By Tom Konrad, Ph.D., CFA

Supply and Demand

One uncomfortable fact for green investors is that the clean energy transition is going to require a lot more mines.  Lithium, nickel, cobalt, copper, manganese, graphite, even steel: just name and industrial commodity, and we’re probably going to need a lot more of it.

Total mineral demand for clean energy technologies by scenario, 2010-2040

Even worse, it’s not at all clear where all these materials are going to come from.  While there are plenty of all the elements we need in the Earth’s crust, actually mining them all in the next 20 years is not something that we can accomplish without paradigm-shifting changes to the mining sector.  It’s difficult to imagine a scenario where we construct enough mines to supply all the materials needed to even reach the world’s stated goals for clean energy development, let alone the scale we would need to keep global warming below 1.5℃ or 2℃.  

Economics 101 tells us that when demand for anything increases much faster than supply, price will also rise until the two can be balanced again through demand destruction (reduced purchases because it’s too expensive) or increases in supply (companies increasing production), usually both.

Investing 101 tells us this is an opportunity for companies that already supply the commodity or can supply the coming future demand are likely to do well, and we should buy them.  The obvious suppliers are existing mining companies. This investing theme was particularly popular two years ago when the expected increase in demand for materials was frequently in the news.  This led to a peak in the S&P/TSX Global Mining Index at 133 in April 2022, which has since fallen to 103 as of February 20 (data from spglobal.com).

Little has changed in the long term bullish outlook for commodities in the last two years since the mining index peaked.  Except the stock prices, that is.  Hence, with the mining index down over 22% at the same time that the broad market has been rising, now seems like an excellent time to invest in companies which seem likely to profit from the coming clean energy minerals boom.

Reduce, Reuse

While I expect that investors in mining companies will do well financially over the next decade, as an environmentally minded investor, mining is one sector I’m simply not willing to invest in.  While I believe that there are likely some mining companies that behave as environmentally responsible as possible, I do not have the skills or the inclination to determine which are which.

Environmentalism 101 (Is that a class?  If not, it should be.) tells us to reduce, reuse, or recycle before we buy something new.  When it comes to these materials, mining is making new.  I expect there are good investing opportunities in all three principles. We can reduce the use of the most expensive and rare materials by substituting more common ones.  Origami Solar (not a public company) is working on replacing expensive aluminum with cheaper and stronger steel in the frames for solar modules, while Form Energy (also not public) is making batteries with cheap and abundant iron instead of the commonly used (and much more expensive) lithium.

We can also reuse existing infrastructure, such as repurposing the sites and grid connections of old coal plants for energy storage. We can also extend and expand the usefulness of power lines with grid-enhancing technologies like better monitoring and software.

Recycle

As astute readers have noted, most of the examples of reduction and reuse of clean energy materials listed above involve new businesses trying to create new markets.  Such opportunities can lead to incredible investment returns, but they also come with a level of risk that I, as a relatively conservative investor, try to avoid.  Recycling, however, is an established business that already produces profits.  This is the type of investment opportunity I look for: Currently profitable businesses that can profit from the transition to a clean energy economy.

Historically, lithium-ion batteries have not been recycled at all due to the lack of facilities to recycle them. That situation is changing rapidly.

The Inflation Reduction Act’s requirement that electric vehicle batteries is leading to a boom in the construction of battery recycling plants in North America.  With all the announcements of new recycling plants, I’ve become concerned that there may not be enough used batteries to go around.  

If I’m right that we are likely to soon have more battery recycling plant capacity than we have used batteries that are easy to recycle, then the companies most likely to make a good profit are the companies that already have systems for gathering used batteries in place.  In the case of used electric vehicle batteries, that means companies that already have vehicle part recycling and reuse facilities, commonly known as junkyards.  Two such companies are Radius Recycling (RDUS – until recently known as Schnitzer Steel) and LKQ Corp (LKQ).  

Radius is vertically integrated, using its junkyards as one source of scrap metal for its recycled steel mills.  It’s also widely recognized as an environmental leader.  Corporate Knights named it the world’s most sustainable company for 2022.  

In contrast, LKQ Corporation is a manufacturer of non-OEM replacement car and RV parts as well as running junkyards.  I don’t think I’ve ever seen LKQ on a list of sustainable companies, although much of its business is inherently sustainable.  Repairing a vehicle is usually a more sustainable option when compared to replacing it.  It’s also what I usually call a “boring” business… I like these because I think they are less prone to selling at inflated earnings multiples.  That’s certainly the case for LKQ today.

