• Steven Bowen

Sustainable Investing weekly blog: 27th August 2021 (Issue 6)


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


The format 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.

If you would like to subscribe, please contact Dan at dan@sustainableinvesting.co.uk. For the next few weeks, we will focus on just four key stories, and then we will ramp up coverage. For now, the blog will be freely available but at some point we will shift to a public blog and a more detailed client ie subscription version.

This week our top story examines the possible implications of increasing desertification in Europe ; then we look at further moves by Shell into electricity supply,  a rapid expansion in green hydrogen electrolyser production and our BST-Impact partners examine the extra-territoriality concept implications of two recent US court cases

This week’s top story : Agriculture, Agtech and Natural Capital


Evolution of the blue water (irrigation) footprint of wine in Spain, 1935–2015. Source: Maria-Isabel et al 2020, reference below.


Spain counts cost of agribusiness in rising desertification (FT)

Main points of the story as published

  1. We normally try very hard not to use stories from the FT. Our view is simple, it’s so widely read by investors, at least in Europe, that by the time we write this on a Friday morning, its hardly news. But every now and then an FT story is such a good hook into what we think is a wider theme that long term investors need to think about, that we just have to use it. This week is such a story.

  2. As part of their climate capital series, the FT covered the threat of desertification to Spain. According to recent analysis, about a fifth of the country is already affected (Present and future of desertification in Spain). Desertification is the degrading of land in dry areas in such a way as to make it unproductive and infertile. The main cause is often human action. Over-farming and excessive irrigation erode soils and drains aquifers.

  3. The problem exists on a daunting scale in Spain, where agriculture has become more industrialised, and three quarters of the land is already dry or semi-arid. More intensive agriculture has helped Spain increases income from agriculture by almost 50% in the decade to 2020 (Europa factsheet) but at a price. Spanish agri-industry uses almost seven times as much water as all Spanish homes, (INE publication) and according to an EU study about a quarter of the countries aquifers are over exploited (Second River Basin Management Plans) .


Our take on this

  1. The extreme weather events seen in the US over recent years have got a lot of publicity (punishing temperatures in the US ), as have the apparent increasing incidence of floods and wild fires in Europe and elsewhere (we don’t plan on listing them, but its obviously a worldwide phenomenon). While these are shocking and important, there are other less obvious but arguably equally important (from a long-term perspective) impacts. These include biodiversity loss, water shortages, and the impact on the output of agricultural produce.

  2. Agriculture accounts for as much as 70% of the EU 27’s total water use. According to data from the European Environment Agency, (global climate change and its impact on European agricultural commodities) Europe is a major exporter of processed food and dairy products and, by and large, is self-sufficient in terms of the main staple foods such as grains (wheat, barley) and vegetables. However, the impacts of climate change put this at self-sufficiency at risk, with some serious long-term concerns about both water use (or overuse) and the impact of climate change on where crops can be grown.

  3. In this context it’s worth noting that Spain is Europe’s largest internal exporter (ie to other European countries) of fresh fruit and vegetables at c. 12.8m tonnes in 2020 (Spain’s fruit & vegtable exports 2020 ). Plus, looking at grains, findings from the Joint Research Centre’s PESETA IV project (Feyen et al., 2020) suggest that, up to 2050, grain maize yields will decline by between 1 % and 22 % in the EU, and wheat yields in southern Europe by up to 49 %.

  4. Spain is also one of the world’s largest producers of wine (at c. 30m – 40m hectolitres pa, production varying materially y/y ). As our featured chart above shows, the use of irrigation water by the Spanish wine industry has exploded since the mid 1990’s. (the Blue Water Footprint of the Spanish Wine Industry) Before then, most vineyards were rain fed. This shift has led to serious deletions of aquifer reserves. For instance, groundwater extractions in the region of Ciudad Real, where irrigation increased from 30,000 ha in 1970 to more than 200,000 ha in the 2000s, caused the depletion of the Western La Mancha aquifer. In the 1980s, this aquifer was officially declared as being overexploited.

  5. Clearly something has to give. While you may think of Spain as an extreme example (in the European context), these problems are already being experienced right around the Mediterranean (including especially in North Africa). Various solutions are possible. Agtech solutions can help, for instance the shift to drip irrigation has enabled some regions to dramatically reduce their water usage, notably in parts of Poland, Italy and Greece. We may need to accept that within a decade or less it may no longer be possible to grow certain crops where we do now (The environmental consequences of climate-driven agricultural frontiers), say fruit and vegetables in Spain, with material implications for both local economies, and retail and manufacturing supply chains.

  6. More dramatically, some researchers have pointed to the surge in demand for some products, including seeds and nuts. They suggest that a tax on consumption may be needed to suppress demand, something that may not yet be politically palatable, especially given the push to shift diets away from meat.

