• Steven Bowen

Sustainable Investing weekly blog: 1st July 2022 (issue 38)


Story tags for this blog

Paying for renewables, the environmental impact of rice and its possible solutions, are we prepared to pay for the decarbonisation of shipping, and the importance of non financial motivation & how it impacts our thinking on sustainability communication

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 German removal of green levies from retail electricity prices. Next up, in Agri-Food we examine the environmental impact of rice, and some of the research that might help reduce this. Then in Transport, we cover some of the challenges in decarbonising shipping. Finally, in our One Last Thought, we cover the importance of non financial incentives, and how we should think differently about communicating sustainability issues.

There will be no weekly blog for the next week or maybe two. This is partly as we add new platforms (substack and LinkedIn Newsletters - being cautious as things always go wrong in a tech change over) but its also to allow us to shift the blog focus. This is in response to the really useful feedback we have had. Going forward, the blog will help you build a better understanding of what you can do with your investments to address some of the most pressing challenges our society faces, while still earning a fair financial return. The shift is subtle, but we will be writing more on the big investment themes that we believe will make a real difference. Together with our Bigger Picture blogs (& future presentations) the stories in the weekly will build up a picture of the multitude of actions we as investors can take. More on this when we relaunch later in July.

Important - 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”). See the end of this blog for important terms of use.

Top story : Germany stops funding renewables via power bills


Germany ends landmark renewables levy (Clean Energy Wire)

Main points of the story as published

  • On 1 July, Germany marks the end of its landmark renewables levy on consumer power prices. The surcharge helped to spur the growth of wind and solar power capacity for more than two decades but it has also been criticised for contributing to Germany having some of the highest household power prices in Europe.

  • Electricity users from now on will no longer pay the levy and from now the government will support renewable power with the proceeds from emissions trading and the state budget.

  • Although the end of the surcharge will give some relief to households, the intended effect of making electricity more attractive for the use in mobility and heating, will likely be eaten up by the drastically rising prices for energy - as a fallout from the Russian war against Ukraine and the ensuing fossil fuel crunch.

Our take on this

  • Why is this important ? In the aftermath of the invasion of Ukraine, and the related surge in gas prices, political and press attention has focused on the high level of retail electricity prices and the contribution of the so called green levies. Lets be clear, the German policy change has been flagged for some time, so the timing is coincidental.

  • So, how much difference would removing these taxes actually make. Not as much as you might think. In Germany, the chart above shows that the renewable subsidy (pale blue) made up c. 10% of consumer bills. In the UK, despite some politicians claiming that green levies add 25% to household energy bills, the actual number is much smaller at around 9% of a typical UK electricity bill (ex social costs). And while we don't have detailed data for other European countries, 2H 2021 figures suggest that outside of a small number of the high electricity cost countries (Denmark, Germany, Spain and Portugal), the percentage impact of these levies is small. So the move is more about the longer term direction of policy.

  • However, this doesn't make the shift any less important. In our view, while expecting individual electricity users, especially households, to pay the costs of subsidies for renewables and other green investment might have been defendable at the start, it makes less and less sense as renewables make up more of the electricity supply.

  • This is partly about fairness. We get the argument that says as the price of a good goes up, people tend to consumer less of it. But, for very practical reasons, we tend to favour the counter argument that says - if the shift to low carbon electricity generation is something that is good for society as a whole, surely subsidies should be paid for out of wider government taxation. This fairness argument has even greater weight in Germany, where many energy intensive industries were actually exempt from the levy.

  • But its also about effectiveness. Germany has had very high electricity prices for many years now. According to data from the European Union, in the 2nd half of 2021, Germany had the second highest retail prices in the region, after Denmark. And we note that retail (household), electricity prices in Europe are much higher (and we mean a lot higher) than the average in the G20. And yet despite these high costs, German household electricity consumption has only fallen slightly from the last 2010 peak.

  • And finally, its an argument about public support. Regular readers will know that we go on endlessly about the need to positively motivate public support for amny transition investments. Some commentators argue that the Net Zero transition can be economically positive, and by implication, largely pain free. We don't agree, at least not over the next decade.

