climate change are women. In addition, the burden of caregiving and providing food and water to a family more often than not falls on their shoulders. In sub-saharan Africa, where dry seasons are becoming longer and drier, this responsibility is becoming more and more difficult to fulfill.
Furthermore, climate change is worsening the situation of women and girls in education. A 2021 Malala Foundation study shows that climate-related events will prevent at least 4 million girls in low income countries from completing their education. By 2025, it estimates this number could rise to 12.5 million, causing profound effects not just on population growth and health, but across society.
While women unfairly bear the brunt of climate change, they’ve also often been stalwarts of the environment as activists and conservationists for decades. The Green Belt Movement in Kenya was formed under the National Council of Women in 1977, which was designed to respond to the needs of rural women who reported droughts, insecure food supplies and shortages of wood for fuel and fencing. Since 1977, they’ve planted more than 30 million trees and helped restore some of the vital ecosystems there to build climate resilience. In the Amazon too, groups such as AMIMA (Articulation of Indigenous Women of Maranhão) patrol the rainforest, protecting it and deterring illegal deforestation, as well as providing education and knowledge to other groups about conservation.
While the exact numbers can be hard to verify, there is also evidence that female representation in national parliaments tends to lead countries to adopt more stringent climate change policies. A study of 91 countries found that nations that elect more women also happen to support environmental protection, as well as showing that aten unit increase in female representation resulted in 0.24 fewer metric tonnes of CO2 emissions per capita.
Gender equality brings economic benefits as well, andrecent research shows that women and minority-led hedge funds perform better than their non-diverse counterparts, both on the short and long term horizon. Funds with women representation on the board achieved a median one-year return of 21.6%, whereas the ones without had only gained 12.7% during that same period. Longer term horizons show similar trends in this study, while others have yielded similar conclusions. The results of Lückerath-Rovers, M. (2013) show that companies with female directors do indeed perform better on a range of financial metrics as well as in terms of market – stock price performance.
Furthermore, this is something that is also confirmed based on the broader literature review by Post & Byron (2014). In their meta analysis of over 140 studies examining the relationship between women on boards and market performance, they found that the relationship is positive in countries with greater gender parity. However, this turns negative in countries with low gender parity.
So it’s clear that we need to achieve funding on a never-before-seen scale for the net zero transition, and a strong and well managed economy includes building diversity and gender parity into the equation, something that the evidence supports. Gender inequality is a continuing crisis that exists side by side with the climate crisis, and neither should be prioritised at the expense of the other. In fact, dealing with the climate crisis is central to gender equality, while progress towards gender equality is likely to provide a boost to tackling climate change.
Let’s take the example of Mia Mottley, the Prime Minister of Barbados, who delivered a cutting (and well celebrated) address to delegates at COP 26. Her speech pointed out the huge disparity between the trillions of dollars mobilised to fight the pandemic and the failure of wealthy nations to deliver the comparably tiny $100 bn a year for climate change finance in developing countries.
Mottley stands out at COP 26 as a truth teller, a leader from a developing island nation in the global south where climate change is not just a future threat but a present one. Raising up the voices of leaders like Mottley, as well as the women and indigenous communities of the world will not only help us cope with climate change, but will also allow us to build a more inclusive and equitable world.
Climate-related events are growing more frequent and costly to the global economy. As well as finding ‘mitigation’ solutions that combat climate change, we also need to invest in technologies for ‘adaptation’ – or dealing with the consequences. And their evolution needs to be much faster than this Darwinian description would suggest.
Let’s start with the evidence for extreme weather events. The data over the last 50 years points to a damning conclusion: the frequency is increasing and the ferocity is worsening. On average, this period has seen a weather, climate or water related disaster happening every single day, resulting in 2.06 million deaths and $3.64 trillion in losses. Global temperature rises have made drier, hotter regions even more so, causing record beating wildfires, while cooler areas such as Central Europe have seen more intense flooding. Rising sea temperatures have also made hurricanes more powerful, and the list goes on.
