fbpx

We're crowdfunding!

Own a part of our business. Capital at Risk

View our pitch

Could the energy crisis derail our transition to net-zero?

Bastien Dublanc

20 October 2021 Climate ChangeSustainability

If you have been following the news for the past couple of weeks, the term “energy crisis” has been hard to miss. Across the world, shortages in energy sources are wielding havoc. In Europe, natural gas prices are on the rise, oil prices are going up, and China is struggling with dwindling coal reserves. And as the world is pushing towards a transition to low-carbon economies, could this spike in fossil fuel prices challenge the post-COVID 19 green economic recovery? 

What exactly is leading to these high energy prices?

Energy prices have been formed through many past cycles by supply and demand. Over the past few years, we have seen a confluence of factors which enabled the supply of more, and cheaper energy. Strong oil supply growth in the US (8.9% a year between 2009 and 2019, see below) followed by an oil price war between OPEC and Russia that resulted in an oversupplied oil market, and the sharp decline in costs of renewables (at parity with fossil fuels when it relates to power generation) kept overall energy costs low for consumers and businesses. That was before the COVID-19 pandemic.  

Strong oil supply growth and fast-declining renewable costs

Source: EIA, IRENA, Clim8Invest computations; NB: Liquids = Oil + NGLs; CSP = Concentrated Solar Power

In the first half of 2020, COVID-19 first created a demand shock (energy consumption was down 4.5% in 2020), notably for oil (mobility was significantly curtailed in 2020), requiring a coordinated answer from OPEC+ which is still in force, in practice, to adjust supply with demand. To address the economic shock (demand and supply), global central banks injected a lot of liquidity into the financial systems which had two consequences: boosting economic growth in 2021 which lead to higher energy demand, and favouring inflows into commodity markets. The combination of the two are the main drivers behind the recent spike in fossil energy prices. 

Put simply, energy demand is rising (from a depressed base) but oil & gas producers haven’t responded to price signals yet (they are reluctant to boost investment in order to increase supply). In our view this is driven by three main reasons: 

2020 was a record year in terms of installation, resulting in a 10% YoY growth in renewables capacity (wind and solar). Yet, this pace of growth is proving itself as too slow to make our economies less reliant on fossil fuels. And while most of the recent fiscal packages (EU Green Deal, US Infrastructure Bill, China’s 2060 vision) support the introduction of renewable energy, we believe the velocity of money remains too slow to reach net zero by 2050. According to the IEA World Energy Outlook 2021, fiscal measures dedicated to the green recovery amount to $2.7tn, o/w $0.4tn directly dedicated to clean energy. Indeed, in the IEA’s net zero scenario, electricity production from solar and wind should grow at an annual pace of 21% and 17% to 2030, dropping to 11% and 10% between 2030 and 2050. A quick catch up is absolutely necessary to keep us aligned with 1.5°C. 

Despite the competitiveness of renewable energy against fossil fuels, our economies remain heavily reliant on fossil fuels as they still account for 83% of the world’s primary energy consumption (coal included), and 94% of CO2 emissions (coal included) in 2019, a picture that is by and large no longer accepted by our societies.  

The prices of oil and gas have significantly increased over the past twelve months (see charts below), implying that energy bills for households and businesses will start to be noticed over the next few quarters. 

Source: FactSet, Clim8 Invest

Put together, the lack of response by energy producers, the seemingly slow rate of growth in the expansion of renewable capacities and the underinvestment in the broader energy landscape might be leading us into a short term future of more frequent shortages and price volatility.

Energy transition vs. security of supply

As economies grow, so does energy demand (and vice-versa). In practice this means that producing goods and services (economic output), requires energy to fuel production, whether it be manufacturing plants or computers. An increase in output usually means an increase in energy demand. Thus, having access to abundant and cheap energy is in many ways necessary to creating wealth. 

GDP growth vs. primary energy consumption

Source: BP statistical review of the world, IMF, Clim8 Invest. 

Our societies are increasingly keen to see the green transition happen. Equally, facing energy shortages is not acceptable in 2021. Anecdotes of empty gas stations in the UK, or Chinese plants forced to shut down because of very low coal inventories are flourishing and provide evidence that we’re entering an uncertain energy outlook, at least in the short term. This complex equation – short-term security of energy supply vs. long-term decarbonisation – can be solved in multiple ways. As an example, China recently approved the increase in domestic coal production and started to re-import Australian coal (despite a ban) to prevent electricity prices from skyrocketing further. Yet, accelerating the energy transition requires in itself energy.  It is worth mentioning that the IMF slightly reduced its 2021 GDP growth forecast to 5.9% (from 6%), with fuel prices inflation being one of the drivers of this revision. 

Can the energy crisis dent the green transition? 

Over the past decade, economies of scale, better efficiency (i.e. ability to convert sun radiation or wind resource into electricity) and cheaper cost of capital were the main drivers behind bringing the cost of renewables down. However, there was very little inflation associated with it in the past. These days, inflation is front and centre of the economic agenda, with energy possibly the most visible example of inflation impacting our economies. But it’s just not energy. For instance, copper prices have jumped by 82 percent 2 over the past two years, semiconductor shortages are in the news, wage inflation is becoming apparent in selected regions, and polysilicon prices are on the rise (polysilicon is a key component of solar modules). We believe this could create near-term headwinds on the penetration of renewable electricity: 

  • The ability to increase production capacity for wind and solar due to widespread shortages and/or higher costs
  • Economic rationale to switch to renewables, potentially more challenged in the absence of a global CO2 price and/or coercitive mechanisms
  • Increased cautiousness from consumers (households and corporations alike) that may prioritise in the short term other spending categories to navigate this more uncertain environment 

Conversely, there are enough historical references that support the view that high oil & gas prices lead to renewed investments in alternative energy sources (nuclear acceleration in the wake of the 1973-75 oil shock such as in France, hydrogen as we headed into the dotcom bubble of 2000, solar in 2007-08). We believe this time will be no different, especially given the widespread policy and societal support for clean energy with net-zero pledges flourishing

All put together, the sharp decline in renewable costs can be challenged in the near-term by supply chain inflation (energy costs being one of the many factors at play) but there are many reasons to believe that current market forces and the push to decarbonise quickly the energy system will be able to shrug off these headwinds. 

Conclusion

There is little doubt about the direction of travel. More renewables (wind and solar) and alternative fuels (biofuels from waste residues, hydrogen) are required at a massive scale in order to reach the net zero emissions goal by 2050. Renewables can now compete with fossil fuels on price as costs have been sharply decreasing over the past decade. And yet, we might be entering a period of less abundant, more expensive energy prices, still due to our large reliance on fossil fuels. Despite inflation building in supply chains and raw materials, this is an opportunity to accelerate the energy revolution that requires more energy, and a much cleaner energy, to drive sustainable global economic growth. This has a cost: $4Tn of annual investments to 2030 according to the IEA net zero scenario. But the cost of inaction in the long term is, we believe, far greater than that. 

References

1: analysis based on FactSet data for the FactSet industry group World Minerals; net debt to EBITDA at 1.5x as of Q2 2021 vs. 1.2x as of Q4 2019; total debt/total equity at 61.7% vs. 51.1%

2: source FactSet, as of October 19th, 2021. 

0 Comments

Duncan Grierson, Clim8 CEO: “We must act now”

Duncan Grierson

09 August 2021 Climate ChangeSustainability

On August 9th the IPCC released a landmark study, warning of increasingly extreme heatwaves, droughts and flooding, and a key temperature limit being broken in just over a decade. The report “is a code red for humanity” and a global call to action. 

