Tom Konrad, Ph.D., CFA

I don’t spend much time reading investment company ESG reports, but a friend asked me to take a look at a copy of the TIAA’s 2021 Climate Report.  I was deeply unimpressed.  Here are a few things in the report that triggered my greenwashing radar:

• TIAA wants to work with companies to improve their behavior.  They call this company engagement.  “[W]e do not expect [asset sales] to account for the majority of our emissions reduction — we are primarily focused on company engagements” page 9.
• Much of TIAA’s emphasis is on reducing emissions from their own operations, rather than the companies they invest in. For an investment company, the greenhouse impact of its offices and computers are tiny compared to the impacts of the companies that it invests in.
• While TIAA has set greenhouse gas reduction targets for the assets it owns directly, it also manages over four times as much money for other investors.  The report completely ignores the greenhouse gas impacts of these investments.
• Where TIAA does have targets, they are long term, for 2040 and 2050.  We need to act now, not in a decade or two.

Given the urgency of the climate crisis– “Code red for humanity” as the UN Secretary General puts it– incremental change falls so short of the need that it’s difficult to consider it green.  

Why Company Engagement Doesn’t Cut It

At best, working with companies to improve their behavior will produce incremental change.  Do we really see an oil company completely ceasing new development of fossil fuels, and phasing down its current operations over the next 20 years because of shareholder engagement?  The idea seems laughable, but that is exactly what an oil company would have to do if it plans to be part of the solution, not just a smaller part of the problem.  Even the most ambitious oil majors, like BP (NYSE:BP) are just hoping to reduce the emissions from their own operations to zero by 2050.  If they are still producing oil after 2050, they are part of the problem.  

Engaging with companies to try to get them to reduce carbon emissions is better than nothing, but stronger measures are needed.  The potential gains from shareholder engagement are fine if a company only needs to make small changes to reduce its greenhouse gas emissions, but stronger measures are needed when a company’s core business causes climate change.  If an investment management company wants to help solve the problem of climate change, the only real solution is to sell companies (like coal, oil, and gas producers,) whose core business causes climate change.

Too Little

The difference between powering your computer with renewable electricity and powering your computer with electricity generated from coal is negligible if what you do with that computer is buy shares in Exxon Mobil (NASD: XOM).

Like an oil company that has a target to reduce the emissions from its own operations to zero, while ignoring the emissions when its customers burn the fuels it produces, an investment management company that reduces its own emissions while ignoring the emissions of the companies it invests in is missing the point. TIAA is doing just that.

Apparently without intended irony, TIAA included the following diagram of its emissions targets in its report (slide 17):

The tiny orange/green triangle represents the carbon emissions from TIAA’s own operations (i.e the power that heats and cools its offices and powers its computers.)  The larger blue triangles represent the financed emissions from the assets which TIAA owns directly.  The (even larger) financed emissions from the companies owned by TIAA mutual funds and other investment products are not even shown. (TIAA has $1.3 trillion under management.  The general account and real estate assets shown in the diagram are only about a quarter of that… and still they make the emissions from TIAA’s own operations look insignificant.)

In short, TIAA’s climate targets only encompass about a quarter of the carbon emissions from the investments it manages… the ones where it has the most control.  A more accurate picture of the relevant sizes of TIAA’s targets (and lack thereof) would be shown in the expanded diagram below:

(Diagram by author. Large gray triangle drawn as approximately 4x the area of the TIAA general account, to reflect the relative sizes of TIAA’s assets under management.)

Too Late

Even if TIAA’s targets covered all of its assets under management, including only 2040 and 2050 targets without significant shorter term goals means that these targets fall far short of what we need to accomplish to avert the worst effects of climate change.  

According to the International Panel on Climate Change, the entire world (and hence all assets which TIAA invests in, including those it manages for others) needs to produce net zero carbon emissions by 2050.  To get there, we can’t leave most of the work until the last few years.  We need to make significant progress by 2030.  For TIAA, this might mean moving up its 2040 net zero targets (Nuveen Real Estate and its own operations) to 2030, its 2050 target for the general account to 2040, and setting additional targets for the funds it manages for others to be one third of the way to net zero by 2030, two thirds by 2040, and at net zero by 2050.

That’s what it would take for TIAA to stop being part of the problem.

To be part of the solution, green money management leaders go much further.  A net zero portfolio can be built today.  We also actively invest in the companies that will help the world get to net zero, and avoid the major greenhouse gas emitters entirely.  Not everyone can lead, so I’ll be happy if TIAA just stops being part of the problem.  The sooner the better.

DISCLOSURE: No positions in any companies mentioned.

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by Debra Fiakas, CFA

Published by the Climate Accountability Institute, the Carbon Majors Reportlays bare the truth about which companies are responsible for industrial greenhouse gas emissions.  One hundred fossil fuel producers are linked to 71% of global industrial greenhouse gases emitted since 1988.  Something like a line in the sand for climate scientists, 1988 is the year human-induced climate change was official recognized by the Intergovernmental Panel on Climate Change.

Fossil fuels in the form of coal, crude oil and gas are by far and large the culprits.  Rolling forward three decades later, we can observe in the charts below that fossil fuel production has actually increased since those panelists first locked arms to accept human responsibility for the changes underway on Planet Earth.