All this points to the need for investing heavily in adaptation, as mitigation alone can no longer realistically prevent extreme weather events. Unfortunately, in recent years various climate forums have failed to implement proper funding mechanisms and drive contributions from the private sector, despite knowing the severity of the issue. At the 2009 climate summit in Copenhagen, for instance, the wealthy nations of the world pledged to channel $100 bn a year to poorer nations for adaptation and mitigation measures, as they too often feel the worst effects of extreme weather. But in no year since that pledge was made have they met that target.
What is more, the majority of the funds were spent on reducing greenhouse gas emissions and other mitigation efforts, rather than adaptation projects. In fact, of the total $80 bn given in loans and grants in 2019, just $20 billion went to adaptation measures. This despite the UN estimating that developing countries already need $70 billion per year to cover adaptation costs, rising to $140 billion–$300 billion in 2030 and $500 bn by 2050.
So what explains the general hesitancy to invest in adaptation projects? In a nutshell, because it’s harder to demonstrate ROI. Climate finance is typically ‘given’ in loans, and in the case of mitigation projects, it is fairly easy to understand the economics of building solar and wind capacity. This is because the project will generate a return over its lifespan which therefore makes it interesting for private finance institutions.
On the other hand, the case for financing future dams or new crops to adapt to climate-related challenges is far less attractive to private investors. But grant based funding is absolutely necessary for adaptation to take place, and most of this needs to go directly to developing countries. One rare success story in this field is the Adaptation Fund, which has allocated over $850 million through grants for 123 projects, resulting in 31 million beneficiaries in developing countries.
When we crunch the numbers, the picture gets even clearer. According to a recent study from the Swiss Re Institute, the cost of climate change could negatively impact global GDP in 2050 between 4% (if global temperature increases are below 2C) and 18% (if temperatures increase by 3.2C). For reference, 18% of 2020 GDP is roughly $15.2 trn. So we’re comparing adaptation costs that could reach up to $300 bn a year in 2030, with an estimated $4 trn in mitigation costs to transform our energy systems and infrastructure between now and 2030 (source: IEA). In a nutshell, by investing $4.3 trn in mitigation and adaptation between now and 2030, we could potentially avoid annual GDP losses greater than $15 trn from 2050 and beyond. If the purists among you will forgive us for not extrapolating world GDP to 2050 and discounting back the $15 trn of economic losses into today’s $ value, then the maths seems clear.
Needless to say, we are lagging behind in the fight to adapt to the changing climate, but it is not too late to change course. Humans, by nature, are an adaptable species. As Charles Darwin’s Origin of Species outlined, the theory of evolution is predicated on the idea that“all species of organisms arise and develop through the natural selection of small, inherited variations that increase the individual’s ability to compete, survive, and reproduce”. Humans have made it thus far based on our survival mechanism, but we cannot wait for natural selection to save us in our fight against climate change.
Fortunately, technology can play a key role to help us adapt to this warming world. As far back as 2006, the UN outlined a series of adaptation solutions and technologies. More recently (and closer to home), large dams projects in Northern Europe are on the drawing board to protect shorelines from rising water levels. This call to action has also been followed by more positive developments, starting with the UK committing £200 million over the next five years to a Climate Innovation Facility to scale up technologies that help deal with the impacts of climate change, such as drought-resistant agriculture and sustainable forestry.
We certainly have the engineering and technology skills to make it, but do we collectively have the most powerful driver, namely the will to act?
Elon Musk is keen to have space explorers reaching the surface of Mars by 2026. Starship and Starbase are under construction and the man is on a mission. But is this whole idea only about scientific and technological prowess? Or is it a hedging strategy, since every year (barring 2020 and COVID-lockdowns) Earth Overshoot Day arrives earlier in the year? The problem’s initial conditions remain the same: we are 7.5bn human beings (and growing) on a planet that has been harvested and exploited in a very unsustainable manner (probably an understatement) for the past 150 years.