My final recycling holding is Umicore SA (UMI.BR, UMICY).  Umicore is a European processor of  recycled battery materials and other precious metals. They are a little farther up the value chain, making them relatively more vulnerable to future spikes in the price of used batteries, but I expect that their established relationships, proprietary recycling expertise, and participation in the more mature European battery recycling industry should help them weather increased competition for a limited supply of used batteries.

Conclusion

It’s widely accepted that the clean energy transition will lead to the demand for many industrial commodities growing faster than supply, although many investors have moved on to other themes since the interest in commodities peaked in 2022.  That makes it a great time to get in.

Investing in mining companies is an obvious, but environmentally problematic way to profit from coming price increases.  Investing in the recycling supply chain may be a less obvious method, but it is much more environmentally sound.  Three stocks to consider are Radius Recycling (RDUS), LKQ Corp. (LKQ), and Umicore (UMI.BR, UMICY). 

DISCLOSURE: As of 2/21/24, Tom Konrad and accounts he manages own the following securities mentioned in this article: RDUC, LKQ, and UMI.BR.  He does not plan to sell any of them in the next two weeks, and may buy more.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  All investments contain risk and may lose value. Past performance is not an indication of future performance. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

ABOUT THE AUTHOR: Tom Konrad, Ph.D., CFA is the Editor of AltEnergyStocks.com (where this article first appeared) and a portfolio manager at Investment Research Partners.

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By Tom Konrad, Ph.D., CFA

On Friday February 2nd, Brookfield Renewable (BEP and BEPC) reported earnings.  Judging by the immediate stock market reaction, many investors did not like the results.  Quarterly earnings actually beat expectations, but for Yieldcos like Brookfield, cash flow numbers and revenue (which can be more indicative of the company’s ability to pay and raise dividends) can be more important.  These fell short.

The company attributes the cash flow shortfall to its own clients delaying payments at the end of December, in order to make their own financial statements look better, and it expects the shortfall to reverse in the first quarter.

Beyond cash flow, I found the earnings report to be all good (if not particularly unexpected) news.  As one of the preeminent renewable energy infrastructure investors in the world, Brookfield’s access to capital is allowing the company to go on something of a spending spree, buying up cheap assets and companies as many of its rivals have to pull back.

Overall, I feel the pullback after the earnings call is a buying opportunity, and sold some short puts on BEPC this morning (February 5th.)

Why buy BEPC rather than BEP?

Unlike the nearly equivalent share classes of Clearway Energy (CWEN-A and CWEN, discussed here.), rival Yieldco Brookfield Renewable Energy has two share classes with significant differences: Brookfield Renewable Energy Partners (BEP) and Brookfield Renewable Energy Corporation (BEPC).

The company was originally organized as a limited partnership with all equity issued as partnership units (BEP).  In 2020, the company created Brookfield Renewable Energy Corporation (BEPC) through a combination of legal and financial wizardry in order to appeal to investors who prefer to get all their investment income from a brokerage’s 1099 form rather than the individual K-1s received by BEP limited partners.

This makes BEPC more appealing than BEP to many investors, so it is unsurprising the BEPC tends to trade at a larger premium to BEP than CWEN trades relative to CWEN-A.

As I write on Feb 5th, BEPC is trading at $26.10, compared to $24.55 for BEP, or a 6.3% premium.  I generally buy BEPC when the premium is under 10%, and BEP if the premium is higher than that.

Here’s a chart of the prices of the two shares and the BEPC price premium over time.  The data is from Yahoo! Finance on 2/5/2024.  

You’ll note that when BEPC was first launched in 2020, the C-shares temporarily traded at a slight discount (negative premium) to BEPC, and shot up to a bubbly 30%+ at the end of 2020 into early 2021.  The premium hit 25% in November 2020, and later got as high as 40%. At 25%, I thought BEPC’s premium was too high.  That was the only other time I’ve written about the premium publicly.  I thought it was far too low when it was below 5% for most of 2022, but I didn’t get around to writing about it.

Now that BEPC shares are a little more seasoned and we’re mostly done with the stock market disruptions of the covid pandemic, I doubt future swings in the premium will be nearly as dramatic, but it still make sense to pay attention to the price premium when you are deciding to trade BEP or BEPC.  