Despite irrefutable scientific argument, political will to address the climate issue has faltered.  Government officials have paid little more than lip service to regulatory changes that would drag polluters onto a cleaner but fair playing field.  Investment in renewable energy has been paltry in comparison to the continued tax breaks and subsidies that fossil fuel producers still receive.  Recent U.S. policy changes go so far as to support unprofitable coal producers, encourage new oil production in previously protected lands and waters, and facilitate cheap pipeline transportation for shale oil gas.

Since advocacy has not worked and our world has moved from a climate concern in 1988 to a full blown crisis in 2019, it is time for investors to take action with their capital.  It is no longer just a matter of considering potential erosion in profits due to reduced demand for coal, oil and gas.  It not even any more a matter of portfolio risk in the event that corporations are held liable for environmental harm from fossil fuel combustion.  It is time to recognize that fossil fuel producers are killing their customers.  This is not a viable business model and it deserves a ‘short.’

The previous post, “Top Greenhouse Gas Emitters”, listed the three companies and a fourth industry group in one country that are collectively responsible for 25% of total greenhouse gas emissions between 1988 and 2015.  All are largely controlled by governments and therefore are beyond the reach of investors. However, among the companies responsible for an additional 25% of greenhouse gas emissions are several with publicly traded stocks that are in the control of minority shareholders like you and me.

Interestingly, all but two of the stocks in the list below trade on the New York Stock Exchange and represent over $1.1 trillion in market capitalization.  That is a very large number that is probably dangled in front of any politician who even suggests curbing emissions.  What cannot be missed in the discussion is that these NYSE-listed companies are also responsible for 8.7% of those gases that keep melting glaciers, stirring up violent weather and foiling our air.  The consequences of those emissions are known to many, including every insurance actuary who raises premiums to cover respiratory illness costs, every community that has had to spend tax dollars on cleaning up after climate-related natural disasters, and every farmer who sees reduced crop production.  The consequences need to be appreciated by investors as well.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

This article was first published on the Small Cap Strategist weblog on 6/28/19 as “Fossil Fuel Industry: Killing the Customer”.

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by Debra Fiakas, CFA

As well derricks cast oily shadows across the landscape, Air Products and Chemicals, Inc. (APD:   NYSE) has installed Saudi Arabia’s first hydrogen fueling station.The set up is tucked safely into APD’s new technology center in a science park, but the significance of this incursion into oil and gas country can be felt across the region.The fueling station, which incorporates APD’s SmartFuelhydrogen fueling technology, will service six Toyota Mirai fuel cell electric vehicles. Undertaken in cooperation with Saudi Aramco, the project is intended to demonstrate the potential for hydrogen as transportation fuel.

Hydrogen has potential advantages over conventional fuels, including Saudi Arabia’s oil and gas.  First, hydrogen is versatile.  It can be used in fuel cells like APD’s SmartFuel innovation or it can be burned directly in internal combustion engines.  Second, hydrogen is abundant and can be made readily available all over the world.

On the surface combustion of hydrogen appears to be environmentally friendly because it is clean burning.  Hydrogen combines explosively with oxygen, releasing energy and forming nothing more than water.  However, this end-use view ignores the production step, which depending upon the method, can be highly polluting.

It is possible to produce hydrogen with hydrolysis where electricity is applied to water to separate hydrogen from oxygen.  The method is comparatively inefficient compared to the steam methane reforming method that separates hydrogen from natural gas.  Naptha or refinery off-take gas can also be use.  As a consequence of the economics, steam reforming is used to produce about 95% of hydrogen in the market today.  Unfortunately for the environment, a by-product of the steam reforming method is a great deal of carbon dioxide that most producers just release into the atmosphere.

Why did Saudi Aramco tap APD for its hydrogen project?  It is probably because APD is a world leader in hydrogen production and sales, operating facilities with 2.7 billion standard cubic feet per day production capacity. APD is not standing on its steam reforming experience alone.

APD engineers are working on a system to capture CO2 from two steam methane reformers located at Port Arthur, Texas.  It is a project that has been undertaken in cooperation with the Industrial Carbon Capture and Sequestration Program of the U.S. Department of Energy.

APD is also working on a proprietary ‘precombustion decarbonization’ technology using a process called ‘sorption enhanced water gas shift’ or SEWGS.  APD has so far been silent on its progress, but others have reported tests of SEWGS achieving 85% CO2 avoidance with 39% energy efficiency.  APD is working with the Energy Research Center of the Netherlands on the SEWGS project.  British Petroleum (BP:  NYSE) leads a group of energy companies and research institutes that are supporting this project and others.

It is clear that the incumbent players in the oil and gas industry have been at least cooperative in initial efforts to clean up fossil fuel combustion.  Saudi Aramco has been named among the top 100 companies responsible for the vast majority of greenhouse gas emissions.  The social liability is evident even if governments have not yet seen fit to hold companies legally accountable for the climate crisis that now imperils us all.

Given the risks associated with climate change for all industries, the prudent man rule alone makes it imperative that investors take environmental considerations into account in every decision.  Investors must make certain new capital is directly carefully to not only support those companies that innovate renewable fuels, but also entice greenhouse gas producers to quickly adopt environmentally friendly processes.   Capital is better placed with those companies such as APD that are pursuing solutions.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

This article was first published on the Small Cap Strategist weblog on 6/18/19 as “Hydrogen in Oil’s Back Yard”.

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