Here are my 4 takeaways from the report:

  • The new report begins with a definitive statement: “It is unequivocal that human influence has warmed the atmosphere, ocean and land.”
  • The last decade was hotter than any period in 125,000 years.
  • The key aspect of the IPCC report is that the 42-page summary is agreed, line by line, by every government on the planet. 
  • We are running out of time. But if we can cut global emissions in half by 2030 and reach net zero by the middle of this century, we can halt and possibly reverse the rise in temperatures. UN Secretary General António Guterres said: “If we combine forces now, we can avert climate catastrophe. But, as this report makes clear, there is no time for delay and no room for excuses. I count on government leaders and all stakeholders to ensure COP26 is a success.”

We are running out of time”

– Duncan Grierson

Though this report is extensive and has brought together leading climate scientists from across the globe, it doesn’t report on how we can mitigate and adapt to the climate crisis. Later this year, the IPCC proposes to publish a follow-up report to delve into climate adaptation.

It’s clear from the research that we need to act FAST now. There is hope, and where there is hope there are opportunities for us to take action.

One of the ways to take immediate action is through climate impact investing. It’s why we invest 100% into the companies and technologies that are at the forefront of a sustainable future.

Together, we can build a sustainable and financially secure future.

Capital at risk

0 Comments

Future Outlook for Clean Energy

Clim8 Team

09 July 2021 Climate ChangeSustainability

Guest article from Industry Expert, Michael Wilshire

In the last decade, the clean energy sector has grown at an impressive rate.  Wind and solar accounted for less than 2% of global generation in 2010, growing to over 10% by 2020, with a 56% share projected for 2050 (see Bloomberg New Energy Finance’s latest “ New Energy Outlook”, Economic Transition Scenario). Global investment in renewable energy generation now runs at around $300 billion a year. Installation of domestic heat pumps added another $50 billion of annual investment in 2020.1 Total annual expenditure on electric vehicles and associated charging infrastructure, an industry that barely existed ten years ago, was an additional $140 billion in 2020.


Underlying trends


The keys to this success have been a mix of technology innovation, coupled with policies that stimulated early demand for these developments. As a result, we are now seeing just the first instalments of a radically different and cleaner energy system.  Innovation has been unusually rapid for three reasons

  • Modularity, a shift away from large scale generation and other assets towards new smaller scale units that are being deployed in large volumes – for example solar modules, individual wind turbines, heat pumps, batteries and hydrogen electrolysers. High unit volumes lead to strong learning effects that rapidly drive down costs. In solar, for example, every doubling of installed capacity has led to costs falling by over 28% – a learning rate that is almost unparalleled, other in a few fast-developing sectors such semiconductors, software and genomics. 
  • Decentralisation, where the physical location of assets moves from the centre towards a distributed network of smaller, often interconnected assets, in homes, commercial buildings and local districts.  New types of businesses are emerging that may install, operate, own or aggregate these assets – for example offering managed solar and storage services, EV charging, energy management, microgrids, and demand response services.  In some ways, this catalyst for innovation is similar to the early days of the internet, a highly decentralised technology that liberated the telecommunications industry from closed, proprietary and centrally managed networks.
  • Digitalisation, in particular an abundance of data to and from sensors, controls and other devices (the so-called ‘Internet of Things’), low cost cloud computing, and machine learning.  These technologies allow decentralised assets to be monitored, controlled and optimised in new ways that improve efficiency and resilience.

New challenges

There are however still many challenges and the scale of required investment is huge.  BNEF’s Economic Transition Scenario, which focuses on the direct economics of energy investment and removes longer term policy drivers, forecasts that between now and 2050, a cumulative total of $15.1 trillion will need to be invested in new power capacity, 80% of which is renewables and batteries, plus another $14 trillion in the grid.  Even this is unlikely to be enough. For example, to stay on track for 1.75 degrees warming (as a reminder, the Paris agreement targets to remain below 2 degrees compared with pre-industrial times), we would need to more than double the cumulative amount invested just in power generation and grid storage assets to $35 trillion, even before allowing for additional power capacity needed to produce green hydrogen. Other challenges include:

  • Balancing the grid, as the proportion of intermittent renewable generation increases and as more flexible gas fired generation comes under pressure due to its emissions.  Curtailment, longer term storage, and demand management will all be needed.
  • Managing complexity.  The transition to clean energy also requires a digital transformation of energy networks, so that they can handle fast growth in the number of underlying assets and devices that in turn generate huge volumes of data.  Without new approaches, the complexity of doing this would increase in a non-linear, even exponential manner.  New technologies are needed to meet this challenge, such as more modular software platforms and AI.
  • Ensuring resilience, for example strengthening the grid to help integrate renewables and EVs, with major upgrades in cybersecurity. 
  • Deepening inroads into transport, which generates almost a quarter of total fuel-related emissions.  Consumer-driven EVs are just the beginning and battery powered light commercial vehicles, buses and trucks are also strong candidates for electrification. Cities need to develop integrated approaches to different types of public and private transport. Other forms of transport such as long-distance shipping and long-haul aviation will need alternative low carbon molecules such as biofuels or ammonia, due to their requirements for high energy density and long ranges.
  • Decarbonising buildings, which account for around 10% of global emissions from fuel combustion, over half of which is from space and water heating.  This requires a major shift away from gas and oil to electricity.  Heat pumps that extract and concentrate heat from the outside air or ground and which can almost magically produce up to four times as much heat as their electricity input are very energy efficient, but for mass adoption the capital costs of installed systems need to fall significantly.
  • Cleaning up industrial manufacturing and processes, which represent just over a quarter of emissions from fuel combustion.  Steel, chemicals and cement production are the most emissions and energy intensive sectors, but are often low margin, with long-established and optimised processes, high entry barriers and large amounts of existing capacity – all of which act as disincentives to major change.


Opportunities

Addressing these challenges will lead to a variety of new business and investment opportunities, for example in:

  • Asset investment, to build the energy infrastructure of the future.  Utilities will need to invest heavily in renewable generation, grid infrastructure, grid-scale battery storage, and hydrogen electrolysers. One of the best applications for hydrogen is likely to be for long-term storage of energy to balance the grid in periods of peak demand.  Other players, including oil and gas companies, are already shifting more of their investment towards clean technologies.
  • Deeper decentralisation of electrification.  Continued investment in rooftop solar for commercial and residential premises is one example of decentralisation, but a massive programme of investment is also needed in distributed assets that can take advantage of cheap, clean electricity such as heat pumps for buildings, private and public EV charging networks and local battery storage.  Installation and design services will be needed to support these rollouts.
  • Software platforms, that act as a unified interface with complex energy systems and simplify the challenge of developing applications and systems to run them.  In the US, C3.ai, an enterprise software company, has developed a ‘model-driven architecture’ that acts as a layer of abstraction between different sources of device data, databases, machine learning frameworks, algorithms and applications – with energy as its largest current market. In Europe, software businesses like Greencom Networks, Kiwigrid and others have developed platforms, designed to help utilities control distributed assets such as control solar panels, batteries, electric vehicle chargers and smart home energy loads.  Cybersecurity platforms are also being developed that similarly interface with a myriad of different devices on networks.
  • New service models.  Whilst much of the energy industry has in the past been vertically integrated, we are seeing a distinction between businesses which provide a service and those which own or operate the underlying assets.  For example, Octopus Energy in the UK, launched in 2015, now has 2.2 million domestic customers, 7.5% of the UK retail market. At the core is its ‘Kraken’ software platform, which  supports a wide range of consumer services, including clean electricity retail, EV charging points, battery storage services, and integration with rooftop solar generation. It also licenses Kraken to third parties, with a total of 17 million energy accounts now on the platform.
  • Clean industrial processes. Technologies are being designed to reduce emissions from industrial processes.  Examples include Boston Metal in the US which has developed a molten oxide electrolysis process that eliminates the need for coke in steel production.  In Sweden SSAB (a Swedish steel company), LKAB (Europe’s largest iron ore producer) and Vattenfall (a major European energy company) are working together to decarbonise steel using hydrogen, aiming for commercial scale production within five years.  CarbonCure has developed a process for adding captured CO2 to concrete as it is produced, thereby increasing its strength, embedding the CO2 permanently and reducing the amount of cement needed.
  • Continual technology innovation.  Whilst ‘breakthroughs’ are often hoped for, technology innovation is often a more continuous process of learning in which a series of smaller improvements are made more gradually, but which collectively add up to a remarkable improvement over time.  We are likely to see continued reductions in the costs of solar, wind energy, battery technologies, heat pumps and other areas – due to improvements drawn from engineering, physics, chemistry, materials and computer sciences.  There is little evidence that the learning rates we have seen over the last ten years are slowing, and companies that best understand these trends and exploit them are most likely to prosper over the next decade.

