• Steven Bowen

Sustainable Investing weekly blog: 20th Dec 2021 (Issue 20)


Our weekly summary of the key news stories, developments, and reports that are impacting investing in the wider transition to net zero carbon and a greener/fairer society.


This is our last weekly blog for 2021. We hope 2022 is less challenging, although we are not holding our breathe, we think change is going to be the only constant for a while now. This weeks blog is a bit of a mixture of theme/stock related stories (rooftop solar & fertiliser) and a bit of end of year reflection !

This weeks top story highlights the the proposed change to California’s rooftop solar subsidy programme, a move that had a material negative impact on the share prices of companies exposed to that market. It reinforces to us the importance of fully considering the risks involved in investing in industries that rely on government or regulatory support, especially as that support becomes increasingly expensive (and socially divisive) to maintain. We then break one of our key rules (stick to what impacts companies), writing about the debate following the Bloomberg article we highlighted in last weeks “one last thought” on the MSCI ESG scoring methodology. The feedback we have received, and the coverage in social media such as LinkedIn, has highlighted how we as an industry can say the same words but mean totally different things, depending on your starting perspective. This is an issue that we need to overcome if we are to properly mobilise the capital we need to fund the transition.

Back to investing related news. In Agtech, we examine the emerging scale of the problem of nitrogen and phosphorous runoff entering rivers and lakes. We finish with a guest story from our human rights expert on  what breaches of human rights might actually look like in practice. Our “one last thought” highlights a legal case (now at appeal) in Australia that could have material consequences for how that countries government deals with climate risk.

The format of the blog is simple, first our summary of the key points of the story (click on the green link to read the original) and then what we think it means for investors. The focus is on news flow that we think should change the markets perception of the investment case of individual stocks and sub sectors. So not the place to come to for news that has already been well covered in say the FT. Our approach is unashamedly long term, so we ignore short term noise.

Top story : Is California about the pull the plug on rooftop solar ?


Unpacking California’s new rooftop solar proposal (Inside Climate News)

Main points of the story as published

  1. California regulators released a proposal this week that would drastically reduce the financial benefits of rooftop solar in a state that has done more than any other to nurture the solar industry. This bitter medicine comes in the form of a proposed decision from the California Public Utilities Commission, a document that, in places, reads like talking points from utility companies that have long called for a reduction in the financial benefits for solar owners. The commission could vote on the plan as soon as Jan. 27.

  2. The proposal includes provisions such as a “grid participation charge” that would be $40 to $50 per month for a typical household with rooftop solar. The charge means California would have the highest monthly utility charge for rooftop solar in the country, displacing Alabama, according to the advocacy group Vote Solar. In addition to the new monthly charge, the plan would reduce the “net metering” rates that solar owners receive for selling excess electricity back to the grid. The specific changes vary depending on how long someone has had their system and other factors.

  3. Why is this happening in California of all places? The proposal reflects a view among utilities, consumer advocates and some environmental groups that the popularity of rooftop solar in California is leading to concerns about the costs of subsidies. Plus, Utilities have argued that the growth of rooftop solar is leading to a shift in costs, with predominantly affluent solar customers paying little for electricity, while the costs of maintaining the grid gets transferred to customers that do not have solar.

Our take on this

  1. There are, in our minds, two key lessons from this. The first is that any subsidy system can become (or at least perceived to become) both financially unsustainable and socially divisive. Obviously, this is a risk factor all investors need to be aware of.  But the important point is that end of a subsidy regime is not always bad news. A useful parallel is China and EV’s.  In our previous roles we started writing about how the Chinese EV subsidies were becoming un-affordable as far back as late 2018.  This 2020 article in Fortune (China rolling back the subsidies that fueled its EV boom)  discusses the series of subsidy cuts, some of which date back to mid 2019.  Did the boom end as subsidies were cut- well no, at least not if the latest sales figures are anything to go by (China doubles plug in sales in Oct 2021). Yes they have faltered on occasions, often dramatically, but the upward trend in market share has continued despite the subsidy cut.

  2. Its not clear in the California example how much of a role subsidy affordability played in proposal. Its hard to be sure, but we can assume that the success of the policy must have been a factor. Based on 2020 data, California has 6x more small scale solar than the next most important state (Arizona – as you asked), coming in at 17.4 GWh.  Based on current (ie the old) subsides, roof top solar apparently had a payback as short as around five years !

  3. Press interviews, such as this one (everything you need to know about the solar subsidies) also suggest fears around  “the need to keep the lights on, prevent electricity rates from rising and encourage people to install batteries” also played their part.