DISCLOSURE: As of 2/5/24, Tom Konrad and accounts he manages own the following securities mentioned in this article: CWEN-A, BEP, BEPC.  He does not expect to sell any of them in the next three weeks, and may buy more of CWEN-A or BEPC.  He might buy BEP if the BEPC premium over BEP increases to over 10%.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  All investments contain risk and may lose value. Past performance is not an indication of future performance. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

ABOUT THE AUTHOR: Tom Konrad, Ph.D., CFA is the Editor of AltEnergyStocks.com (where this article first appeared) and a portfolio manager at Investment Research Partners.

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Eventbrite sign-up: https://www.eventbrite.com/e/how-to-divest-from-fossil-fuels-and-invest-in-clean-energy-tickets-591429470467?keep_tld=1

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by Paula Mints

Transmission and distribution is the process of getting electricity from the point of generation to the point of use. Unfortunately, upgrades, maintenance, and the need to extend the electricity infrastructure from point a to point b are often ignored. Also ignored are infrastructure designs that support a distributed grid with renewable energy sources of electricity.

Transmission bottlenecks are the utterly foreseeable consequence of accelerated solar and
wind deployment. As countries worldwide were announcing RE goals, holding auctions, and providing incentives, system operators everywhere were warning about the need to add new and upgrade existing infrastructure while also warning about the effect of variable sources of electricity production on the grid and mismatched peaks.

The industry and governments listened, but governments and utilities didn’t act. And then,
seemingly overnight, accelerated solar deployment DID happen, bringing long queues for transmission studies, high costs for the new transmission, long connection queues, and curtailment as a special treat.

Ontario, Canada, offers an example of what happens when a country moves to accelerate
solar deployment by offering healthy incentives without considering whether its  infrastructure is up to the deployment goal. In 2009, the province’s government announced a generous 20-year feed-in-tariff for rooftop and utility-scale solar and a CAD $2.3-billion T&D plan. The new feed-in tariff was the centerpiece of Ontario’s Green Energy Act. The act also made connection permits easier and established a Right-to-Connect for RE projects of any size. Project approval queues sprang up overnight, as did requests by homeowners. Unfortunately, projects were proposed in areas where new transmission was necessary to deliver the electricity to the demand centers. After experiencing long wait times, developers began canceling projects.

Ontario applied restrictions and fines to prevent early and easy exits but, as transmission
building continued to lag, was forced to allow developers to exit without penalty.

When Ontario first announced its FiT, it expected gigawatts of deployment. Though installations in Canada did increase, mainly in Ontario, deployment was primarily rooftop and far below expectations. Figure 1 depicts solar growth in Canada from 2009 through 2019. Deployment is, again, primarily in Ontario.

Canada Demand Growth, 2009-2019

Over ten years ago, California’s Independent System Operator stated that increasing solar on the state’s grid would strain resources partly because of inadequate transmission and partly because solar’s peak is a mismatch for the demand peak – the infamous duck curve. The mismatch can be mitigated with storage, but over ten years ago, storage was considered too expensive and, in some cases, unnecessary. One west coast utility announced that it did not need storage but would instead strategically install wind and solar, assuming that wind would take over when solar stopped producing. As everyone knows, it never pays to bet on the weather. Sometimes the wind doesn’t blow, and the sun doesn’t shine.

The current situation, understood well by developers, is for longer wait times for transmission studies to begin and higher costs for transmission when they do. Building new transmission is, ballpark, $1-million a mile (or so), with the cost of undergrounding lines much higher. Who pays? – often the developer. Other project delays, such as permitting and offtake agreements, are icing on the unpalatable cost-overrun cake.

The infrastructure problem is global – and since deployment activity continues apace, it’s  not improving.

Most countries, for example, China, though the problem is far beyond just one country, continue installing and simply do not connect new systems to the grid. Systems that are connected to the grid are almost always subject to curtailment.

Transmission planning is the boring, necessary stuff of getting electricity from one point to
another. Rethinking infrastructure to enable a world dominated by renewables is a challenge – and an expensive one. The electricity future cannot be a reimaging of the past. It will take bold thinking and unpopular action to redesign the current electricity structure, literally, tear it down, redesign, and build new – one circuit at a time if that is the only way to move forward.

What the world needs now isn’t love, sweet love (What the World Needs Now is Love, lyrics, Hal David); it’s a T&D infrastructure that serves the present and addresses the future.

Paula Mints is founder of SPV Market Research, a classic solar market research practice focused on gathering data through primary research and providing analyses of the global solar industry.  You can find her on Twitter @PaulaMints1 and read her blog here. 
This article was written for SPV Reaserch’s monthly newsletter, the Solar Flare, and is republished with permission.