Capital at risk. For illustrative purposes only and does not constitute investment advice.

1 BNEF 2021 Energy Transitions Investment Trends Report

About Michael

Michael is a private investor and advisor, with a particular focus on the impact of emerging technologies.

Michael has significant industry experience having previously worked as Head of Strategy and Research at BNEF, where he built the research teams covering renewables, advanced transportation and digital technologies. He was one of the first investors in the company, prior to its acquisition by Bloomberg in 2010. Michael was formerly a partner at McKinsey, where he advised clients in the energy, technology and telecommunications industries on technology, strategic, operational and marketing matters. Prior to that Michael worked in the UK Department of Energy and was Private Secretary to both the Permanent Secretary and the Minister of State for Energy where he worked on the deregulation of the energy sector, nuclear policy and the privatisation of the electricity industry.

Michael has an MA in Mathematics from Cambridge University and an MBA from the London Business School.

0 Comments

Our view of seven sustainability trends on the rise in 2021

Clim8 Team

08 April 2021 Climate ChangeSustainability

sustainability trends

Sustainability trends suggest a shift towards a more circular system is beginning.

In the last 70 years, mass consumerism and a maturing linear system (make, use, throw away) have changed how we view resources.

The term ‘waste’ can infer little or no worth. All resources, effort, energy and time that goes into making products are dismissed in a single word and often after very short lifespans.

Sustainability trends in waste management

Times are changing. Although landfills and incinerators continue to fill and mindsets still need shifting, rays of hope are on the horizon.

2021 looks to be a year of accelerated change in the waste management world.

Here, in our view, are seven sustainability trends to watch closely over the course of the year.

1. Capturing methane

Landfills emit 15% of the world’s methane emissions, a potent greenhouse gas 28 to 36 times more powerful than CO2 at trapping heat in the atmosphere.

Waste Management, one of the largest waste management companies worldwide, focusses on capturing this methane and using it to run its natural gas-powered fleet of vehicles.

Hopefully this system will also encourage other companies to capitalise on their own methane emissions.

2. Ending the single-use wave

Every additional six-month delay on the ban of single-use plastics results in hundreds of millions more items filling our landfills and oceans. China also recently decided that it would no longer (unsurprisingly) accept non-recyclable waste, heightening the landfill situation further.

Thankfully, we believe legislation is within reach and will force change.

For example, Canada is banning the majority of single-use plastics by the end of this year with Montreal aiming to have a zero waste policy by 2030.

Other countries including France, Taiwan and Kenya are in hot pursuit, many having already banned plastic cups, plates, cutlery and bags.

3. A puzzling affair

The UK has a decentralised waste system with an array of recycling criteria and a confusing labelling system. No wonder 73% of British consumers would welcome greater transparency about their waste.

Combined with a widening variety of plastics and mixed-polymer plastics on the market, sorting waste is, in our view, a complex issue.

Good news though. Advancements in sorting technology continue to make headway in alleviating the pressure for waste-to-product companies such as Renewi.

However the system is still heavily reliant on humans separating out the different plastics at a maximum rate of 30 to 40 recyclables per minute. 2021 will be the year AI becomes prevalent. Increased sorting accuracy and efficiency enables AI-powered machines to sort 160 plastic items per minute.

4. Upping the recycling ante

Increased customer pressure and new legislation are pushing brands to think carefully about their design choices.

Whilst fiscal policy changes (for example a tax on all products that do not hit a 30% recycled-content threshold will be introduced in the UK in 2022) will drive some decision-making, others will be good-will, or value-led (the value of recycled materials especially rare earth could be significant which creates an incentive to recycle), such as the surge in battery technology recycling research by companies like Umicore.

5. Collaboration is king

Waste is, in our view, a systemic issue. Brands trying to solve the situation alone generally stall early on.

We believe worldwide collaborations and partnerships are and will be the answer. Co-founded by Tetrapak, Nestle, Danone and Veolia, 3R Initiative, in our opinion, is a prime example.

A global collaboration, it researches different methodologies to help reduce, recover and recycle the ever-increasing plastic production by companies. Findings are open source so all companies can benefit.

6. Thinking outside the box

Designing out waste completely is the ideal scenario. Unfortunately, society has become less and less circular over the decades. Only 8.6% of waste worldwide is recycled and the figure is getting worse.

Rethinking the way products are designed with end of life in mind will change this. DS Smith, a global packaging solutions company, now trains all of their designers in Circular Design Principles to help them hit their 2023 target of producing 100% recyclable or reusable packaging.

7. Is alternative better?

Sustainable paper-based packaging’s popularity has increased tenfold and Smurfit Kappa is leading the charge.

However, many other brands are turning to plastic alternatives such as plant-derived materials that claim to be biodegradable. Despite sounding green on the tin, in reality they typically only degrade in highly-controlled environments.

Although new varieties of such materials encourage consumers to lower their plastic consumption, they can wreak havoc on a waste management system not capable of processing these materials.

Though it’s not obvious, solutions, partnerships and innovations are being worked on behind the scenes. Working collaboratively is the only way to productively move forwards. Invest your money in companies pioneering the way and accelerate the rate of change.

With investing your capital is at risk. Information is for illustrative purposes only and does not constitute investment advice.

0 Comments

Overcoming water scarcity: water crisis solutions you should know

Clim8 Team

31 March 2021 Climate ChangeSustainability

Tackling water scarcity

Water scarcity is one of four major challenges preventing 2.1 billion people, almost a third of our global population, from having regular access to clean drinking water.

The other three are pollution, quality and affordability. For this first part in the series, we will be focussing on water scarcity.

Water scarcity? And yet water is everywhere I look

The vast majority – 97% of water on earth is stored in its oceans. A further 2.5% is frozen in polar caps, is locked up in soil or polluted beyond repair. The remaining 0.5% of our global water resources is used by 99% of the Earth’s 1 trillion species, of which humans use a disproportionate amount.

To exacerbate the situation even further, populations are booming, existing infrastructure is poor, farming methods are damaging and climate change is already upon us. Every year, water is becoming scarcer.

Two sides of the water scarcity coin

Water scarcity happens in two ways. Physical water scarcity occurs when water supply does not physically meet demand. This affects 20% of the global population.

Economic water scarcity, however, arises when an adequate water supply cannot be tapped due to insufficient funds; often caused by lack of good governance. Economic water scarcity affects 23% of the global population, predominantly in Africa

A range of innovation and technology businesses look to solve water scarcity via different channels.

Focus on reducing non-revenue water

We lose a third of all drinkable water worldwide. Old infrastructure such as leaky pipes cause inefficiencies, alongside human factors such as meter reading errors, theft and corruption.

‘Non-revenue water’ costs countries millions of pounds and usually passes onto the ratepayer, making affordability an ever-growing concern.

