Sustainable Investing weekly blog: 24th June 2022 (issue 37)
Story tags for this blog
Our weekly summary of the key news stories, developments, and reports that are impacting investing in sustainability, the wider climate related transitions, and a greener/fairer society.
This week our top story looks at the latest moves by the European Union to cut pesticide use. Next up, in Distributed Energy we cover an interesting report from Australia on building community consent for microgrids (becoming very topical given rising electricity prices and fears of winter blackouts). Then in Built Environment, we cover the challenges in creating low carbon glass. Finally, in Transport, we look at some interesting data in the recent BNEF EV report, highlighting the importance of two & three wheelers, electric scooters to you & I. In our One Last Thought, we cover a report from a team led by the Bennett Institute on how the degradation of nature could lead to sovereign credit downgrades.
Top story : Reduced pesticide use in Europe gets closer
Main points of the story as published
The European Commission has proposed to slash in half the use (and risk) of chemical pesticides by 2030, confirming the targets set out in the European Green Deal, and the Farm to Fork Strategy. This is despite food insecurity concerns in light of the Ukraine war. The EU plan now introduces the first legally binding reduction target.
The new Sustainable Use of Pesticide Regulation (SUR) will be directly binding in all member states and without the need to transpose it through national laws. The regulation will include a ban on the use of pesticides in urban green areas, public parks, gardens, playgrounds, recreation sports grounds, and ecologically sensitive areas.
While there will be an overall legally binding target to reduce the use of chemical pesticides by 50% by 2030, member states will be asked to set their own national reduction targets. Some limits will be set on how countries can vary from the general target, based on a countries historical progress in reducing pesticides and/or the intensity of the use of pesticides. However, the national reduction target cannot be lower than 35%.
The Commission is also planning to accompany the pesticide reduction by increasing the range of biological and low-risk alternatives on the market and through continued research, innovation and new technologies.
Our take on this
Europe is moving toward a material reduction in the use of pesticides. In a way, the regulation (Directive 2009/128/EC), while politically challenging to get through the system, is the easy part of the process. Europe now needs to find a way to accelerate the roll out of alternatives to chemical pesticides. And to do it in a way that does not negatively impact farm productivity. This is not just a technology problem, its going to need a lot of training and awareness raising.
In their factsheet on the topic, the European Commission discusses the alternatives, including plant breeding, biological pest control and lower risk chemical alternatives, such as baking soda. They also point to the rising number of biological and low risk products that have been approved (from c. 40 in 2010 to over 100 now).
To this list of actions, we would also add precision ag, using technology to only spray the crops that need it. Research suggests that if the use of precision spraying was widespread, the industry could cut pesticide use by up to 90% (depending on the crop etc). New, and potentially useful technologies, also include the use of automated lasers to burn weeds.
Reaction from the industry to the new EU regulation has been muted, perhaps because this has been coming for a while now. Feedback we have seen, including from Crop Life Europe (a pesticide and biopesticide industry body) and Copa Cogeca (representing European farmers) focuses on speeding up the process of approval for low impact alternatives, and the possible cost implications (especially as it might impact global competitiveness). Both are really good points in our view.
Will this regulation make a big difference ? Probably in Europe, although we think the time scale is ambitious (getting alternatives in place and farmers educated and trained is a big job). But globally, probably less so - so its hard to see the chemical pesticide producers fighting this one hard. The top ten pesticide consuming countries in the world are China, the USA, Argentina, Thailand, Brazil, Italy, France, Canada, Japan and India. And European countries such as Italy and France already use a lot less than the big three.
To give this some context, among the top three pesticide users, China uses nearly 5x as much as the US, which in turn uses 1.5x the use in Argentina. And the top three use c. 75% of global demand.
Distributed Energy – building community consent is key
Main points of the story as published
Rural Australia has had a tough year, with floods, drought and fires. As climate change threatens to bring more severe and frequent extreme weather events, how can we help future-proof rural communities? One way is to build electricity systems that can withstand natural disasters. That was the starting point of a three-year project being undertaken by the Australian National University.
The project has now reached a milestone: selecting eight sites where microgrids – small, self-sufficient energy systems – might help boost disaster resilience. All sites selected were found to be vulnerable to natural disaster – for example, they had high residential occupancy rates (as opposed to holiday lettings), or lots of elderly people, or those with disability. These communities also had high rates of rooftop solar installation.
How is the approach of this study different ? As the climate emergency worsens, there is too much at stake to adopt the “decide, announce, defend” method of technology roll-out. Under the previous Federal government, Australia’s approach to emissions reduction was narrow and technology-centred. By contrast, community-based approaches will better build the widespread support needed to accelerate climate action.