  4. An additional factor was the “concern” that current subsidies favored middle class homes, leaving lower income families to carry more of the grid cost. This last card is one that gets played on a regular basis by some electricity utilities, often as a means of protecting their generation profits. Although we get it, we are sure that there are better ways to overcome the social equality problem than this “sledge hammer to crack a nut” solution. We note that this is not a new debate, with The Motley Fool for instance, writing (article here) on the love hate relationship that utilities seem to have regarding roof top solar back in 2015.

  5. What is the second lesson from this situation ? Coming back to the China EV situation, its around innovation. Yes, it very likely that if the measures proposed do end up leading to a slowing in the installation of domestic roof top solar in California, this is going to impact near term profits for the companies exposed. BUT …. the smarter (more flexible ?) ones will have seen the writing on the wall and will have started to build alternative revenue streams. What could these be, we are currently doing analysis on this so for now we just highlight commercial solar, behind the grid systems, virtual power plants, grid support via storage, and grid forming inverters.

  6. Note – California is not alone is having to sort this “too much roof top solar problem” out. The state of South Australia is in even deeper. According to the grid operator, on Sunday 21st November 2021  “scheduled” demand – local demand minus the output of rooftop solar and small unscheduled generators such as small solar farms and bio-energy – fell to minus 38MW in a five minute period at 1235pm (grid time, or AEST). The response there is interesting, seeking to use roof top solar as a positive force for improving grid stability and managing overall electricity costs down..

ESG scoring – are we all speaking the same language ? 


Are ESG ratings more about a companies bottom line than its impact ?

Main points of the story as published

  1. For more than two decades, MSCI Inc. was a bland Wall Street company that made its money arranging stocks into indexes for other companies that sell investments. Looking for ways into Asian tech? MSCI has indexes by country, sector, and market capitalization. Thinking about the implications of demographic shifts? Try the Ageing Society Opportunities Index. MSCI’s clients turn these indexes into portfolios or financial products for investors worldwide.

  2. Increasingly though investors are starting to worry that the ratings don’t measure a company’s impact on the Earth and society. In fact, they gauge the opposite: the potential impact of the world on the company and its shareholders. MSCI doesn’t dispute this characterization. It defends its methodology as the most financially relevant for the companies it rates.

  3. This critical feature of the ESG system, which flips the very notion of sustainable investing on its head for many investors, can be seen repeatedly in thousands of pages of MSCI’s rating reports. Bloomberg Businessweek analyzed every ESG rating upgrade that MSCI awarded to companies in the S&P 500 from January 2020 through June of this year, as a record amount of cash flowed into ESG funds. In all, the review included 155 S&P 500 companies and their upgrades. The most striking feature of the system is how rarely a company’s record on climate change seems to get in the way of its climb up the ESG ladder—or even to factor at all.

Our take on this

  1.  When we highlighted this Bloomberg story last week, we didn’t expect the debate it caused. Yes, we knew that the “two tribes of sustainability” (financial and impact) view the world very differently, and we are very aware of the criticisms of ESG scoring (many of which we share). What surprised us about the debate was how little the various parties involved seemed to understand each others position (we don’t mean agree, just understand).

  2. Why do we see this as critical ? This is a long answer, but its important, so here goes. Our starting point is that if we are to deliver the necessary transition (not just to net zero carbon, but also better protections for our natural capital, less pollution, less exploitation etc etc), we need to mobilise vast (& we mean vast) amounts of capital. This is well beyond the funding capability of governments. We need private capital to be allocated at scale – for this to happen these investments need to generate a fair financial return. 

  3. To us, this requires leveraging the current financial system. We know others disagree, they believe the whole system needs changing, but we don’t think there is time for that (and we are not sure its possible or it would work). For the current system to be refocused, we need to break the silos – we need every sustainable investing person to understand both impact (or perhaps more strictly outcomes) and finance. The good news is that its starting to happen, the bad news is that its not happening fast enough.

  4. In the spirit of poacher turned gamekeeper, we think it’s worth starting by examining how the financial world appears to be thinking about ESG investing and what pressure points the asset owners (from retail investors through family offices, endowments and wealth managers, to giant pension funds and sovereign wealth funds) can do to push the system toward one that actually helps deliver the transition we need, in a way that still delivers the fair financial reward we need to fund our retirement, our children’s education, and our future investments.

  5. We argue the starting point has to be an understanding that many in the financial world are firmly in the MSCI camp. A good friend who has successfully run (measured by Assets Under Management and financial performance) a large ESG branded fund for many years put it very sufficiently. My clients measure me on financial performance first & foremost, yes they want the fund to be aligned to their values, as measured by an ESG score, but if I don’t deliver financial performance, they take out their capital”. Given this, its not surprising that many portfolio managers are aligned with the MSCI view, treating ESG risk as financial investment risk.