Thankfully, many companies have developed and are implementing solutions, for example:

  • Xylem SmartBallTM is a multi-sensor tool that detects and locates leaks without the need for costly excavation exercises. Africa’s largest water utility company, Rand Water, used this technology to examine 2,200 kilometres of pipelines and locate every single leak down to the closest metre.
  • Utility companies rarely have funds to replace infrastructure. In fact, USA companies need $1 trillion in the next 25 years to replace all existing leaky infrastructure. Aegion Corporation have invented future-thinking technologies that aim to enable effective pipeline rehabilitation rather than replacement.
  • Smart water meter technologies, such as Badger Meters, are being used to replace existing antiquated systems. Smart technology enables companies to check water usage, identify water leakages and detect tampering in real time.

Moving to access the 97%

Rapid adoption of desalination technologies in arid regions such as the Middle East, has helped countries deal with physical water scarcity. In Saudi Arabia, desalination now accounts for nearly 70% of their drinking water. 
However, desalination plants are power-hungry using 4 kilowatt hours of energy for every cubic metre of water produced. This costs customers as much as $5 per 1000 gallons versus $1.50 per 1000 gallons from a typical municipal water supplier even if the costs have fallen significantly over the last 2 decades.

Increasing solar power generation will bring this cost down, though some experts believe that desalination must be coupled with other solutions to reduce costs substantially.

water scarcity
Source: Mission 2017

To make desalination truly affordable, Energy Recovery, an innovative desalination company, produces highly efficient and scalable solutions that minimise existing plants’ energy usage and carbon emissions. To date, $2 billion in energy expenses have been saved and 11.5 million metric tons of carbon dioxide emissions have been eliminated.

A team in Singapore are also exploring biomimicry techniques to see how mangrove plants are able to extract fresh water from the sea with minimal energy.

Slowly changing perceptions

Reusing and recycling water should alleviate municipality and industry-wide water scarcity. Depending on whether it is drinkable, water can irrigate orchards, recharge groundwater or wash vehicles. Wastewater treatment technology has improved exponentially in the last decade. Kurita Water is a prime example that has created Zero-Liquid Discharge (ZLD) systems, a closed-loop process which treats and reuses water without any discharge. 

The public appears to remain sceptical as to whether recycled, treated wastewater is drinkable. Highly visible champions such as Bill Gates are vouching for its safety, which should help grow the practice. Australia turning to greywater would save 1 trillion litres of water.

Intelligent irrigation

The global agricultural industry uses 70% of our freshwater supply. Inefficient watering methods loses much of it to field run-off. 

In developing countries, the Food and Agricultural Organisation of the United Nations (FAO) launched an initiative, Global Framework for Action on Water Scarcity in Agriculture helping farmers adapt to climate change impacts and water scarcity. In the meantime,  precision irrigation systems and computer algorithms are becoming commonplace in developed countries, reducing water usage ten-fold and preventing run-off. 

For many of us living in rain-abundant countries, it can be hard to envisage water scarcity. With increasing global temperatures though, it may become more frequent. 

In order to resolve this worsening situation, investment into innovative companies applying solutions to water scarcity is essential.

With investing your capital is at risk. Information is for illustrative purposes only and does not constitute investment advice.

0 Comments

Clean Energy Superpower: The Energy Storage Solution

Clim8 Team

13 April 2021 Climate ChangeSustainability

Wind farms and solar panels are a common sight these days. Originally criticised for blemishing unspoilt landscapes, they are now welcomed as signs of greener times.

And as fossil-fuel energy gradually gives way to clean energy, wind and solar will likely take over as the dominant energy source. Especially in the UK and other less mountainous countries that do not benefit from an abundance of hydropower, currently the world’s most utilised renewable energy source.

Actually, over the course of the last two years, the UK managed several months without coal-based power generation at all.

The clean energy conundrum

Water might always flow, but what happens when the sun does not shine and the wind does not blow? How do you maintain a consistently sufficient supply of power when the weather isn’t playing ball?

 Adding to the challenge, electricity consumption patterns are changing. Transport systems are gradually electrifying and our dependence on numerous electronic devices increases.

Clean energy: the missing solution

The answer, we believe, is energy storage. Combining solar, wind and battery storage technology (known as SWB) cannot only, in our view, help bring the cost of green energy contracts down but also balance intermittent energy supply for grid operators.

Think tank, RethinkX, believes that when SWB technology is finally fully integrated in power systems and running at optimal conditions, it will generate 3x-5x as much energy as today’s grid whilst energy can be stored on the less windy days.

If anything, clean energy sources are capable of excessive amounts of surplus electricity generation, produced at near-zero marginal cost, coined ‘Clean Energy Superpower’.

An idyllic thought but a few hoops we feel need to be jumped-through first.

Automotive industry – a source of inspiration

Battery storage size (the number of kWh that a battery can hold as opposed to the physical size) and output remains a challenge for the adoption of electric vehicles.

Thankfully the race to find solutions to these challenges is drawing closer; the magic figure of $100/kWh is widely seen as the threshold beyond which batteries will become mainstream. This is mostly driven by the Electric Vehicle (EV) industry’s need for batteries that last longer, hold more energy, and weigh less.

As of this month StoreDot, a startup battery manufacturer working in the automotive marketplace, released a battery that it says can fully charge in just five minutes; a notable step change brought about by highly-targeted industrial innovation.

We all want an electric car but where can we get power when we want it? The concept of ‘range anxiety’ is key; when people  try to keep their battery charged 100pc even when they do not need it.

Some clean energy companies such as Vestas, a wind turbine manufacturer, are latching onto the innovative sprint and deep pockets of the automotive industries and forming partnerships with leading EV companies like Tesla to help accelerate the process further.

Capturing the clean energy superpower

Many energy suppliers are taking storage issues into their own hands.

Ørsted, originally a Scandinavian oil and gas company and now the world’s largest offshore wind power developer, has recently installed one of the first stand-alone, large-scale battery energy storage units near their wind turbine site off Liverpool, UK.

Ørsted can now, we understand, capture 90MW of energy directly from their turbines, helping existing local grid services to meet peak demands when required.

Flattening out peak demand

Factories have, in our opinion, had this nailed for decades; running their machinery overnight when energy is abundant and prices are low.

However, despite the availability of smart home technology on the market, adoption levels are still low; the cost savings are often not understood, or not enough to outweigh the timing convenience on a per-household basis.

Studies also reveal that perceived usefulness, ease of use, trust and compatibility are inherently affecting uptake levels. More research needs to be done, in our opinion, to enable companies to break down entry level barriers.

Elephant in the room or The inconvenient truth

Transitioning to a green economy, we believe, is going to need substantial resources; starting with all the raw materials needed to meet the growing battery and wind turbine demands. Wind turbines alone need 5.5Mt of copper to meet 2028 targets, regardless of all other metals required in their construction.

Sadly, the long-term ill-effects of most current mining operations are considerable. Mining these materials also has a detrimental effect on the environment. Most notably from air and water pollution, to land damage and loss of biodiversity.

Climate change deniers, in our experience, repeatedly raise this as part of their argument against the green transition. We must carefully explore this point while we look for alternative solutions.

Mark Carney, ex- Governor of the Bank of Canada and Bank of England, as well as Financial Advisor to Boris Johnson for COP26, has stated that the net-zero transition is the ‘greatest commercial opportunity of our time’. Many companies worldwide also share this opinion and are jumping on board to find solutions. The race is on to turn abundant amounts of clean energy into an abundance of money.

Companies are already jumping on the bandwagon. They are focusing on technologies that aim to minimise mining for virgin materials. Amazon’s Climate Pledge Fund recently put a sizable portion of its $2 billion pot into Redwood Materials, a company founded by Tesla’s former Chief Technology Officer. It focuses on solving the battery recycling challenge.