Electricity generation and distribution 


Shell to start selling residential electricity in the Netherlands (Netherlands News Live )

Main points of the story as published

  1. Netherlands News Live reported that Shell announced on Thursday that it had received a permit to sell electricity in the Netherlands. They are expected to start as a household energy supplier later this year. The plan is that they will initially purchase electricity on the free market, but that in the future, the company wants to supply electricity directly from its own wind farms. As a customer, anyone who drives an EV can receive a combined discount on an electric charging station for home and refuel at a station of the group. The oil company was in the race to take over Eneco, the Dutch supplier of natural gas, electricity, and heat, two years ago, but was beaten by Mitsubishi.


Our take on this

  1. Shell already provides electricity & gas (& broadband etc plus smart home services) in Germany and the UK (Shell Energy UK) . The UK business operates though what used to be called First Utility, which they purchased for c. $200m in 2018. The UK business has steadily grown over recent years. By 2021 it  had a 3.3% electricity market share and a 3.6% share of the domestic gas market. As of Q1 2021, Shell was the poorest performing of the medium sized energy providers with 1,652 complaints per 100,000 customers. However, this does represent a significant fall compared to their spike of 3,039 in Q4 2018. (Shell energy supplier review)

  2. Its not totally clear what the end business model will be for Shell, although we can see a pattern emerging. The retail supply business on its own is unlikely to be a big profit generator for the company, with the historic challenges of this sector being pretty well understood. What is more likely is that they will offer a one stop shop, so electricity and gas supply (plus heat where relevant) AND ad in home battery storage (via sonnen – acquired 2019), smart home technology, EV charging (with Newmotion – acquired 2017) and maybe even residential virtual power plants (again via sonnen).

  3. What we are watching closely is what happens next. Shell is already active in renewables (Shell – energy & innovation) and battery storage, and they recently acquired Next Kraftwerke, a wholesale VPP. The company has recently released its targets for being net zero by 2050, including the aim to deliver electricity to more than 50 million households by 2030. What is not totally clear is how they get there … can it be done organically, ie one project at a time, or are they looking at maybe accelerating progress by buying an electricity utility. Even with their E130bn market cap, a mid-sized European utility would make a material difference.

Electrification applications and alternatives


Clean hydrogen market set to double in 2021 (renewables now)

Main points of the story as published

  1. Renewables Now reports that the BNEF 2H 2021 Hydrogen market outlook shows 5 gigawatts (GW) of annual electrolyser manufacturing capacity should come online by the end of 2021, rising to 10GW by the end of 2022.  Furthermore, their analysis anticipates that manufacturing capacity could increase to 16 GW by 2024. This capacity will be more than enough to cover demand, leaving many factories underused and pushing down prices. 

  2. This is despite strong demand growth so far this year, largely on the back of China’s “surprising” growth in the first half of 2021. As a result, China is expected to account for 60%-63% of the world’s installed electrolyser capacity. However, large-scale demand for clean hydrogen is moving at snail’s pace, unable to keep up with electrolyser makers’ capacity expansion plans due to the lack of strong policies to stimulate and sustain consumer appetite. “We’ll need to see CO2 prices of at least $100 per ton by 2030 to incentivize hydrogen adoption. No country has such carbon prices today, and we forecast only three markets to reach that level before 2030: Canada, the EU and the UK.”

  3. The article also flagged the low cost of setting up electrolyser production in China, highlighting the relatively low capital and technical hurdles for building new factories for electrolyser production (at least for the most common alkaline technology). They quote BNEF research indicating that constructing a 1GW electrolyser factory could cost as little as 100 million yuan ($15.4m) in China.


Our take on this

  1. This article is consistent with our analysis, published back in July. In it we highlighted the potentially rapid ramp up in production (as manufacturers seek to gain economies of scale), the lower costs of production in China and the likely slower than hoped for pace of demand growth. While we see material potential for green hydrogen in applications such as replacing existing dirty hydrogen use in fertilizer plants and oil refining, we expect the market development to be slow and steady, not rapid.

  2. Most of the current large scale hydrogen applications and co-located alongside large client plants. Replacing them will need much cheaper renewable electricity and the process will be driven more by plant major refurbishment cycles as it is by electrolyser costs. Longer term we see markets emerging in steel production and other hard to decarbonise activities, but this will likely be a post 2030 event.

Social and Legal factors – BST Impact


Photo by Mahosadha Ong on Unsplash

Don’t get left behind on ESG – the law will get you (Forbes)

  1. Just a reminder. This news story and the views are from our partner BST-Impact. The team at Sustainable Investing is unqualified to discuss the legal implications of cases such as these. Fortunately, the BST-Impact team has many years’ experience with international human rights legislation. The importance of international human rights law to investors is becoming material, both from a risk perspective but also with regard to informed engagement. This blog comment is a short version of a longer article, which we will be publishing shortly as a stand-alone blog.  For follow up, consultancy and training etc, BST-Impact can be found here.