  6. Some of this comes from how asset managers and the finance industry generally think, but some of it also comes from what clients seem to want. By “seem to want” we mean how they measure and reward (and hence incentivise) their managers of capital – the equity, debt and private capital investment firms. The belief that ESG ratings based investing allows investors to align portfolios with values, support the transition, & earn a market beating financial return, is part of this incentive structure.

  7. We don’t agree. Passive investing in the listed equities (ie the secondary market) of high or improving ESG stocks may help align portfolios with values, but it does little, on its own, to deliver the required transition. Don’t get us wrong, we understand why investors want their portfolios to better align with their values, especially in relation to companies that materially damage our environment and exploit workers. Its just that selecting companies on that criteria is not going to deliver the wider transition we seem to want.

  8. We also recognise that many asset managers have done some excellent work evaluating and measuring the impact that ESG driven changes could have on the financial value of companies. In doing this they have highlighted how the future costs of correcting current practices could reduce future profitability and potentially lead to stranded assets. Despite what the Bloomberg article implies, this serves a useful role, highlighting to companies that they need to change if they are to have a successful future. Maybe companies should do this on their own, but the reality is many do not.

  9. Coming back to the debate – how can we refocus our financial system to deliver the transition we want while still providing us with a fair financial return ? We argue that this refocusing must be led by asset owners. It might seem simplistic, but if enough asset owners demand something (& follow that up with the right incentives and monitoring – ie do not take it on trust), then the financial industry will provide it.

  10. What is this “something”? Its a financial product that selects under valued companies that make a positive contribution to the transition. By positive contribution we mean those companies that produce the goods and services that will replace the incumbents that excessively add to our carbon, and that destroy our eco-systems, and that pollute our water, soil and air. We want these companies to not only make this positive contribution but to do so in a way that causes the least harm, and in a way that delivers a fair financial return to the providers of their capital. In some cases this investment it might be via public equities but in others it might be via debt or private equity. Finally, we want our asset managers who run this product to drive forward this process through active engagement (not just voting, we mean the roll your sleeves up, detailed analysis driven engagement).

  11. All of this sounds demanding, and it is. Having been involved for many years in active equity and debt investing, we know that this is both resource intensive and time consuming. For this – read costly. The trend toward passives, ETF’s and cheaper active management has worked against asset managers being willing to fund this.  So the most important lever that asset owners can pull is being willing to pay for real active management and understanding that sometimes a fair financial return may be less (at least in the mid term) than could be obtained from a simple ETF. 

  12. This is a complex and perplexingly difficult topic.  For many asset owners, the investable universe that this process throws up is not currently big enough for them to allocate all of their assets, but it will grow. The world is changing for many, if not most, companies. Some will innovate, change and adapt, some will not and they will fail. The first group will gradually come to dominate.

  13. In this blog we can only touch on the key points, but its something we will keep coming back to in 2022 – its really important & we think its a part of the future of our industry. If you want to discuss how all of us can make this happen, or if you think we can help your organisation work toward a solution (or even if you disagree), get in touch – using our “contact us” webpage or by DM if you are reading this via LinkedIn.

Agtech – nitrogen run off costs are high 


The High Cost of Algae Blooms: More Than $1 Billion in 10 Years (EWGT)

Main points of the story as published

  1. Cities and towns in the US have spent at least US$1.2bn since 2010 dealing with algae blooms. News reports of algae blooms have increased by 600% in the same period. Both figures are likely to significantly understate the true problem with research on the topic still relatively new.

  2. Blooms are triggered by nutrients such as nitrogen and phosphorous entering rivers and lakes (a process known as eutrophication). These can come from farm run off in rural areas and wastewater/stormwater in urban areas. In many cases, such blooms contain toxins detrimental to human health. They also deplete oxygen levels in the water, killing marine animals and aquatic plants.

  3. Much of the focus is on treatment not prevention despite clean-ups being expensive. A clean up of Lake Champlain in Vermont, for example, is expected to cost more than US$1bn over the next 20 years. Prevention is potentially cheaper and more effective but will likely require more stringent farming regulations (farms are viewed as non-point sources of pollution under federal law).

  4. Nutrient run-off is not the only water pollution arising from agriculture. A recent European Environment Agency report found that 19% of rivers and lakes in Europe had levels of pesticides above critical thresholds, deemed harmful to the environment. In Belgium, Finland, Italy and the Netherlands thresholds were exceeded in half of all their rivers and lakes.

Our take on this

  1. While not a new story, it highlights the emerging scale of the problem, one that is not just confined to the US nor to lakes and rivers. The US National Ocean Service highlights that 65% of the estuaries and coastal waters studied in the contiguous US are “moderately to severely degraded” by excessive nutrients.