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By Tom Konrad, Ph.D., CFA

Second quarter earnings season is in full swing.  Below are a couple updates and the monthly performance chart that I recently shared with my Patreon supporters.

Green Plains Partners Earnings and Future Dividend

(published August 2nd)

Ethanol Master Limited Partnership Green Plains Partners (GPP) declared second quarter earnings today.  The main news remains the long anticipated debt refinancing and new dividend guidance going forward.

At the end of the first quarter, I predicted that, after debt refinancing, GPP would increase its quarterly dividend to something in the $0.25 to $0.30 range.  

The new guidance is for the partnership to target a distribution coverage ratio of 1.1x over any 12 month period, a bit lower than I anticipated, allowing a higher level of distributions.  I expected lower dividends and higher coverage ratio which would allow a higher margin for error and room for future dividend increases.

With the current $0.12 dividend, the coverage ratio over the last twelve months was 4.01x.  If the dividend is raised to reduce that to the target 1.1x, we would get a quarterly dividend of $0.437.  Given the new guidance, I expect the board of directors to raise the dividend to between $0.40 and $0.45 next quarter.   $0.48 was the quarterly dividend before the covid pandemic.

Valuation

At a $0.40 quarterly / $1.60 annual dividend, the anticipated yield at the current stock price of $13 is 12.3%.  This leaves significant room for further price increases before and when the dividend increase is announced.

I’m shifting my stance back from “Hold” to a short term “Buy” on this one.

Covanta Earnings and Buyout

(Published August 3rd)

Covanta Holding (CVA) announced second quarter earnings on July 28th, and investors yawned.  With the buyout agreement by EQT Infrastructure (announced July 14th in place, Covanta’s future and current earnings are very unlikely to have any impact on investors’ returns.

EQT has agreed to buy CVA for $20.25 a share, and the deal is expected to close in the 4th quarter.  This price places a substantial premium to the $15 or so at which CVA was trading before the deal was agreed, so I expect it to go through.

CVA will continue to pay its $0.08 dividend at the end of each quarter until the deal closes, meaning one more dividend payment at the end of September is likely. 

I’ve been buying Covanta shares when they fall below $20 as a substitute for cash.  Market valuations seem high to me, so I consider these shares to be a relatively safe place to park my money for a few months.  At $19.95, I can expect to earn $0.30 capital gain and a $0.08 dividend payment (1.9% total) in less than 5 months.  That’s over 4.5% on an annualized basis, a nice return compared to the cash I would otherwise be holding.

DISCLOSURE: Long all stocks in the 10 Clean Energy Stocks for 2021 portfolio, including CVA and GPP.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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by Tom Konrad, Ph.D., CFA

2020 ended with a massive spike in clean energy stock prices.  From the end of October, election euphoria drove Invesco WilderHill Clean Energy ETF (PBW) from $63.32 to $136 at the close on February 9th, a 114% gain in 100 days.  

Joe Biden is as strong a supporter of clean energy as Donald Trump was a supporter of big fossil fuel companies, but even with control of the presidency and both chambers of congress, there is a limit to what a president can do in a short time.  This is especially true when their top priority is (as it should be) dealing with a pandemic.

Acknowledgement of this reality seems to be setting in. as I write on March 5th, PBW is now down almost 35% from its high.  If the Dow Jones Industrial Average or S&P 500 had fallen 35%, this would be the depths of a bear market.  Clean energy stocks are generally much more volatile than the broad market, but, even so, a 35% decline should make investors sit up and take notice.

I focus on clean energy income stocks because they tend not to be subject to such wild swings.  The benchmark I use, the Global X Renewable Energy Producers ETF (RNRG – formerly YLCO) is also down significantly- 26% from its high of $20.20.

Pop! Goes the Bubble

With these large declines, it’s time to assess what’s next.  Large drops like this don’t happen without some panic among investors.  As always in a panic like this one, we need to assess:

1. Has anything fundamentally changed which would justify the declines and possibly further declines.
2. Is the panic approaching capitulation, when there is no one left to get scared and sell, or does the panic have farther to run?

Fundamentals

The biggest fundamental change is that interest rates are creeping up. This is in reaction to the expected spending in the Biden rescue package, and fears that we may see a surge of pent-up consumer spending as the vaccine allows the end of lock-down measures this summer.

These higher interest rates make stocks, especially income stocks like the ones I focus on, less attractive compared to bonds.  Higher interest rates also make it harder for companies to use debt to finance new investments, and so can reduce future earnings expectations.