Saturday 6th was all about Nature whose role in trapping CO2 (natural sinks) has been documented by researchers. However, human activities are increasingly putting pressure on our natural carbon sinks.
Oceans: since the Industrial Revolution, oceans have been able to absorb roughly 30% of global CO2 emissions. However, relentlessly rising emissions mean that the concentration of CO2 in oceans has increased significantly, leading to higher ocean acidity. The acidification of the oceans can have significant long-term consequences on marine food chains (and subsequently to humans) while reducing reef protection in the event of storms.
Soils and plants: of all the CO2 stored in the biosphere, 80% is in soils, and 20% in plants. This ratio moves to 70%/30% in forests, and up to 50%/50% in tropical forests. No surprise then to see COP26 committing to end deforestation by 2030 despite the no-go from Indonesia (despite having made significant progress on deforestation since the early 2000s). In addition, we could face two risks that were under the radar at COP26:
Is this all doom and gloom? The answer is no. First, the role of sustainable agriculture in achieving climate ambitions is better understood. According to the FAO, 9.3 bn tonnes of GHG (farm gate and related land use and land use change) can be attributed to the agricultural sector (2018 figures, or 17% of total GHG emissions). According to this same study, emissions at the farm gate have kept increasing since 2000 (+14% over 2000-18) while emissions related to land use and land use change (primarily deforestation) have decreased by 20% over the same period. It is thus no surprise that COP26 has established a sustainable agriculture agenda. The role of innovation (precision agriculture1, vertical farming) and a change in our feeding habits (plant based vs. meat-based) are, in our view, two powerful drivers of a more sustainable agriculture.
Second, we have gathered enough evidence about the role of biodiversity in restoring balance to natural ecosystems. In 1995, wolves were reintroduced to Yellowstone Park, resulting in an ecological phenomenon known as a trophic cascade (trophic, relating to feeding; cascade, passing on, or falling). This phenomenon displaced some ideas about how ecological health is restored, and that it is more than a few factors such as soil health and climate. In fact, over time, it became obvious that when we take big, influential creatures like wolves out of an ecosystem, we create an imbalance. In the case of Yellowstone, the absence of wolves meant that the elk population were not hunted, and not forced to move constantly. This meant they would overgraze on willow, particularly close to rivers where beaver populations then suffered as their main food source was closely grazed. With more willow in winter, beaver populations recovered and began to dam rivers and create pools, processes that are central to rivers, evening out seasonal runoff and even creating cooler pools for fish and songbirds.
When it comes to oceans, the case for ‘re-wilding’ is even more compelling, as human impacts are devastating ocean habitats faster than any other species. Industrial fishing is the key culprit and a claim by the controversial environmental documentary ‘Seaspiracy’ stated that if overfishing continues at the current rate, that oceans will be so overfished that fish species will be critically depleted by 2048, at which point it would be impossible to continue fishing. While such a claim has been met with scepticism and controversy, there is widespread agreement that fish stocks are massively depleted and this is causing significant changes in marine ecosystems. As the largest carbon sink on earth (thought to concentrate 50 times more carbon than the atmosphere) we need to be conscious that changes to marine life and ecosystems are critically affecting the ocean’s role in carbon capture, with rising sea temperatures and acidification happening at record levels. According to US researchers Worm and Hilborn (2009) there needs to be enforcement of the concept of ‘Maximum Sustainable Yields (MSY)’ in fishing. At the time of writing, around two-thirds of the world’s stocks were being fished beyond their MSY, and to make progress MSY’s need to be treated as limits on fishing, rather than targets. Evidence has suggested that reducing fishing rates and allowing overfished areas to recover has allowed ecosystems and ocean wildlife to bounce back in many regions.