  • We largely agree with the McKinsey analysis that says "even under the relatively orderly scenario , the economic transformation will be universal, substantial, and often front-loaded, with sectors, geographies and communities, and individuals facing uneven exposure".

  • We don't argue that these front loaded costs are not required, but we believe its important to be honest with the public about their impact. Rapidly replacing most of our existing electricity generation and transmission infrastructure, that was built up over multiple decades, with a entirely new system, will involve material up front costs.

  • Despite their high electricity prices, public support for green policies in Germany has remained strong, with 87% of respondents to a recent survey (post the Ukraine invasion) saying that speeding up the expansion of renewables was the right move. But, even with this, the government-appointed expert commission tasked with monitoring the progress of Germany’s Energiewende has regularly warned against complacency. While the general acceptance of wind and solar power expansion or the need for new power lines remains high, they noted that much of this support is passive. Given that this is not a quick fix, the government needs to guard against a fading citizen acceptance of key energy transition infrastructure projects.

  • Finally, if removing the green levies will not materially change retail prices, what might ? Its a blog subject in itself, but this article, from Professor Grubb at the UCL Bartlett School of Environment, Energy & Resources, is worth a read as it highlights, in a non technical way, the need for reform of the electricity pricing system. This will not happen overnight, so its not going to help in the short term. But industry opinion is growing that change has to happen, as we get more low marginal cost renewables in our generation mix. If done right, this could cut our bills.

Agri-food – we need to talk about rice

Credit - Magdalena Love: Unsplash

Methane, water pollution - rice farmers face trade-offs (Greenbiz - Foodstuff)

Main points of the story as published

  • Rice is the world’s most important crop. Over half of the global population relies on rice as their daily staple food; over a fifth depends on rice cultivation for their livelihood. This is all according to the International Rice Research Institute and the U.S. Department for Agriculture.

  • But, rice production is also responsible for large amounts of methane emissions. According to the World Resources Institute, they equate to about 10 percent of global agricultural GHG emissions. And, rice growing consumes 40 percent of global irrigation water.

  • The good news is that promising work on sustainable rice farming is happening in Arkansas and other states in the Lower Mississippi River Basin, home to two-thirds of U.S. rice fields, according to the Agricultural Research Service.

  • Most rice grows in flooded fields, requiring large amounts of irrigation water. When the water covers the soil, it prevents oxygen from passing through, creating perfect conditions for bacteria that break down organic matter and emit methane.

  • Benjamin Runkle, associate professor at the University of Arkansas, has been researching techniques that reduce water coverage, allowing soils to breathe, and hence cutting emissions. The method he’s most optimistic about is called alternate wetting and drying (AWD). Instead of continuously flooding fields, farmers let irrigated areas dry up for one or two days before pumping in the next round of water.

  • "Our measurements show that you can reduce methane emissions by 64 percent without impacting yield when it’s done right," Runkle said. At the same time, water use falls by 20 to 40 percent.

Our take on this

  • Why is this important ? There has been a rising level of research on the challenges faced by agriculture, including water use and methane emissions. We talked in earlier blogs about methane emissions from livestock, and the increasing risks of drought. Rice is one of the "elephants in the room".

  • Agriculture is what we think of as an Olive (the colour, not the fruit) industry, somewhere between green renewables and dirty fossil fuels. Why Olive ? While agri-food is both a cause of many of our challenges (emissions, water use, fertiliser use, pollution etc), and one of the most high profile potential victims of the impacts of climate change, it also has the potential to materially contribute to solutions.

  • Part of this comes from natural carbon capture potential, while more comes from practices such as regenerative agriculture. Finally, there is massive potential from reducing food waste and from new agricultural practices. Which is where rice comes in. We think its important that when we think about agri-food, we remember that its really important that we continue to feed the world. Some of the livestock issues could be helped by shifts in diet, but the rice problem is more challenging.

  • Which is why the research being carried out in this study and elsewhere is important. There are some real benefits possible, but as well as the technology, we need to think just as hard about the trade offs and the barriers to adaption (not just in the US but across the developing world as well). For those investors looking for long term themes, this might not be an obvious one, but could be both financially and environmentally positive.

Transport - could decarbonising shipping actually be cheap ?