While all these things are true, I expect their long term impact to be limited.  Most importantly, I do not expect interest rate increases to be large.  Interest rates have been historically low: It would take a much larger rise than I expect to bring them to a level that is not still low.  

There may also be some demand driven inflation in the summer, but I do not expect the demand or inflation surges to persist.

Similarly, the effect on future earnings from higher interest rates is also likely to be limited.  Most companies have been very active refinancing in the recent low interest rate environment, often bringing plans for future debt offerings forward.  This means that most will have the flexibility to reduce borrowing in the short to medium term if interest rates rise significantly.

Will Panic Lead To More Panic?

This is just a feeling based on having watched many market panics over the years, but I feel that the panic seems to be reaching its maximum.  I think the short term bottom will happen in the next couple weeks.  

I’m buying (actually selling slightly out of the money cash covered puts), especially clean energy infrastructure stocks like Yieldcos that I had been selling because of high valuations in December and January.  These include AY, NEP, AGR, and CWEN/A.  The amounts of each depend mostly on the size of my current positions- this is less a call about individual stock valuation and more one of market timing.

Conclusion

It’s time to bring much of that cash I’ve been telling people to keep on the sidelines for the last several months back into the game.

DISCLOSURE: Long positions all the stocks mentioned.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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If you want your money to help with the transition to the clean energy economy, most investment advisors will probably try to accommodate by finding a few green mutual funds for you.

There are now hundreds of mutual funds and ETFs that brand themselves as green, but many will not meet your definition of what is “green.” This could mean not being completely divested from fossil fuels, investing in nuclear power, or owning too much of non-fossil fuel stocks like Apple (AAPL) and Facebook (FB) and not enough green-focused  companies like Tesla (TSLA).

An investment advisor who does not consider values investing to be important will also not be particularly good a choosing investments that match your values.  So it makes sense to choose a specialist.

Below is a list of the specialist environmentally focused investment advisory firms I am aware of.  I’m sure there are many more, so if you know of them, please leave a comment.  I’d love to expand this list to have at least one in every state.  Until then, most advisors should be able to meet your needs remotely.

DISCLAIMER: Inclusion in this list should not be taken as an endorsement of any investment advisor. To be included, advisors simply have to be licensed and have environmental values investing featuring prominently on their websites.

DISCLOSURE: The author is a research analyst for JPS Global Investments. 

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Here is a short presentation on stock picking for green investors by AltEnergyStocks Editor Tom Konrad CFA, Ph.D., with a couple stock picks.  I gave this presentation as part of a workshop on divestment from fossil fuels and investment in green stocks at the third annual Climate Solutions Summit.  The Divestment part is here.

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This is a presentation from the Third Annual Climate Solution Summit by Katelyn Kriesel, Board President of the Sustainable Economies Alliance on the case for divesting from Fossil Fuels.

_Divestment Presentation – New Paltz

Katelyn Kriesel is an expert in the field of sustainable finance. She is a Financial Advisor with Hansen’s Advisory Services, located in Fayetteville, NY, a firm that has specialized in Socially Responsible Investing for over 30 years. She is also Board President and founder of the Sustainable Economies Alliance (SEA), a not-for-profit organization that is raising community awareness regarding economic sustainability and empowerment. She uses this expertise in sustainable finance and outreach to educate the community on the merits of fossil fuel divestment and sustainable reinvestment. She has consulted with several higher education fossil fuel divestment campaigns across New York State with a focus on financial case and mechanics of divesting from fossil fuels. Through the SEA, and in collaboration with 350.org and Divest NY, she is helping to build a coalition of higher education divestment campaigns to join together and redirect their efforts in support of the New York State Fossil Fuel Divestment Act which would divest the state’s pension of billions of dollars of fossil fuel companies. Katelyn is from the Syracuse, NY area, where she lives with her two daughters, Alianna and Vivienne, and their famous dog, Henry. She is passionate about environmental justice, economic empowerment, and community development and reinvestment.

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A conference hosted in NYC in early April, 2019 ESG5 SUMMIT showcased the issues of current concern to institutional asset managers.  ESG as a term is a rebranding of SRI (socially responsible investing) and CSR (corporate social responsibility) now under broad headings of Environment Social & Governance, to reflect that it is more than just an investing style, but is concerned with risk management and value creation.   ESG strategies are being pursued by a range of participants, including public and private pension funds, mutual funds and ETFs, family offices and sovereign wealth funds, and advisors and advocacy groups.