The complexity of nature is bewildering and human actions can spark multitudes of events, of which very few are linear in effect. Instead, effects cascade, with complicated feedback loops making it almost impossible to predict the ecosystem outcome. Re-wilding is the way to mass restoration of ecosystems, ideally bringing back as many of the missing elements as we can and allowing ‘tamed’ areas to become wild. Other ways include letting hedgerows grow wild, restoring land previously grazed by livestock, rewetting peatlands and leaving patches of land unmanaged. In essence, the concept is to remove humans from the equation and allow nature to provide its own checks and balances, which it tends to do very successfully.
Nature is resilient and it will be around a lot longer than we will, and if we do cause the sixth mass extinction, the planet is likely to recover, and that’s more than we can say for ourselves. Unless we buy tickets to Mars to Elon’s other $100+bn venture.
1The application of modern information technologies to provide, process and analyse multisource data of high spatial and temporal resolution for decision making and operations in the management of crop production. Global Food Security, 2016.
Day #6 at COP26 was about Youth and public empowerment. We’re fortunate to have young and talented people in our investment team supporting us in many different aspects of our jobs, and bringing valuable insights to our decision making process. They are the best-placed to express in their own words their fears and hopes. Let’s hear from them.
There are a multitude of issues facing young people today. Whether it be mounting student loan debt, unaffordable housing, rising prices due to inflation as a result of the centrally planned monetary policy, or a job market that is becoming increasingly unfriendly to anyone without a masters degree, there is one issue that often tops the list of concerns: climate change. We have seen some interesting actions taken by YOUNGCO, the official youth contingency of UNFCCC (United Nations Framework Convention on Climate Change). At COY16 (the youth equivalent of COP) they issued a Global Youth Statement, which over 40,000 individuals from all over the world signed. It called upon world leaders to implement the necessary policies (across key industries such as energy, agriculture, and finance) to help fight climate change. In addition, they have demanded that the most marginalised groups have a greater voice in guiding policy, especially because people in the Global South, BIPoC (Black, Indigenous and People of Colour), and other vulnerable groups generally feel the worst effects of climate change.
However, there is an argument to be made that the most important events today regarding youth engagement in climate change, are not happening inside the COP26, but outside it. When Greta Thunberg spoke to protestors outside the COP26, she was speaking the thoughts of countless young people around the world. She said “inside COP, they are just politicians and people in power pretending to take our future seriously, pretending to take our present seriously of the people who are being affected already today by the climate crisis.”
Young people, on balance, simply do not trust governments to tackle this issue. In the UK for instance, a majority of young people think that the government is simply failing them. Many feel that conferences like these have little actual impact in fighting climate change, and that protesting and action on the streets is the only way to move the dial. “No more whatever the f*ck they’re doing in there”, as Thunberg put it1.
What is more, there are actually a few cases where sustained public pressure against projects that could be deemed as environmentally hazardous actually led to the project being cancelled. For instance, the Atlantic Coast pipeline was cancelled in July of 2020, due to what Duke Energy and Dominion Energy (the utility companies financing the project) cited as “legal uncertainty”. This “legal uncertainty” came in the form of lawsuits, mainly from environmentalists, which sought to block the project. These lawsuits had increased costs to as much as $8 billion from about $4.5 billion to $5 billion when it was first announced in 2014. In addition, there was also the ambitious lawsuit led by the Dutch branch of the Friends of The Earth grassroots network against Royal Dutch Shell in May this year. This case saw for the first time in history a judge holding a corporation liable for causing dangerous climate change, and forced Shell to reduce its CO2 emissions by 45% within 10 years.
This shows that while protesting is vitally important and shaping discourse, working through the established institutions, like the courts, is also extremely important at implementing the desired change.
Being frustrated with “the system” is not new to young people like us, and when it comes to climate change we are faced with this constant duality. It’s a problem so big that we can never try and fix it ourselves and yet we are constantly told that it is our responsibility, while the structural change we ask for is only delivered in disappointing increments every few years (No wonder the term, “climate anxiety” has been added to our vocabulary). So we face the same choice as Greta, do we continue to ask for real leadership or do we abandon those in power and try to shape the world through our own lives and actions?