Whilst Vestas has teamed up with Aarhus University and the Danish Technology Institute to build a circular economic model. This retains and reuses everything, including the wind turbine blades, which to this day has been a sore sticking point for the industry.

Final word

The topic is hugely complex but in our view, if solved, comes with an equally huge reward. And we may not have solved the challenge yet.

But with so many countries and companies worldwide striving for a solution, one can’t help but feel optimistic that positive change is on the horizon.

The big question is – will it be too late? We think not, but it will require huge investment in the right companies to find answers fast.

With investing your capital is at risk. This information is for illustrative purposes only and does not constitute investment advice.

0 Comments

How to fight climate change – The impact you can have as an individual

Clim8 Team

23 April 2021 SustainabilitySustainable Investing

how to fight climate change

Climate catastrophe-lead headlines fill our newsfeeds on a daily basis. And the frequency appears to have  been increasing exponentially since the start of the COVID crisis. From Australian bushfires that burn for months [1] to devastating hurricanes in the Caribbean [2], it has been near impossible to escape these devastating events and reports. For some, it can be rather overwhelming at times, especially when linked with a sense of helplessness. However, we believe there are many ways in which you as an individual can help fight climate change with your daily actions.

Discover your power – how can individuals make a difference?

How you choose to live your life can have an impact every single day. What changes can you make to maximise that impact and help fight climate change? Here are some of our views:

  • Transport – if possible, switch your main mode of transport to cycling (running is even better) [3] and reduce your total emissions by up to 11% [4].
  • Shopping – buy products and services from low carbon footprint companies. Apps such as CoGo and Pawprint can point you to eco-friendly options for different/various aspects of your life.
  • Food waste – minimise food waste and decrease your emissions by as much as 30% [5]. Olio encourages users to impart unwanted food to others, whilst chef Jamie Oliver, publishes waste-curbing recipes.
  • Diet – move to a vegetarian diet and slash your emissions a further 25% [6]. 
  • Less is more – buy less. Full stop. And when you do buy something, select long-lasting, quality items.
  • Energy – switch to a renewable energy contract to take your emissions down a further 26% [7].
  • Packaging – choose unpackaged products and take your own bags when out shopping. Zero-waste shops encourage customers to use refillable food containers whilst local fruit and veg shops rarely use plastic-wrapped produce.
  • Travel – where possible when going on holiday, opt for ground transport over air. Traveling by train can emit as much as 66% fewer emissions [8]. If unavoidable, offset your emissions using a company like ClimatePartner.

Your greatest impact

One vital component is missing from the list above – money. How and where you put your money is one of the most efficient and impactful ways to make a difference [9] .

Since the Paris Agreement was signed in 2015, global banks have invested USD 2.7 trillion in fossil fuel companies [10]. Sadly, this figure continues to rise despite countries setting ambitious targets to prevent our planet warming more than 1.5 degrees.

Thankfully, you no longer need to invest in fossil fuels to make money. According to Nordea Bank’s recent research, choosing to place your money in a sustainable bank or investing in a sustainable fund is proven to have 27 times more impact on your carbon footprint than eating less meat, using public transport, reducing water use, and flying less [9].

As David Attenborough so eloquently put it, “it is crazy that our banks and our pensions are investing in fossil fuels, when these are the very things that are jeopardising the future we are saving for”.

Capital at risk. For illustration purposes only and does not constitute investment advice. Past performance is not a reliable indicator of future results.

Sources

[1] BBC Newsround

[2] The Guardian

[3] Healthline

[4] Institute for Transportation & Development Policy

[5] The Guardian

[6] NewScientist

[7] OVO Energy

[8] BBC News

[9] Nordea

[10] Forbes

0 Comments

What is upcycling and how can it stop food waste?

Clim8 Team

19 March 2021 Climate ChangeSustainability

From fashion to food, upcycling is in Vogue this year. No pun intended, here is the article. Everyone wants a slice of the cake. A welcome trend that is helping tackle our inherent waste problem. 

Simply put, upcycling takes what would traditionally be seen as waste and turns it into new products of similar or higher quality. Making better use of the energy expended in sourcing, transporting and processing material, it prevents valuable resources going to landfill.

A term originally coined by Michael Braungart and William McDonough, upcycling also plays a major role in the circular economy transition.

Food waste: today’s problem

Waste is a recent phenomenon. Until the 19th century, people made all they needed at home, squeezing out every last drop of value from each item. Broken ceramics, shells and animal bones were all discarded. 

During Queen Victoria’s reign (1837 – 1901), an enormous societal shift took place. Incomes were on the rise and people subsequently started buying what they previously made at home from stores. Packaged goods became the norm average household waste skyrocketed and the perceived value of each item was lost. 

Only when waste started visibly piling up were people forced to start finding solutions to fix this new systemic issue. Upcycling was born. 

Changing perceptions about food waste

The term ‘waste’ can imply something of little value. Although upcycling in other industries is becoming ‘trendy’, people still perceive food waste as ‘rotten’, ‘useless’ or even ‘inedible’.

Today’s biggest challenge is not figuring out how to upcycle food waste but convincing people that food waste is in fact perfectly fine to consume. Marketing has a major role to play if upcycled goods are to become mainstream. And not just for eco conscious customers.

Messaging, in our view, needs to steer away from waste’s negative connotations. Companies that have latched onto this have changed the narrative, successfully luring customers in with terms such as ‘by-product’ or ‘derivative’.

Killing two birds with one stone

Despite the marketing conundrum, upcycling food waste brings substantial economic benefits. Companies have discovered a win-win opportunity; an additional revenue stream and a means of saving money on waste disposal.

Their creativity, in our view, is inspiring. Here are some imaginative examples:

  • Sensient Technologies use leftover grape skins from the wine industry to make a hotly sought-after purple extract for dyeing.
  • International Flavors & Fragrances (IFF) recently safeguarded 400 metric tonnes of surplus spinach from farmers’ bins after their production levels exceeded supermarket demand. IFF subsequently turned the leaves into nutrient-rich powders, adding them to health products such as nutritional beverage powders or snack bars. Originally a pilot program, it generated an additional USD $1.3 million leading to discussions on how the initiative could be permanently rolled out.
  • Symrise uses discarded cranberry by-products that do not meet current food standards in cosmetics.
  • Givaudan converts spent coffee grounds into premium ‘coffee oil’ adding it to premium skincare products.
  • Rubies in the Rubble rescues leftover wonky and slightly bruised fruit and vegetables from local markets and transforms them into condiments. 

We still throw a third of all food produced worldwide every year. We have a long way to go to tackle  this but upcycling is definitely one lever we can and should be pulling to ease the load.

With investing your capital is at risk. This information is for illustration purposes only and does not constitute investment advice.

0 Comments

Sustainable Investing Glossary

Clim8 Team

23 April 2021 Investment AcademySustainabilitySustainable Investing

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

A

Active investing

The process of directly trading individual stocks or bonds in the hope of making a profit by ‘beating the market’. This can be achieved when either an individual chooses where to put their money themselves e.g. day trading or when they invest money in a  fund where the investment manager makes active investment decisions on their behalf.

Actively managed fund

A fund where a management team or investment manager actively decides how to invest an investor’s money  in order to meet predefined investment goals. 

B

Biodiversity

The variety of life found in a single location, ranging from animals and plants to fungi and viruses. Biodiversity encompasses genetic variation within species depending on the ecosystem they are part of e.g. African vs Indian elephants

Brand purpose

The reason a brand exists beyond making a profit e.g. Unilever’s Lifebuoy soap aims to reduce the spread of disease caused by lack of sanitation in developing countries by actively encouraging people to make handwashing part of their daily routine.