The goals are to allocate funds that encourage corporate practices that positively promote environmental stewardship, diversity, human rights, and consumer protection, and steer funds away from corporations with socially harmful business models.   In connection with the Paris climate summit, a group of investment funds with $26 trillion AUM, pledged to pressure the worst 100 companies responsible for 65% of all emissions.  That effort has expanded to become the G20’s Taskforce on Climate-related Financial Disclosure (TCFD) which now includes over 500 firms with market caps of $7.9Tr, including 150 financial institutions managing assets over $100 trillion, including 20 of 30 systemically important banks and 8 of 10 of the largest asset managers.

To support these efforts, metrics, ratings & other resources have been developed for determining materiality, ie., whether the investment can make a material impact, and whether it can generate alpha and can compete with conventional investments. The most prominent data analytics are provided by the Sustainability Accounting Standards Board (SASB), UN Principles for Responsible Investing (PRI),  Sustainalytics & MSCI.  Other entities that have developed their own systems for assessment and reporting, include: CSRHub, Ceres, Edison Electric Institute (EEI), Global Reporting Initiative (GRI), Carbon Disclosure Project (CDP),  Climate Disclosure Standards Board, UN Sustainable Development Goals, Oxfam, World Resources Institute, SSI, & Sustainable Investment Forum (USSIF). 

SASB developed an extensive sustainability framework of environmental & social capital necessary to create long-term value, and a Materiality Map to provide guidance on use of SASB standards in making disclosures, and for conducting materiality assessments of issues that are likely to affect financial condition or operating performance.   For purposes of scoring and ranking, each industry has its own unique sustainability profile, and assessment of the ESG factors as shown below must be adapted for relevance.

A big data approach is necessary to manage the large disclosure datasets from many categories to build key indexes, improve ratings, assess material outcomes and compare alpha outcomes by strategy.  A data-centric quantitative approach starts with                  1) self-reported data from 600-10,000 companies using over 900 indicators, from primary providers including Bloomberg, Thomson, & Factset.                                                      2) This information is filtered into professional ESG opinions using fewer indicators, 16-250, as provided by services such as MSCI, Sustainalytics, ISS, & Vigeo in a smaller company universe of 1500-8000.                                                                                                3) The last step is aggregating these into consensus opinions and narrowing the indicator sets to 12 sub-categories to simplify ESG decisions, as provided by CSRHub.

Concrete outcomes from ESG practices are measured primarily in terms of “materiality” in the sense of effecting changes, solving problems in the real world, but also secondarily in terms of generating alpha, producing financial gains by the corporations or investors.

Addressing the 2^nd issue first, one study, presented by the panelist from CSRHub, analyzed six generic ideas for using ESG approaches to generate alpha:

• Long / short strategies, buying positively rated and selling negatively rated firms.
• Buying category leaders
• Rely on recommendations from high value consensus opinion sources, ie., Sustainalytics & MSCI
• Select highly rated firms that also report frequently
• Stick with a large cap blue chip with good ESG ratings
• Focus on firms with good materiality metrics.

In each approach, empirical factors were found that mitigated the effectiveness of the strategy:

• The ESG ratings of the best & worst rated companies were found to be mean-reverting, the ratings value of the top 20% drop the most, the bottom 20% improve the most. “ESG trend momentum” persisting for more than 6 months occurs for fewer than 5% of companies.
• The “leaders” do not persist, those highest ranked drop substantially by their 5^th year
• Sustainalytics & MSCI scorings don’t match up
• High ESG disclosure scores on the Bloomberg platform correlate only weakly, 25%, with highly rated consensus scoring compiled by CSRHub.
• There seems to be no correlation between a CSRHub rating and market cap or revenue.
• Material metrics are just not well enough covered by analysts, rarely fill in even 50% of ESG indicators in their analyses.

This study suggested that obtaining alpha with ESG-related strategies is difficult to achieve.  This would tend to corroborate a widely accepted assumption that ESG investing plans reduce returns on capital & shareholder value.  However, a Harvard report contends that empirical results show that “companies committed to ESG are finding competitive advantages in product, labor, and capital markets, and portfolios that have integrated “material” ESG metrics have provided average returns to their investors that are superior to those of conventional portfolios, while exhibiting lower risk.”

An example of the 1st strategy, which appears to be succeeding, is an Energy Transition Long-Short strategy offered by advisory service Fossil Free Index, which holds long positions in clean energy, advanced transportation, and smart grid companies, and short positions on reserve-owning fossil fuel companies, and is currently outperforming the S&P.