The answer, really, is both. We must continue to demand action and accountability from the people we vote for, the universities we pay expensive fees to, the organisations we work for and the companies we give our money to.
At the same time, our individual actions matter too. When we reduce our meat intake, cycle to school or work, reduce our flying and even decide not to have children, we are communicating again and again that we are to be taken seriously and that climate action and a just world are not going to be abandoned.
Here’s some of the ways we can exercise our power:
As consumers… Over 70% of young people in a recent poll said that they have changed their behaviour because of climate change, with over 37% saying that this has affected what they purchase. This is an important way of communicating to companies that climate change is not just a fad, but that climate friendly products are necessary and marketable (look at Beyond Meat!)
As voters… Young people have the lowest electoral participation of any generation, meaning that passionate voices are often drowned out by the concerns of the “baby boomers” and pension recipients. While lots of these generations are starting to recognise the importance of Climate Change, it’s just not as far up the agenda as it is for us. So it’s important that young people are active and vocal during election times, sharing that they voted, asking friends to vote, asking family to vote on climate, and asking politicians what their plans are for climate.
Politics doesn’t end at the polls. Remember that whoever wins the election, whether you voted for them or not, is representing you. That means that they are obligated to listen to your views and take them seriously. Different organisations (https://www.theyworkforyou.com/mp/; https://www.writetothem.com/ ) help people find their representatives and send emails and letters about what they care about.
As activists… Groups like Extinction Rebellion have garnered both praise and criticism for their style of protest2, from environmentalists and opponents alike. Being an environmentalist is more than just one thing, and as this movement gains momentum, we need to be careful of gatekeeping3 environmentalism. You can be just as much an environmentalist if you eat meat or are vegan, if you have a bike or a car, and if you’re out on the streets or sharing climate facts with those around you, and it’s never helpful to criticise or accuse people of not being a good enough environmentalist. The most important thing we can do is come together and multiply our power, in whatever shape it takes, rather than allow ourselves to be divided.
As learners… Striking for Climate is a last resort. No child wants to or should be out of school, but the Fridays 4 Future demonstrated that something radical was needed and gained the attention of politicians (and parents) who finally sat up to take notice. In an ideal world, they don’t have to strike. But we can ask our teachers and politicians to integrate climate change into the curriculum and teach climate change and justice to a new generation.
COP 26 has frustrated young people and activists alike today by both organisationally and politically excluding the voices that are most affected by the climate crisis. Let’s just find some hope in the fact that there are millions of people outside of those rooms who are still shouting, regardless of what happens inside.
It’s not easy to continue to fight for climate justice today, and William Shakespeare’s quote seems appropriate: “(the young and) the miserable have no other medicine but only hope”. Hope in a greener, more just and more sustainable world that we will never stop fighting for.
By Marie Allen, Aubrey McKinnon, and Piotr Habrajski
1Greta was speaking from inside COP 24, where she desperately asked leaders to take action. This year, she’s given up on that, and her space outside COP 26 is with the activists and the young people, where she says, “that is not leadership. This is leadership.”
2Extinction Rebellion are a people-led movement with a general assembly structure designed to allow individuals shape the movement themselves based on their interests and local issues, as well as their preferred style of protest. Unfortunately, they have had a persistent lack of diversity in many groups and there are some fair criticisms of parts of the English leadership. Controversial actions have further tarnished their image. Due to its decentralised nature, XR is very different region by region (XR Scotland has coped much more effectively with diversity) and has had some uniquely powerful protests.
3Gatekeeping is the practice of controlling, and usually limiting or preventing, someone’s access to something.
CO2 = P x S x E x C. A man who became a billionaire selling software threw that linear equation to solve global warming. P = global population, S = services consumed by this population, E = energy required to power those services and C = CO2 content of this energy. Well, to get CO2 at 0, you need at least P, S, E or C going to 0. There are unequivocally social and moral hazards associated with trying to bring P, S or E to 0. The only variable left here is C, leading to the most important question COP 26 should answer (and it’s not how many tons of CO2 were released by all the private jets that flew to Glasgow): how and when can we bring C to 0?