  2. As the US NOS explains, eutrophication sets off a chain reaction. As the algae decompose post bloom they release CO2, resulting in acidification. In turn, this slows the growth of fish and shellfish with knock on effects for the fishing industry. It is a complex problem but a key part of the solution is reducing farm-derived pollution. Half of all nitrogen-based fertilisers applied to farmland are lost, either as run-off or as gases. The level of nitrogen pollution is expected to increase by 150% between 2010 and 2050 with agriculture accounting for 60% of the increase. In addition, as the EEA report shows, pesticide pollution of water bodies is widespread.

  3. Agtech offers farmers a range of options to reduce the use of fertilisers and pesticides. These include smart application technologies (based on a combination of computer vision and AI), gene editing, and biologicals including those targeting the soil microbiome, technologies we covered in a recent research report (‘Agricultural technology – field of dreams’, 9 December 2021). The current high fertiliser prices will likely further stimulate interest in these alternative technologies.

  4. Notwithstanding tailwinds from high fertiliser prices in the short-term, we see the agchem industry under pressure in the long-term, especially in the EU and US. This reflects a combination of regulation, litigation, political and consumer pressure, and the adoption of Net Zero targets, as well as the emerging agtech alternatives and the adoption of more soil-friendly farming practices.

Social and Legal factors


Photo by Mahosadha Ong on Unsplash

Lawyer who defeated Shell predicts “avalanche” of climate cases (FT)

  1. This week our good friend Kristina Touzenis, who has many years experience in the human rights field (LinkedIn profile here), has again kindly guest written the social & legal section of the weekly. Thank you Kristina. Just a reminder, this section is not written and prepared by Sustainable Investing LLP. Quite frankly, we are not experts in this field, so we leave the topic to those that are.

  2. For this blog, she examines in more detail what the “right to a clean environment” might be interpreted as, potentially leading to the view that it may not require proof of direct damage. This process can seem incredibly slow to investors, but as the FT article highlights, the ability of “injured parties” to take (& win) legal action, often in a different jurisdiction from that in which the damage occurred, is growing and growing fast. The well regarded Grantham Institute wrote an interesting piece on the growth in climate litigation (2021 snapshot) earlier in the year.

Kristina’s take 

  1. A few blogs ago we discussed how the Human Rights Council (HRC) has now recognised the right to a clean environment as a human right. This is just the latest step along the path to not just recognising certain fundamental human rights but to also start entrenching these in our legal system. We subsequently got the question “and so what?” which is a very legitimate question indeed! By “so what” we mean both what happens next and what this actually means in practice.

  2. As mentioned in the previous blog the HRC’s decision will first impact States (countries) who will now have a clearer obligation to protect people from the harm that a “polluted” environment creates. In recent years, the recognition of the links between human rights and the environment has greatly increased. The number and scope of international and domestic laws, judicial decisions, and academic studies on the relationship between human rights and the environment are growing rapidly.

  3. Moves by multilateral organisations such as the HRC often guides implementation of international obligations and therefore legislative developments and cases before courts. The difference, the real difference, this resolution opens up is that polluting, and not respecting/protecting the environment, could develop into a violation of rights on its OWN  – without proving a direct link to violation of other rights (health, property, living, life etc). How long this may take in national jurisdictions is still to be seen. But considering how quickly this field is developing it may come about sooner than our historic experience of international law suggests... and that will mean more cases world wide based “simply” on the fact that a company pollutes and therefore their actions are automatically considered to  harm people.

  4. Plus, its not yet clear exactly which actions are to be considered as a violation of human rights, although the definition is wide …”the unsustainable management and use of natural resources, the pollution of air, land and water, the unsound management of chemicals and waste, the resulting loss of biodiversity and the decline in services provided by ecosystems interfere with the enjoyment of a safe, clean, healthy and sustainable environment, and that environmental damage has negative implications, both direct and indirect, for the effective enjoyment of all human rights”.


One last thought

The teenagers and the nun trying to stop an Australian coal mine (BBC)

When eight teenagers and an elderly nun in Australia teamed up for a climate case, they won, in a historic judgement. Their  original case attempted to stop the expansion of the Vickery coal mine in New South Wales, which is estimated to add an extra 170 million tonnes of fossil fuel emissions to the atmosphere. The judge, ruled that the government had a duty to protect young people against future harm related to climate change (see how we seamlessly link issues !). According to the report – it’s the first time in the world that a duty of care of this kind has been recognised (we are not sure this is the case, at least in a non legal sense, but if its not the first, its one of the first). Their case has now been appealed by the country’s government. If the final verdict swings in their favour, it will have ramifications not just for Australian law but for climate cases world-wide.