C

Carbon capture and storage (CCS)

Also known as carbon capture and sequestration. The process of permanently removing carbon dioxide from the atmosphere at source and then storing it, typically underground. The source of the carbon is usually a factory or power plant. (Our view is this is a controversial approach both in terms of cost and safety).

Carbon footprint

The total sum of greenhouse gases produced by a group, individual or company to support human activity both directly and indirectly. Often measured over a given timeframe. 

Carbon negative

Also known as climate positive. An activity or company that is removing more greenhouse gases from the atmosphere than it is emitting. 

Carbon neutral

An activity or company that is removing the same amount of greenhouse gases from the atmosphere as it is emitting  or one that does not emit any greenhouse gases at all (though in our experience, there are very few examples of the latter). This only applies to Scope 1 and 2 (definition below). They are generally said to be releasing net zero carbon emissions.

Carbon offsetting

The process of a company placing funds into certified and tradable carbon removal schemes in order to counteract their carbon emissions output. Carbon offsetting is typically split into two categories:

  • Avoidance – projects that avoid emissions from being released from the outset e.g. forest conservation prevents deforestation and provision of clean stoves in developing worlds prevents wood being burnt for cooking.
  • Removal – projects that remove emissions from the atmosphere after they have been released e.g. planting trees.

Carbon positive

Also known as climate negative.  An activity or company that is removing less greenhouse gases from the atmosphere than it is emitting. 

Carbon pricing

The cost applied to carbon emitted into the atmosphere. Pricing is typically determined in two ways:

  • A carbon tax – a set price allocated per tonne of CO2 emitted.
  • An incentive to emit less – usually the purchase of a limited number of permits (known as carbon emissions trading).

CDP (formerly known as the Carbon Disclosure Project)

The CDP is an independent not-for-profit charity that set up and now manages the global disclosure system which aims to help investors, cities, regions and companies handle their environmental impact. It houses large databases of company environmental information including in depth insights on carbon emissions and environmental strategies.

Center for International Climate and Environmental Research (CICERO)

CICERO is a climate research institute based in Oslo, Norway that works with governments and organisations worldwide, providing insight on how to solve climate change challenges. The institute is particularly well-known for the research it did on the effects of man-made emissions on the climate, the management of international agreements and civil society’s response to climate change.

Circular economy

An economic system that eliminates waste and aims to ensure materials and products are continually kept in use whilst retaining their total value. The system focuses on removing pollution and regenerating natural systems. 

Climate change

Climate change is the long-term alteration in the planet’s average weather patterns. Although climate change has occurred several times throughout Earth’s history, the term specifically refers to the change in weather systems and rise of average temperatures experienced since the mid-1800s (the beginning of the Industrial Revolution). High levels of carbon dioxide have subsequently been released into the atmosphere causing unprecedented changes in weather systems, never seen before in history. 

Climate disclosures standards board (CDSB)

An international group of environmental Non-Governmental Organisations (NGOs) and businesses that have united to form a non-profit organisation. The CDSB is committed to changing today’s global corporate reporting model to one that equates natural capital (see Natural capital for definition) with financial capital. 

Companies are provided with a framework that aims to enable them to report on environmental information with similar or substantially the same rigour as financial information. This degree of transparency is intended to provide financial institutions and investors with the level of detail required to analyse the risks and opportunities associated with climate change.

COP

Conference of the Parties (COP) is the major decision making body of the UNFCCC (see below for definition). All 197 nations (known as parties), bar a few failed states1 signed the UNFCCC treaty in 1992. The parties meet annually to vote on the latest decisions for implementation.

COP is the only climate crisis forum in the world where the poorest countries’ opinions carry equal weight to the richest countries’ opinions. No agreements can be made unless there is a full consensus. The next COP meeting, COP26, will take place in Glasgow, UK in 2021.

1 states that cannot perform the two fundamental functions of the sovereign nation state in the modern world system

Corporate governance factor

Also known as governance or governance factors, it makes up the G in ESG (see below for definition). Corporate governance is a toolkit of rules, processes and practices that dictate how a company is governed and to what purpose. It spans a wide range of factors from outlining the distribution of responsibilities and rights amongst different stakeholders to rules on how decisions are made. 

This structure aims to enable the governing body (typically the Board) to deal more effectively with the daily challenges of running a company. Company laws are designed to ensure companies are operated and managed in a way that is in their shareholders’ best interests and that conflicts of interest are appropriately mitigated.

Corporate social responsibility (CSR)

Also known as corporate responsibility or corporate citizenship. Corporate social responsibility is when a company consolidates social and environmental issues into its planning and operations. It is a self-regulating model that shows company employees, external stakeholders and the public that businesses can be a force for good. 

D

Decarbonisation

The transition of an economy from one that relies heavily on burning fossil fuels to one that uses advanced methodologies to sustainably reduce and compensate greenhouse gas emissions.

Diversity and Inclusion

Also known as social justice. Diversity refers to the characteristics and traits that make individuals unique such as gender, race, age, orientation, disability, religion, beliefs etc. whilst inclusion refers to the social norms and behaviours that ensure people feel welcome in their surrounding environment. 

When applied to the workplace, diversity implies that the group of people employed by an organisation directly reflects the diversity of society in which it operates. Whereas inclusion infers that every individual is treated fairly, able to contribute to the organisation’s success and has equal access to resources and opportunities. 

Divestment 

Also known as divestiture. Divestment is the opposite of investment. The process of selling an asset such as equipment, real estate or a subsidiary for moral, political, social or environmental reasons e.g. Fossil fuel divestment means selling off investments in the fossil fuel industry. 

E

Environmental factors

Environmental factors refer to the E in ESG (look below for definition). This includes all the physical and non-physical influences that affect the organisms living in that area. When applied to a company framework, these factors pertain to all environmental elements in the political, regulatory, technological, economical and demographic landscape affecting how a company survives, grows and operates e.g. waste management, energy use, greenhouse gas emissions, treatment of animals, climate change, biodiversity, natural resource use. 

ESG

ESG stands for Environmental, Social and Governance – three key factors required to measure and evaluate the ethical and sustainable impact of an organisation. Commonly used to gauge a company’s future financial performance and its behaviour against other companies.

ESG Investing

Method of investing focused on delivering ESG criteria and impact when building portfolios or selecting which company to invest. 

Ethical investing 

Investors that are actively avoiding putting money into companies that have a negative impact on society e.g. tobacco, arms and gambling. 

F

Fossil fuel

A non renewable source of energy that releases carbon dioxide and other greenhouse gases when burnt. Sources include coal, petroleum, oil shales, bitumens, natural gas, tar sands and heavy oils and are generally found beneath several layers of sediment and rock. These contain carbon and derive from the remains of organic matter produced by photosynthesis; a process that began over 2.5 billions years ago. 

G

Green bond

Loan issued by a company or government to finance new and existing environmentally focused projects such as renewable energy. Investors put money into this loan in return for green bonds. 

Greenwashing

A type of marketing that uses inaccurate or misleading messaging to imply a product, service or organisation is more environmentally-friendly than it actually is. (Learn more in our Greenwashing guide)

H

Hydrogen Fuel (H2)

A zero-emission fuel, otherwise known as a clean fuel, that when burnt with oxygen in a fuel cell only produces water. Hydrogen can be sourced from a variety of domestic resources including nuclear power, biomass, natural gas and solar power, using extraction methods such as biological processes or electrolysis. Hydrogen is currently very expensive and is still not produced at industrial levels but many Governments have committed vast amounts of subsidies that should help costs reduce to a level that could make H2 competitive within 10 years.

Different types of hydrogen fuel exist:

  • Grey hydrogen – the most common and dirtiest hydrogen fuel. Grey hydrogen is made from fossil fuels using an energy-intensive process called steam methane reformation. 11 tonnes of carbon dioxide is emitted for every tonne of hydrogen produced.
  • Blue hydrogen – same process as grey hydrogen but carbon is captured and buried underground.
  • Green hydrogen – the cleanest and most expensive hydrogen fuel. Pure hydrogen is extracted from water using electrolysis (a powerful electric current runs through water separating hydrogen from oxygen), powered by renewable energy sources (definition below).

