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

In recent weeks management from Global Bioenergies (ALGBE: EURONEXT)made the rounds among New York City investors. The French specialty chemical developer is trying to win new friends in the U.S. for its bio-isobutene made through the fermentation of organic materials. Isobutene, also called isobutylene, is a four-molecule hydrocarbon that is a foundational chemical in a wide range of common products from gasoline additives to cosmetics. Until recently, isobutene was made exclusively in the crude oil refinement process. It is one of the many by-products of crude oil refining that helps pad the profit margins of big oil and as companies such as ExxonMobil (XOM: NYSE) and Marathon Petroleum (MRO: NYSE).

The founders of Global Bioenergies, Marc Delcourt and Philippe Marliére, understood the role of bacteria in accelerating the breakdown of organic material in nature’s own refinery – fermentation. The well-known renewable fuel, ethanol, is a typical product of fermentation. Highly caustic and wanting in efficiency in converting organic matter to power, ethanol has limitations. The duo wanted to extract more value from organic feedstock. They also wanted a result that would be compatible with the entrenched fossil fuel supply chain and distribution network.  They set a goal for a biologically-based hydrocarbon.

Bacteria may seem simple, but they are particular about their living conditions.  It took several years of trial and error before the two scientists finally coaxed some bacteria into producing isobutene in a gaseous state. It was a dramatic breakthrough for the specialty chemicals industry that had never imagined organic hydrocarbons. That might have been the easy part. The years since have been dedicated to getting the bacteria to live in large colonies that can produce isobutene at commercial scale.

Patience has paid off. In 2015, Global Bioenergies completed construction of a pilot plant located at an industrial site near Reims, Germany. The plant has a capacity of ten metric tons. A demonstration site with 100 metric tons production capacity was also built at Leuna, Germany in 2016.

Ready for Commercial Stage

Cristal Union, one of France’s largest sugar producers, is Global Bioenergies first commercial partner. The two have formed a joint venture to build a plant with a 50,000 barrel per year nameplate capacity at one of Cristal’s beet sugar production facilities. The beet sugar process generates ample waste materials that do not make it into the bags of beet sugar.  The estimated capital cost to reach commercial production is Euro 115 million, which will be financed through a mix of construction, equipment and project financing. The partners are targeting 2021 for the first commercial shipments of isobutene.

The two companies will run the plant as a joint venture named IBN-One with Global Bioenergies taking the lead in marketing and distribution.  The company sees multiple markets for its isobutene.  The cosmetics industry makes use of a variety of specialty chemicals for lotions and crèmes and isobutene is widely used for texturing properties.  The high octane character of isobutene also makes it useful as an additive to gasoline to boost performance of combustion engines.

Global Bioenergies will earn royalties on the project with the first Euro 5 million payment is due upon plant completion and the onset of production. The company wants to cookie cutter the arrangement around the world with other partners that have a ready source organic material that might otherwise be considered waste.

Acquiring a Ticket to Go Global

The company is looking well ahead to a mix of potential partners.  The recent acquisition of Syngip, B.V. with its technology for converting organic material to fuels is expected to make it possible to use a wide range of feedstocks in Global Bioenergies’ proprietary fermentation process.  The company has already proven is process at commercial volumes with sugars and cellulosic materials such as straw or wood chips have been proven compatible in the laboratory.

However, Global Bioenergies wants to use third-generation feed stocks such as industrial waste gases.  Think of the carbon dioxide and carbon monoxide in the emissions of steel mills.  Syngip’s has developed a process to convert gaseous carbon sources to light olefins, the foundation for strong, colorfast fibers with a wide range of uses such as carpeting, ropes or even wallpaper.

As beguiling a concept at waste gas to carpet might be, a partnership with a major steel producer such as ArcelorMittal (MT:  NYSE) is quite a way off.  Investors should be looking more closely Global Bioenergies current commercialization efforts.  In addition to the joint venture with Cristal Union to produce isobutene, the company has collaborations underway to reach end customers:  Lantmännen Group’s Aspen, a specialty gasoline producer; bottled gas maker Butagaz SA owned by DCC, PLC (DCC:  LSE); and beauty products developer L’Oreal SA (OR:  EPA).  Car manufacturer Audi and specialty chemicals producer INEOS have also expressed interest in working with Global Bioenergies.

Keys to Success

Turning technology into commercially viable products and reaching customers requires capital.  Global Bioenergies is burning about one million Euros per month and will probably not become profitable for several more years.  The company recently raised capital and now has an estimated EURO 19 million (US$24 million) on its balance sheet.  Management expects its nest egg to support operations and development plans well into 2019.  Management has a strong history of successful capital raising efforts and makes a credible argument that new capital can be easily raise when needed.

Once commercial production begins, each joint venture project will have to manage margins between the costs of inputs and selling prices.  Global Bioenergies expects its bio-isobutene to command premium prices from customers that want to claim sustainable raw materials in their supply chains.  Nonetheless, as a substitute to oil-derived specialty chemicals, the product will be susceptible to the trend in crude oil prices.  On the input side, sugar prices will impact the company’s first beet-to-isobutene project in Germany.  If successful in making in the leap to cellulosic or gaseous organic materials, the company may get a break on the cost side from zero to low cost feedstock from waste emissions or agricultural waste.

A company can stub its toe when taking the steps from laboratory bench to commercial production and then to the market.  Besides capital and a sound business model, the right management skills must be deployed.  The problem is that each step takes different talents that are rarely all found a single person.  The scientist-product developer-negotiator-marketer is a rare animal, indeed.  Even rarer is the scientist-developer who understands when to reinforce the team with a qualified negotiator-marketer.  Investors will need to watch closely for early warnings of execution missteps.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.  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.

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