Gender diversity was also cited as benefiting profitability.  The Thirty Percent Coalition promotes gender diversity on corporate boards and institutional investor boards, and contends there are clear, identifiable results that diversity lead to better performance and governance.   Several participants with affiliations to institutional funds expressed confidence that performance improvements corresponded with improvements in gender diversity on their boards.

ESG ratings are being made available to retail investors as well.   Yahoo Finance includes a tab for Sustainability, that includes scoring for a Total, and separate Environment, Social & Governance for performance, ranked in a percentile against other peer companies, with graphics, and a scoring for controversy level.  It also includes a list indicating involvement in 14 adverse areas:  alcoholic beverages, adult entertainment, gambling, tobacco, animal testing, fur, controversial weapons, small arms, catholic values, GMO, military contracting, pesticides, thermal coal, palm oil.  Fidelity is offering similar tools on its platform as well.

Index & ETF products have proliferated:  MSCI (iShares/Blackrock) has 4 categories with 17 ESG & climate indices, Thomson Reuters has 4,  CleanEdge has 4, FTSE4Good has 7, S&P/DowJones offers a large family of sustainability indices,  ETF.com lists 78 socially responsible ETFs with $7.4B AUM.  ETFdb.com offers a deep resource, with 35 ESG themes, 77 metrics and a screener which identifies 23 assets with ESG scoring in 90^th percentile.   The volume of assets invested in ESG funds are up nearly 60% from the prior year, as reported in the WSG.  ESG funds are being marketed by Wall Street as a “bankable trend,” as private equity & hedge funds report participating in these offerings.   However, it is still early in the overall trend, less than 2.5% of 401(k) plans offer ESG funds as an investment option.

The effectiveness of actively managed ESG portfolios as compared to passive index funds is debated.  However, one strategy in which active management seems to be effective involves ESG “activist” investment.  ESG advisor firms search for underperforming publicly traded firms with low ESG ratings, then begin with a consulting engagement, which then transitions into negotiating an equity position as a long-term value investor, in order to effect a turnaround by implementing ESG policies & practices, to achieve improved productivity & financial outcomes.  Two such firms pursuing this approach were present, Barington Capital Group, & Impactive Capital and reported on their process and positive outcomes.

Returning to the primary issue of materiality, does ESG investing, and implementation of ESG practices, make a material difference in the real world?  How effective is voluntary ESG participation as compared to material effects resulting from compliance with statutory requirements?  One panelist, William Jannace, adjunct professor at Fordham Law school, observed that sustainability policies for corporations are driven by a) an internal reputational desire to contribute, & b) external demand from customers or RFP conditions, but c) contended that more significant outcomes are driven by compliance with regulatory imposition.

At worst ESG participation as a cultural artifact that may be criticized as “greenwash”, bandwagon promotion with no substantial behaviors, and at best can drive only incremental improvements, unable on its own to drive solutions to the largest systemic problems.  Two such examples were considered:

Illicit financial flows (IFF): from kleptocratic capital flight & laundering, human trafficking of migrants & sex slaves, & from black market drugs & arms, facilitated by use of complex entity structuring & tax venue shopping, has been estimated between $21Tr – $32Tr, according to a Tax Justice Network study of data from the BIS, IMF, and several private sector analysts including Gabriel Zucman.   Would the financial services industry on a voluntary basis from a commitment to ethical principles and motivated by the desire to appear supportive of initiatives against human trafficking refuse to handle financial flows found to be associated with such criminal activity?  Clearly a naïve expectation.  Without the compulsion to comply with Anti-money Laundering (AML) statutes, under threat of federal prosecution, the progress achieved to date likely would not have occurred.  But the recalcitrance of the US to legislate & enforce aggressively has led some experts to now rank the United States as the world’s biggest financial secrecy haven.   Corporate social & governance commitments are not trivial, but should be recognized as a social catalyst for coalescing sentiment for triggering cultural shifts.  ESG would be synergistic with legislative reform, where the heavy lifting really occurs.

Climate Change:  expedited reductions in GHG emissions is clearly on everyone’s ESG list but voluntary adoption is not capable of scaling to the same extent as a mandated industrial policy, such as outlined in the Green New Deal, and would likely be unrealized without regulatory enforcement by the EPA and other agencies.   Further, concern for a “carbon bubble” of potentially stranded assets of fossil fuel reserves that cannot be burned, has been recognized in various high-level risk assessments, including the IMF, World Bank & HSBC.  The most alarming analysis came from Mark Carney, governor of the Bank of England, who calculated that one-third of global wealth is invested in oil, gas, coal, and other “carbon-heavy” companies.   Citigroup’s ’17 GPS report concurs with an estimate that the “total value of stranded assets could be over $100 trillion”, which is 5x the size of losses associated with the ‘08 housing bubble.*   A devaluation of those assets could crater the entire global economy, at minimum would adversely affect countless institutional funds.