  2. In a follow on to last week’s blog, our partners at BST-Impact continue to dig into emerging theme of international jurisdiction, or more specifically the extra-territoriality concept of “exercising effective control”. This is going to become an increasingly important legal tool, and one that investors really need to understand. As the Forbes article says, we cannot be left behind.This is a slightly longer post, as they are starting to pull various strands together.

  3. In August 2021 the US District Court for Puerto Rico approved a $25 million settlement in Puerto Rico’s favour as part of a lawsuit the Commonwealth filed more than a decade ago against ExxonMobil Corp. and Esso Standard Oil Co. claiming the companies contaminated the island’s groundwater.  The order establishes that Puerto Rico will use the settlement to pay “to repair, restore, and replace injured or lost natural resources…or permanently protect the natural resources…or to investigate and remediate contamination in Puerto Rico, including surveillance, monitoring and treatment of the waters…or for paying oversight and administrative costs,” among other requirements.

  4. This follows the June 2021 decision by a Massachusetts Court. They declined to dismiss a Massachusetts Investor and Consumer Protection Action Against Exxon. In two decisions, a Massachusetts Superior Court denied Exxon Mobil Corporation’s (Exxon’s) motions to dismiss an action brought by the Massachusetts Attorney General asserting that Exxon systematically and intentionally misled investors and consumers about climate change. In the first decision, the court declined to dismiss the action on personal jurisdiction grounds or for failure to state a claim. With respect to personal jurisdiction, the court found that the Commonwealth sufficiently alleged that its investor deception claim arose from Exxon’s contacts with Massachusetts.

BST- Impact take on this

  1. In the past two weeks we have mentioned multiple different cases brought to court related to the impact on people of environmental damage. In two the Court reversed a previous decision of NOT hearing the case and in all the link to impact on societies is clear. The current developments in case law underlines that business enterprises of all sizes, sectors, operational contexts, ownerships, and structures, do have roles and responsibilities when it comes to respecting human rights.

  2. These roles and responsibilities derive from existing international norms, in particular the nine core human rights conventions and the principles concerning fundamental rights set out in the International Labour Organization’s various conventions.  The fact that enterprises are not direct duty bearers under international law does not absolve them of responsibility. It is by now well accepted that corporations should support, further and respect the protection of human rights and should make sure that they are not complicit in human rights abuses. This includes when that abuse is linked to issues which are at first glance environmental – such as the Puerto Rico case on pollute ground water – which is drinking water and irrigation for crops.

  3. The obligation to Protect for States has over the past years been extended beyond the territory of a State once there is “effective” control over the individuals affected by State action/non-action. This means that substantive obligations of States to regulate and control the activities of corporations operating in more than one jurisdiction consist of the duties to prevent abuses through effective policies, legislation, regulations, and adjudication.  In case of human rights violations as well as environmental damage both national, regional, and international monitoring bodies (courts and committees) have examined whether the State could reasonably be expected to act so as to prevent the infringement of the individual’s rights. This means that the State must act and adjudicate when corporations under its jurisdiction violates rights.

  4. The European Court of Human Rights has ruled on a number of environment-related cases, applying concepts such as the right to life, free speech, and family life to a wide range of issues including pollution, man-made or natural disasters and access to environmental information. In countries with weak governance institutions, which always has a negative effect on human rights implementation, access to justice, especially to international complaints mechanisms by victims can be particularly difficult if not impossible, resulting in the lack of accountability. This was the argument of the plaintiffs in the case mentioned last week against BHP and one of the reasons for hearing the case in the UK.

  5. The Massachusetts decision also shows an extra-territorial aspect – but from the other side of the coin, when they decide to go ahead against a company not domiciled in the Commonwealth – The Massachusetts long-arm statute, “sets out a list of specific instances in which a Massachusetts court may acquire personal jurisdiction over a non-resident defendant.” Tatro v. Manor Care, Inc., 416 Mass. 763, 767 (1994). The Commonwealth asserts specific jurisdiction under section (a), which extends “personal jurisdiction over a person, who acts directly or by an agent, as to a cause of action in law or equity arising from the person’s … transacting any business” in Massachusetts. This is more common in most jurisdictions though – that actions taken by any individual on the territory under the control of the State will be adjudicated there.

  6. There is no doubt that the extra-territoriality concept of “exercising effective control” as it has been developed for States over the past decades as well as using human rights norms as the basis for cases suing for damage and change on environmental issues is a new normal. This means that extra-territorial obligations will become ever more important (a subject we will keep coming back to in future blogs).


One last thought

There are less and less places to hide on ESG and sustainability

Deutsche Bank AG’s asset-management arm DWS Group slumped the most in almost 18 months after authorities in the U.S. and Germany began a probe into allegations that the firm exaggerated the environmental or social credentials of some ESG-labeled investment products.