Credit - Dunstan Woodhouse: Unsplash

Most shipping companies have no decarbonisation pledges (Maritime Executive)

Main points of the story as published

  • With the European Union nearing a final decision on its maritime emissions trade scheme, and other countries increasing their focus on decarbonization, pressure is intensifying to achieve meaningful emissions reductions from the global maritime industry. Yet, despite increasing scrutiny of the industry, new analysis shows that only just over a third of the major shipping companies have clearly expressed targets to get to net zero or made meaningful decarbonization pledges.

  • Saying that shipping is lagging behind other major segments, the Maersk Mc-Kinney Møller Center for Zero Carbon Shipping, which published the assessment, calls its report a serious wake-up call for the maritime industry.The state of decarbonization in the maritime industry shows that while real progress has been made, there is a long way to go for the industry to reach net zero within the limited time left to transition,” write the analysts from the independent research and development center.

  • With 100,000 ships consuming around 300 million metric tons of fuel annually, analysts estimate that the shipping industry accounts for around three percent of global carbon emissions.

Our take on this

  • Why is this important ? First up, 3% of global carbon emissions is a meaningful number. Perhaps more importantly, as the article above highlights, and as reported by the European Union "to date, no adequate measures are in place, either at the global level or in the EU, to achieve the necessary emissions reductions for the maritime transport sector". In the meantime the global industry body, the IMO, keeps talking, but seems to be making little progress.

  • To be a bit fair, this is a challenging problem. In a recent report on the alternative fuel maturity pathways, the Maersk McKinney Moller Center for zero carbon shipping highlighted that no alternative fuels (yes, that's none at all) have solutions to all of the operational factors.

  • Key factors they examined included feedstock availably, fuel production, fuel storage/logistics, onboard storage, safety, vessel emissions and regulation. Only e-ammonia was available in sufficient quantities, but it failed on pretty much all of the other criteria. Some of the other possibilities, such as hydrogen based, bio-methane and bio-methanol, look better, but its not just going to be technological progress that sorts this out. This 2021 report highlights the importance of contributions from policy and regulation, the availability of low cost financing, and perhaps most challenging, customer willingness to pay for decarbonized shipping services.

  • On this last point, that of cost, a recent report from the think tank, Transport & Environment, suggested that tougher green house gas emissions targets might not add as much to the cost as some groups are suggesting. They assessed the likely cost impact of increasing the overall 2030 fuel greenhouse gas (GHG) intensity target under FEUM from -6% to -14%, mandating an additional 6% sub-quota for renewable fuels of non-biological origin (RFNBOs, or e-fuels) and incorporating a well-to-wake (WtW) CO2 equivalent emissions into the maritime ETS.

  • Their analysis suggests this would only add between €8.7/TEU and €13.4/TEU to a typical China to Europe voyage. Putting this in more practical terms its 0.3c on a pair of shoes and up to 27c on the cost of a fridge. Puts things in perspective doesn't it.

  • Its important to remember that its not just new fuels. We can do a lot with vessel design and steaming practices. And maybe bringing production back on shore rather than out sourcing ?


One last thought

Does money really sustain motivation ? (Developing Education)

Despite the massive news this week from the US Supreme Court, we have taken the view that this news has been well covered in detail elsewhere

This interesting article highlights which behavioural changes tend to be influenced by financial incentives, something that is seen as very important in the investing industry. It turns out that the evidence is mixed. Money (extrinsic motivation) is good to get "people to turn up", so for instance encouraging science and maths teachers to stay in education. But, in many areas, and over longer periods of time, it seems to crowd out the more important intrinsic motivation. This type of motivation is the key to why we try hard to make things better, especially for others, even in the face of massive challenges.

For example, this World Bank study showed that a salary increase for teachers in Indonesia led to improved teacher wellbeing, but no measurable improvement in their performance after two years. And initial improvements in absenteeism disappeared within three years. Regular readers will remember the term Intrinsic Motivation from our blogs about the work of Sharath Jeevan. This YouTube video, featuring April Xioajing Xu, from the University of Tennessee, discusses how this relates to how people think about climate and sustainability issues, worth a watch.


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.

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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”).