Large sustainable asset managers such as Ceres and Trillium calling for $1Tr per year in climate change investments, are potent advocates for collective commitment, but even they recognize that transition depends on policy choices to remove the obstacles to clean energy scaling imposed on our political system by entrenched “incumbent” industries.   ESG investing is exerting significant pressure towards reduction of GHGs, but does ESG investing have enough leverage to influence more dramatic policy change?  It could lend weight to “outside the box” policy proposals, such as a proposed fossil fuel nationalization plan, which would be beyond the scope of anything that could be achieved by ESG asset management.   The infographics below illustrate the scope of the entrenchment of incumbent carbon assets, are from Influence Map which is a site that monitors fossil fuel investment, subsidies, influence activity & embedded portfolio climate risk.  Who Owns the Fossil Fuels shows the sheer scale of the fossil fuel ownership & investment chain.

Aside from rampant ambivalence, with 75% of the largest companies neutral about climate change, the fossil fuel influence apparatus is so deep that the prospect of counter-influence from ESG practices succeeding at scale seems remote, except insofar as ESG investing is coupled with ESG lobbying to also pursue major enforceable policy shifts.

Other resources at InfluenceMap provides detailed rankings of companies on the A-list of climate policy engagement, that participate both in ESG activities and participating against fossil fuel lobbying.

Although one impression is that ESG adds value almost entirely by limiting risks & excluding exposures to negative factors, in reality companies with high ESG scores have  experienced increases in operating efficiencies, & lower risks with lower costs of capital.   In early 2018, the US Dept of Labor, had issued ERISA guidance that “managers cannot sacrifice shareholder return for ESG considerations”, which imposed a conflict of interest for for institutional investors’ fiduciary duty, and for portfolio companies investors were seeking to influence toward greater implementation of ESG policies.  But because ESG factors have been increasingly shown to have positive correlations with corporate financial performance and value, ERISA reversed its earlier instructions.

In the broader corporate culture, this implied conflict of interest has been used opportunistically by CEOs, under an economic theory of “shareholder primacy” as advocated by Milton Friedman, to justify policies that benefit C-suite interests at the expense of workers and environment, aggravating wealth & income inequality. “Shareholder supremacism” is being targeted for reform under the Accountable Capitalism Act, S. 3348, which would impose obligations on the largest 1000 corporations, under newly issued charters, to consider broader stakeholder interests, include labor on the board of directors, and require 75% board approval for political expenditures, enforced by risk of revocation of charter.

ESG activism as a response to the groundswell of changing public sentiment is catalyzing some very significant outcomes, against the monumental resistance of the fossil fuel industry, on the battlefield of  shareholder resolutions.   Exxon & Chevron, both of which have stated in analyst meetings that they plan to increase extraction, have recently prevailed against resolutions that would have required the companies to disclose targets for reducing GHG emissions.  However, the SEC has sided with shareholders on two other requests, a) to create new board committees to address climate change and b) to fully disclose political contributions to tax-exempt “dark money” 501(c)(4) organizations.   Exxon & Chevron have made huge dark money contributions to Main Street Investors Coalition launched by NAM, which has executives on the board from Exxon, Shell, Devon Energy, Southern Co & a Koch subsidiary, to combat the threat of these resolutions, according to governance consultant Nell Minow at ValueEdge Advisors.

However, BP & Shell have been more responsive to shareholder resolutions that call for disclosures and for alignment of business plans with Paris goals.  Shell has joined with Climate Action 100+, an institutional investor initiative, and announced plans to reduce the carbon footprint from its energy products, which release 10x more emissions than from direct operations, and further, agreed to link the targets to executive pay.

Both ESG activism and lobbying for policy changes for ESG goals are necessary components of a strategy for change.

*[These large numbers have been disputed – even comparing to the “ownership“ diagram above showing total assets of $185Tr, if the assets at risk for being stranded are estimated at $100Tr, which correlates to the estimated one-third of wealth or economic activity, then implied total assets would be $300Tr.  Other mitigating factors would be a) that the at-risk reserves would be less if some were considered chemical feedstocks rather than fuels to be burned; & b) some critic contend equity share value is derived less from assets and is based more on free cashflow, hence would discounting reserves would not depress equity value to such an extent.]

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