Human rights

The basic rights and freedoms that every human on this planet from birth until death is entitled to without discrimination and regardless of nationality, ethnicity, religion, sex, race or any other status. Human rights include the right to work, education, life and liberty, and freedom of expression and opinion.

I

Impact investing

Investments are made based on the level of environmental and/or social impact achieved as well as financial return. Investors base decisions on impact evidence rather than where their values lie.

Impact measurement

An evaluation of how an organisation’s activities affect the planet both positively and negatively through calculating how a company’s profitability would be affected if their social and environmental impacts were monetised. 

K

Kyoto Protocol

An international treaty that entrusts state parties to reduce their nations’ carbon emissions. It was established in 1997 in Kyoto, Japan at COP3 (see definition above) though only enforced on 16 February 2005. 

M

Modern slavery

The severe exploitation of people for commercial, criminal or personal gain. These people are ‘controlled’ and forced to do an activity against their will. They are often unable to leave the situation because of threats, coercion, violence, deception or abuse of power. Modern slavery comes in a variety of forms including bonded or forced labour, forced marriage and human trafficking. 

N

Natural capital

The world’s stocks of air, land, water, renewable and non-renewable resources (plants, animals, forests and minerals). These stocks are considered capital because they provide goods and services to humans and other species and are the basis for all economic activity.

Negative screening

The process of deliberately excluding companies in investment decisions that are involved in objectionable activities or sectors such as fossil fuel production and arms. 

Net zero carbon

Net zero is reached when a company’s carbon emission rate equals its carbon absorption rate throughout its full value-chain i.e. Scope 1, 2 and 3 (see definitions below). In order to achieve this, companies find ways to improve operational efficiency and subsequently reduce carbon emissions in line with a predetermined science-based target (see definition below) of 1.5°C. 

Any remaining emissions that cannot be removed will be reconciled by allocating funds to certified greenhouse gas removal schemes.

Non-renewable energy

A source of energy that cannot be replenished in our lifetime and will eventually run out e.g. Oil, Coal.

P

Paris Agreement

Also known as Paris Climate Agreement or Paris Climate Accord. The Paris Agreement is short for the Paris Agreement Under the United Nations Framework Convention on Climate Change and is a legally binding international treaty on climate change adopted by 195 countries and the European Union. 

It was established at COP21 (see definition above) in Paris, France in 2015 and requires that every state party does everything in its power to limit global warming to 1.5°C. The treaty sets out to improve on what was agreed in the Kyoto Protocol (see definition above).

Passive fund

A fund that replicates an index. The most famous type of passive investment is Exchange Traded Funds. In passive investment, the involvement from fund managers is minimal and, as a result, costs are usually much lower than those of actively managed funds. 

Passive investing

An investor buys and holds a diversified mix of assets for long periods of time with minimal trading efforts. The most common form is index investing when investors buy assets that mirror the market index.

Physical risks of climate change

Risks associated with climatic events such as hurricanes and droughts that will affect a company’s physical assets i.e. supply chain, markets, customers and operations.

Portfolio

A set of investments in any kind of securities (listed or not), selected along specific strategies or criteria.

Positive screening

Actively looking for companies to invest in that have sustainability practices embedded in their core structure such as socially responsible business practices or environmentally friendly products. 

Product carbon footprint

Also known as life cycle product carbon footprint. It is the climate impact of a product and is measured in carbon dioxide equivalents (CO2e). The footprint is calculated by measuring the total greenhouse gas emissions throughout the product life cycle, from extraction of raw-materials to end of life. 

Purpose-driven company

A purpose-driven company focuses not only on profit but takes a stance on issues beyond their products and services. 

R

Regenerative

Something that can be restored, regrown or renewed. 

Renewable energy

Also known as alternative energy. Renewable energy is a source of energy that never runs out e.g. Solar, Wind, Tidal

Responsible investing

When an investor considers ESG (see definition above) risks and opportunities in the decision-making process. 

S

Science-based targets (SBT)

A set of goals, informed by independent climate science, that provide a company with a clear pathway to reducing their greenhouse gas emissions. Targets are required to be in line with the Paris Agreement (see definition above).

Scope emissions (1, 2 & 3)

Company greenhouse gas emissions are split into three scopes:

  • Scope 1 – also known as direct emissions. Emissions generated from company activity that can be directly controlled by the company e.g. heating, fleet vehicles, refrigeration
  • Scope 2 – also known as indirect emissions – owned. Emissions created during energy production prior to the company purchasing it and when energy is consumed by a company.
  • Scope 3 – also known as indirect emissions – not owned. Emissions generated from every other activity throughout a company’s value chain outside Scope 1 and 2. They include both upstream and downstream emissions. 

Security

A financial instrument issued by a company that is bought, owned and traded by other enterprises and individuals. Examples include stocks and bonds.

Share

A single unit of equity ownership in a financial asset or company. It ranks lower than debt in case of company liquidation. The rise in value of a company is best encapsulated in shares rather than debt (see above).

Social factors

Social factors refer to the S in ESG (look below for definition). The company’s attitude towards social issues including human rights, labour standards, adherence to workplace health and safety, diversity and consumer protection. They also include how the company interacts with suppliers, the local community, customers and other businesses.

Socially responsible investing (SRI)

Also known as social investment or sustainable investing. Actively seeking out companies to invest in that generate financial returns and make a positive contribution to society. This approach allows for companies that are not inherently sustainable but are investing in clean technologies e.g. a fossil fuel company investing in renewable energy.

Stocks

A share of ownership in one or more companies. 

Stock picking

Identifying and choosing stocks to invest in based on a particular set of criteria.

Stranded asset

Assets that have been prematurely devalued and no longer able to earn an economic return. Many fossil fuel assets risk being ‘stranded’ soon. 

Sustainable finance

Any form of financial process including capital flows and risk management activities that integrates ESG criteria (see definition above) into decision-making processes and strategies.

Sustainability

The process of maintaining change in a balanced environment so needs are met today whilst not compromising future generations.

T

Taxonomy regulation

A classification system developed by TEG (see definition below) that provides businesses and investors with a set of criteria detailing which economic activities are deemed sustainable.

Technical Expert Group on Sustainable Finance (TEG)

A group of 35 international finance experts founded in 2018 to assist the European Commission in developing the following areas:

  • Taxonomy regulation (see definition above)
  • EU Green Bond Standard
  • EU climate benchmark and disclosure methodologies
  • Guidance on corporate disclosure of climate-related information. 

Transitional risk

The financial risks associated with the transition to a low-carbon and more climate-resilient global economy deriving from substantial technology, legal policy and market changes. 

U

United Nations Framework Convention on Climate Change (UNFCCC)

The UNFCCC was the first international environment treaty to tackle climate change. Founded in 1994 and ratified by 197 countries, the original objectives were to “stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system and prevent human damage and interference with the climate system.” 

The UNFCCC is the parent treaty of the 1997 Kyoto Protocol and 2015 Paris Agreement (see definitions above).

United Nations Global Compact

The UN Global Compact is the world’s largest corporate sustainability initiative. Businesses are encouraged to sign up and commit to sustainable and socially responsible practices. The initiative is based on 10 guiding principles covering environment, labour, human rights and anti-corruption that organisations should embed in their value systems and their approach to doing business. 

United Nations Principles for Responsible Investing (PRI)

A network of international investors founded by the UN, created a voluntary set of six principles. These principles encourage investors to commit to incorporating ESG factors into their investment processes. 