A handful of scenarios have been made available to understand what is required to get to net-zero (i.e. C to zero): IEA, IPCC, Shell amongst others. All of these net zero scenarios broadly share the same conclusions:
The future is electric – from 20% of our current energy supply to roughly 50% by 2050, with the vast majority of this growth driven by renewables
There will be new fuels – renewable fuels (e.g. reused cooking oil), green hydrogen and ammonia, and yes still oil and gas (but CO2 sequestration should be available) and coal would be almost completely out of the equation
Innovation is desperately needed – the IEA estimates that roughly 50% of the technologies required to bring us to net zero are still in early development.
A close cooperation between governments, finance, energy companies and (activist) consumers is absolutely necessary to push forward this roadmap. This should be the prime objective of COP, shouldn’t it?
The game plan is very straightforward: lower energy demand, and much lower CO2-intensity for the energy produced over the next 30 years. The idea of decoupling economic growth from fossil fuels is already visible, notably in the most advanced economies (e.g. Denmark). However, economically and socially, the lack of energy (blackouts) and/or expensive energy is still considered by most as worse than CO2 emissions. This was the topic of one of our most recent blogs – Could the energy crisis derail our transition to net-zero?
The energy transition will be all but linear, and there will be decisions by governments1, companies, and financial institutions that would fail to promote decarbonisation. But at least, the compass is set:
We need governments to continue to make bold pledges. Not just about emissions trajectories, but about the future energy mix, which will be the backdrop to the transition, and funnel R&D investments. India is well on track to become one of the top producers of renewable energy, and has promised to produce 450 GW of clean electricity by the end of the decade. That’s the equivalent power of 450 nuclear power plants, and the same as around 1,350 million solar panels.
We need activist shareholders. Not just divesting from fossil fuels – but pushing for change from the inside. Engine No. 1, a small hedge fund, shocked the investment community when it unseated two board members of Exxon Mobil earlier this year, claiming that years of slowing returns and mounting debt for Exxon have shown that it’s current direction is not sustainable in the long term and that it needs leadership from within the energy industry to help it adapt to the climate crisis
We need further innovation. It drove down the cost of solar PV electricity falling by 82% over the course of a decade and the cost of electricity from new onshore wind declining by 13% from 2019 to 2020. We hope this week to hear from US Special Envoy on Climate, John Kerry, who is proposing a ‘First Movers Coalition’, designed to facilitate purchase agreements to hard-to-abate sectors like shipping, aviation, cement, steel and trucking, in order to support innovation in low-carbon products. Further innovation will help to achieve the technologies that are needed at costs that are accessible to emerging markets, and money spent on R&D in the right way can support the energy transition in a way which is equitable and even provides a boost for emerging economies.
We need community engagement. Decentralised energy – which broadly refers to energy created off the mainstream, or national grid – can have many benefits, including reducing the impact of power outages as well as allowing people to gain access to the energy market by owning micro-renewables and selling energy back to the grid. Community owned power is something that’s proven incredibly valuable with renewable projects in Denmark, such as Middelgrunden, where the 50% community owned offshore wind farm helped overcome citizen objections, by providing them with ownership of the project and tangible returns on their investment over time.
Announcements so far this week have shown that governments are starting to recognise that renewables are the future, not just to mitigate climate change and meet NDCs2, but also to ensure that energy remains stable and affordable. However, they are far from ambitious enough to limit global warming to 1.5°C. The IEA’s Announced Pledges Scenario (which shows how emission trends will develop in the scenario that all national net-zero emissions pledges are realised in full and in time), sees a temperature rise of 2.1°C in 2100.
The Stone Age didn’t end for lack of stone. Let’s ensure the oil & gas and the coal age will end long before the world runs out of hydrocarbons (inspired by Sheikh Ahmed Zaki Yamani, former Saudi Oil Minister).