Such an approach requires proponents and funding bodies (both government and private) to genuinely listen to communities’ needs – right from the early design stage. If local circumstances are not considered, a trial can be plagued with problems. These can include technical systems that do not address the community’s real problem, such as power outages at crucial times, confusion and cost overruns for local installers and supply chains, disgruntled trial participants who rightly reject or abandon the new technology.
Our take on this
We accept that some of the solutions to the climate change transitions need to be at utility scale, so transmission networks, massive wind and solar farms, and network scale grid stability. But the way the technology is changing means that some solutions will also be very local. Decentralised electricity systems can be a viable and productive contributor.
Yes, this type of approach is not as scalable. But, for those regions with a weak grid and a dispersed, mainly rural/small town population, linked microgrids could end up being a cost efficient solution, saving on grid strengthening capex. We argue that the nature of the electricity transition is such that local buy in is going to become increasing important.
This project in Australia is not the only example. This 2022 study looked at projects across Europe, concluding that "microgrids can not only bring lots of benefits to the community but also support achieving the national clean energy targets, mitigate greenhouse emissions and ultimately provide a healthier environment for society". And, with a similar approach, organisations such as Ripple Energy (compliance note : this is not an endorsement) are building business models based around community involvement and buy in.
As an investment class, this is not for everyone. But for those asset owners who want to follow a "place based approach", this is a concept that is worth exploring further.
Built environment - low carbon glass
Main points of the story as published
In addition to the challenges of sustainably producing high-quality glass at optimised costs, the glass industry is facing new paradigm-shifting challenges: carbon-neutrality and circularity. Achieving low carbon glass production is the priority challenge of the glass industry for the years to come. Many governments and companies have announced clear targets to reach carbon-neutrality in the coming decades. The glass industry must play its part.
The path to the industrial production of carbon-neutral glass still faces many obstacles, the most significant one being the switch to renewable energy sources. Given the complexity of the float glass production process, the technical challenges that these new fuels will create will be significant.
Among the most important are increased exudation and corrosion, the creation of different atmospheric conditions in the refractory (where the float glass is produced), and the potential need for more advanced materials (including composite ceramic shields). The challenges look solvable, but as an industry cost may end up being the driving factor.
Our take on this
Looking back I realised that over the last year or so I had talked a fair bit about green steel and low carbon cement, but very little about glass. Part of the reason is that its emissions impact is relatively small, around 86 million tonnes of CO2e (all glass manufacture), compared with c. 3.6billion tonnes from Iron & Steel. As this article in Nature explains, its a material that can be recycled almost infinitely without losing any of its properties. But even taking this into account, its not an easy win.
Going back a step, flat glass manufacture is energy intensive due to the high temperatures required to melt the raw materials, including sand, soda ash, limestone and dolomite, as well as the fact that kilns have to run continuously for up to 50 hours. Temperatures of around 1,600oC are needed to make float glass (which comprises 80% of all flat glass) and minimise defects that can alter light transmission and transparency. So, similar in many ways to the challenges cement faces.
Burning fossil fuels to heat furnaces accounts for 75–80% of CO2 emissions in the sector, so as the article above discusses, switching to a carbon neutral energy source would represent a significant reduction. But, the alternate fuels all have challenges, as a study by Glass for Europe (a trade body so normal caveats apply) points out.
The two main contenders - electricity and hydrogen – are being tested and developed by many players in the industry. Hydrogen, through a modified gas grid, would require furnace technology to be adapted, and the flames produced would provide relatively low radiation heat transfer. These are similar to the challenges being worked on to allow the use of hydrogen in electricity generation.
Electric melting is already available for small furnaces, with a capacity of under 200 tonnes a day. So, the industry needs to demonstrate that the technology can be scaled up for large furnaces, such as those used in float glass production. Biogas is technically possible, but the limited quantities currently available make it less feasible. And other competing uses might be prepared to pay more.
And then we have recycling. In the case of glass, it will help a bit, but its not even close to being a total solution. Some of the raw materials required can be replaced with crushed recycled glass, known as cullet. When cullet is melted, no CO2 is released. And the furnaces don’t have to burn so fiercely to melt glass as to melt the raw materials, offering further carbon savings. According to the European Container Glass Federation (FEVE), 10% more cullet in a furnace lowers CO2 emissions by 5% compared with making glass entirely from raw materials.