United Nations Sustainable Development Goals (SDGs)

Also known as the Global Goals. A set of 17 goals that were adopted by every United Nations member state in 2015 to tackle the planet’s greatest challenges across society, environment and economy today. They are a universal call to action to protect the planet, end poverty and improve human lives worldwide by 2030. 

V

Values based investing

Investing in companies that align with not only gain financial return but align with personal values.

W

Waste management

All activities and actions, from collection of waste through to recycling, that are required to manage waste.


With investing, your capital is at risk. For illustrative purposes only and does not constitute investment advice

2 Comments

Investments and Greenwashing: avoiding pitfalls to make an impact

Clim8 Team

23 April 2021 Investment AcademySustainabilitySustainable Investing

greenwashing

What is greenwashing?

When a company promotes unsubstantial and misleading green claims about its products or services, it can be called greenwashing.

Often used as a smoke and mirrors ploy, greenwashing distracts customers from the reality of a company’s operations and outputs. Fossil fuel companies are infamous for it. For example, they spend vast media budgets on promoting their latest green technology innovations, which only accounts for 4% of revenues. All the while, pumping billions of pounds worth into new oil research [1]. 

In the investment industry, greenwashing refers to money managers who claim to offer ‘sustainable’, ‘green’ or even ‘responsible’ portfolios without in our view transparent and conclusive evidence of their impact. 

Currently, according to research conducted by The 2 Degrees Investment Initiative 85% of so-called green-themed funds (a specific niche of the wider overall market) all ‘green funds’ have misleading marketing [2].

Paved with good intentions: what drives greenwashing?

Greenwashing, in our view, leverages customers’ good intentions for cynical ends. In the belief they are investing their money to  benefit the planet, on top of growing their nest egg, customers may ultimately be harming it further. 

Even when they implement better investment standards in good faith, investment firms can find themselves greenwashing. A lack of understanding of impact investing, or the desire to appear further along on that journey than is truly the case can drive companies into a greenwashing quagmire. 

Marketing departments must be fully in sync with the investment team, so that a clear and transparent roadmap can be implemented.

How is greenwashing hurting the investment industry?

Greenwashing in our opinion is detrimental to the entire investment and asset management industry regardless of whether individual companies are doing it or not. Younger generations are generally savvier and more demanding. They tend to actively seek out additional information on companies to see whether what is being advertised is backed up with hard evidence. A whiff of greenwashing could damage customers’ trust in the entire sector.

Why greenwash?

In the last few years, customers have become more eco-conscious, leading to a mass inflow of money to ‘greener’ funds. The ‘green’ investing sector hit $1 trillion in 2020 [3]. Many firms realised that their existing portfolios could not benefit from this trend, not having the necessary green credentials to take on their competitors. 

A wave of passive ‘ESG / green’ funds subsequently appeared in the market (see glossary for ‘passive fund’ definition) from companies wanting a foot in the door of this rapidly growing sector. However, due to a lack of regulation and active decision-making in passive funds, despite their ‘green’ claims, a number actually allocated funds where they shouldn’t have. As an example, one third of ‘low-carbon funds’ in the UK are currently invested in oil and gas stocks [4].

Unfortunately until effective regulation is fully implemented, it seems to us greenwashing is here to stay.

Coining greenwashing

The term ‘greenwashing’ was first coined by an American researcher and environmentalist, Jay Westerveld in 1986. Visiting a resort in Samoa, Westerveld noticed they were promoting a new ‘reusable towel service’ which was ‘better for the environment’ yet several hundred metres away, they were cutting down thousands of trees for their latest expansion. The messaging was incoherent. Westerveld defined the term ‘greenwashing’ in an essay he wrote based on the irony of the ‘save the towel’ movement in the hospitality industry [5].

What regulations or laws are in place to prevent greenwashing?

A regulation came into force on 12 July 2020 though most of the provisions will not apply until 2022 and 2023 (since Brexit, we now have no clear information on how and if the UK will enforce any regulations). However, Her Majesty’s Treasury has stated that the sustainability and responsible investing agenda is and has been a focus of its Asset Management Taskforce. Further, the UK government has committed to reach net zero by 2050 and is currently conducting a review on how best to fund the transition to net zero1.

However, the EU Taxonomy Regulation (see glossary for full definition) is currently being further established; a set of recommended criteria that will help investors determine whether funds are ‘sustainable’. However despite the recently approved recommendations put forward to the European Commission, official roll out on transparency will not take place until 2022. 

In the meantime, we would encourage firms with ESG offerings to carefully consider the requirement to be fair, clear and not misleading in their communications. This includes in setting out information about their investment process and investment decision-making so that it is clear to consumers what they are investing in and to help to ensure the industry provides consistent messages to the communities we serve 

Do penalties exist?

Not explicitly. Though, in our view, it can surely  only be a matter of time before greenwashing becomes history. And if regulations don’t lead the way, our view is savvy consumers will. Damage to a brand’s reputation can potentially be irreversible, especially in the financial services industry, where customers trust firms with their savings.

How to spot greenwashing in the investment industry?

Until additional regulation kicks in, customers have a responsibility to put their investigative hats on. In our opinion, here is how:

  • Enquire about the firm’s expertiseIt is key to assess the experience of the fund management team and their sustainable investing credentials. How do they stay abreast of all the latest climate change news? Regular training should be in place to ensure the investment team is staying on top of trends. If those answers are difficult to come by or unconvincing, this should be a red flag. 
  • Transparency is key – The investment firm may well be investing in sustainable initiatives but are they themselves sustainable as institutions? They should have net zero carbon plans (see glossary for definition) in place as well as a Diversity & Inclusion policy which should be implemented via a diverse team across the whole organisation. Energy efficiency certificates can be verified on certifiers’ websites. Beyond companies having plans, customers should also ask for evidence that those companies  are acting on these plans backed up by real evidence. You have to walk the walk as well as talk the talk. 
  • Demand information on how they embed ESG – The term ESG (see glossary for definition) is endemic. However, the current lack of full regulation makes it easy for investment firms to claim their funds are ESG-aligned. Therefore, customers should challenge the investment manager on their strategy to embed ESG in the investment process. While the following may be highly regarded systems that can be leveraged to enhance better decision making – Global Reporting Initiative, Sustainability Accounting Standards Board and the World Benchmarking Alliance, if it emerges that ESG filtering is more an add-on than core to the strategy, then more digging in our view is required. 
  • Question the fund’s investment strategy and process approachFrameworks and methodologies should be clearly  aligned with their sustainability goals. Do they disclose their underlying investments and how those are tackling sustainability issues?  Impact reports on how beneficial their investments have been for our planet in our view should be published annually and backed by solid evidence. Transparency in our opinion has to be key. 
  • It is all in the wording –  Be wary of websites flush with vague wording such as ‘we believe sustainability should be at the core of everything we do’ without hard evidence to back up such statements. Generic fund names e.g. ‘Sustainable ISA’ can also be misleading. Look for hard evidence as well as how such firms have defined sustainable investing.
  • Seek out engagement levels – Management teams should lead the way and hold their investment companies to account, constantly looking to improve their practices. What is their voting policy? Engagement is paramount in the transition to a greener economy. 

Until regulations come fully into play, make sure you keep your wits about you. We expect more transparency and regulation to drip through in 2021, which should be helpful, at least in raising awareness.

You can track the European Taxonomy regulation progress via the European Commission website

With investing, your capital is at risk. For illustrative purposes only and does not constitute investment advice. Past performance is not a reliable indicator of future results.

Notes

1John Glen addresses Investment Association on Sustainability and Responsible Investment – GOV.UK (www.gov.uk)

Sources

[1] Independent

[2] Reuters

[3] The Motley Fool

[4] The Financial Times

[5] The Guardian

2 Comments