Unless reminded with taxpayers money bailouts in the aftermath of the 2007-08 financial crises or regular trading losses due to poor risk management, the finance industry generally likes to be associated with big numbers. And COP 26 offered them one: $130 trn. Indeed, asset owners are reported to have committed to reaching net zero (carbon) by 2050, investing the above-mentioned $130 trn. In essence, this means that all the investments made on behalf of their clients (aka “assets under management” or AUM) should be compatible with the Paris Agreement’s 1.5 degree objective.
As a reminder, 3 sectors desperately need to decarbonise if we are to reach net zero by 2050:
Power (the rise of renewable energy, phasing out of coal then eventually natural gas)
Notably, the IEA published in its net zero reference paper that $4 trn of annual investments in energy and energy infrastructure are required by 2030. So there is a decent hope that the large asset managers of this world would disproportionately invest in the companies and sectors that truly need to be transformed to move towards this greener future.
Well, the iShares MSCI World Paris-Aligned Climate UCITS ETF is invested, as of today, at 1.98% in the broad power sector (utilities and energy) and 1.63% in materials (are wind turbines made of bamboo? will future roads be gravel?). Information technology and Communication account for 33% of this ETF (including the usual suspects such as Microsoft, Apple, Alphabet and Meta in the top 10 holdings). Besides, according to Carbon4 Research, the broad tech sector (including internet, software, hardware, media and telecommunication) was only responsible for 3.6% of world GHG emissions in 2020 and emissions have increased at a pace of 6.2% a year over the past 7 years, which is far from impressive. So in a nutshell, 33% of the money invested in a Paris-aligned strategy is directed towards companies that in aggregate account for a growing, yet small share of global CO2 emissions. Is this how $130 trn is going to be spent? Research by Scientific Beta dove into the flaws of net-zero strategies, which mostly fail to invest where it matters, starting with clean energy.
One other mechanism genuinely emphasised by the finance industry is the cost of capital divergence. Investment people love to use arcane phrasing to impress their audience and give the impression they are smarter (hopefully, we don’t do this). But don’t worry, the concept of financing cost is fairly easy to understand. The entire argument is based on the fact that Company A involved in green, sustainable businesses (think of an offshore wind farm developer) should be able to finance their activities more cheaply relative to Company B that is involved in a dirty business (think of coal mining activities) to facilitate its future growth. Laudable.
The cost of capital is influenced by the capital structure of the company (equity vs. debt) and the expected returns on each asset class (typically, the safer the business operations, the lower my expected returns). Let’s continue with our hypothetical example. Company A can take more debt – let’s say 50% (it’s green and safe), cost of equity around 5%, cost of debt at 0 (thank you green bonds). Company A’s cost of capital is 2.5%. Conversely, Company B, which engages in bad activities will be able to carry very little debt – let’s say 10% (it’s risky and dirty), the cost of debt will be fairly high (8%), and cost of equity will be through the roof (15%). Company B’s cost of capital is a staggering 14.3%. Success right? It is worth keeping in mind that investors do not starve listed polluters off financing by selling their stocks. Ultimately though, a stock that is out of favour tends to see its cost of financing rise and the mechanism described above starts applying to that company.
Wait a minute. If our societies still require coal that Company B produces and the supply of coal is restrained by the lack of access to capital, what happens to the price of coal? It goes up. This in turn enables Company B to generate much more cash from operations, eventually pay down debt, and nicely reward its faithful shareholders via dividend payments. On the other side, Company A can only develop a handful of offshore wind projects at a time (demand and in-house capabilities), no matter how cheap and abundant funding has become.
Some may say that it takes one greenwasher to call out other greenwashers. Is this the underlying message delivered by Larry Fink, BlackRock CEO? Dumping fossil fuels or stopping funding them doesn’t solve the problem. It just becomes someone else’s problem. Equally not allocating investments in the right sectors is unlikely to play in the planet’s favour.
But as long as the big numbers are safe, then we should be all.
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