As with most forms of recycling, some caveats apply, in this case fairly big caveats. Flat glass cannot contain impurities, unlike glass used in many other applications such as packaging. So it’s not possible to melt down jam jars to get a window pane. But flat-glass cullet can be used to make more flat glass. What needs to happen is for countries to stop sending flat glass to landfill sites, and to make glass recycling mandatory.
Transport - two & three wheelers are more important than you think
Main points of the story as published
EV sales are surging driven by a combination of policy support, improvements in battery technology, more charging infrastructure and new compelling models from automakers. The technology is also spreading to new segments of road transport, including buses, vans & trucks and 2/3 wheelers.
China still dominates the global EV market, but sales are rising quickly elsewhere. Full EV's are pulling ahead of plug-in hybrids, and the gap is forecast to widen further in the years ahead. As a result, battery demand is rising sharply, putting pressure on the supply chain for materials like lithium, cobalt and nickel.
More and more charging points are being built, but each country will have its own optimal mix of home, workplace and public chargers. And finally, EVs of all types are already displacing 1.5 million barrels per day of oil usage, equivalent to about 3% of total road fuel demand.
Our take on this
BNEF reports are always worth a read, even if you don't always agree with all of their conclusions. The data point I found most interesting in this report was about the displacement of oil demand by EV's. Apparently vans & trucks displace nearly 60,000 barrels per day, then up to passenger cars at nearly 200,000 barrels, buses at just over 230,000 barrels and then a massive step up (and we mean massive) to two & three wheelers (scooters and small motorbikes to you and me) at over 1m barrels per day. So scooters currently reduce oil use by twice as much as vans, buses and cars combined.
We talked about this topic back in our Feb 25th blog in the context of battery swapping for electric scooters. But the general point is worth repeating. To most western countries, EV's are about cars and vans, and maybe buses and some trucks. But in the developing world, especially Asia, EV's also mean two and three wheelers.
According to the Redefining Energy podcast on this topic (no 76), there are 500m two wheelers in Asia, and 60m are sold every year. As someone who spent some time in Asia, the success of this format is not a massive surprise. Small scooters are very popular, offering a cheap & easy way of getting around.
According to Market Prospects, the world’s top 10 motorcycle and scooter markets are in order: China, India, Indonesia, Vietnam, Brazil, Thailand, the Philippines, the United States, Pakistan, and Taiwan. And Meticulous Research estimates that the market is expected to record a CAGR growth of 28.9% from 2022–2029 to reach $ 625.03 billion by 2029 or c. 266m units.
To us, the key lesson from this is look outside our own direct experience.
One last thought
As an ex credit person, I perhaps think more about what it is the debt markets are sometimes trying to tell us. This report follows that theme. The world’s first biodiversity-adjusted sovereign credit ratings show how ecological destruction affects public finances – driving downgrades, debt crises and soaring borrowing costs. This is all in a report by a team of economists led by the Bennett Institute for Public Policy, University of Cambridge.
Projected losses of plant and animal species may already be set to cause major sovereign downgrades, with China and Indonesia on course to drop two notches as early as 2030 under a business-as-usual scenario. And if parts of the world see a “partial ecosystems collapse” of fisheries, tropical timber production and wild pollination – as simulated by the World Bank – then more than half the 26 nations studied would face downgrades, with India falling four notches and China plummeting by six on the 20-notch scale.
Regular readers know that one of my obsessions is the risk of a disorderly transition - with governments etc taking too little action, and when they do acting too late. Much of what you read on this topic is about the damage to the environment and the impact on people. But if you think a bit deeper - a disorderly transition could also materially damage our wealth. Unlike Stuart Kirk, we should care, even if its for selfish reasons, that "Miami is six metres underwater in 100 years time"
Some process and semi legal stuff . 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 (asset owners, asset managers and companies). We are really keen that you read the original report or article. Lots of people out there are doing some really interesting and valuable work and part of purpose of these blogs is to bring this to your attention, while at the same time giving it context.
The focus is on news flow that we think should change the markets perception of the investment risks and opportunities coming from the big themes around the climate transitions and ESG. So not the place to come to for news about the latest ESG or net zero promise, or that has already been well covered in say the FT. Our approach is unashamedly long term, this is a multi decade investment theme. So we ignore short term noise.
Finally, and very importantly, nothing in this blog should be construed as providing investment advice. For company and/or fund specific investing advice and recommendations, you need to look elsewhere. In more formal language, this blog does not constitute Investment Research as defined in COBS 12.2.17 of the FCA’s Handbook of Rules and Guidance (“FCA Rules”).