Sustainable Investing weekly blog: 3rd Dec 2021 (Issue 18)
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.
I am writing this the day after my covid booster, so if it becomes incoherent, I apologise. This weeks top story picks up on an apparent shift in policy from the EU toward the future applications of green hydrogen, with a move away from hydrogen cars. We follow up with a piece on the upcoming SPAC deal for Voltus, one of the leading distributed energy companies in the US, plus in Agtech, we examine the rise of the use of insects as protein in animal feed. We finish with a guest story from our human rights expert on why we should care about the UN Guiding Principles. Our last thought highlights the potentially important role that whales could play in carbon reduction (& why our focus on forest may be slightly mis-placed).
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.
This week’s top story : Is the EU finally understanding the limitations of hydrogen ?
Main points of the article as published
Fuel-cell cars and trucks once looked to be the future of green mobility, but with electric cars now set to dominate the market, the EU’s hydrogen joint undertaking was rebranded this week to signal a shift in priority towards the production of low-cost green hydrogen from electrolysis. Rather than transport, the focus of the EU’ s hydrogen strategy today lies on heavy industries like steelmaking and chemicals, which cannot fully electrify and need liquid and gaseous fuels as feedstock or for high-temperature heat.
This change in priority is reflected in the third iteration of the European Commission’s hydrogen joint undertaking, launched on Monday (29 November). Formerly called the “Fuel Cell and Hydrogen Joint Undertaking” (FCH JU), it has now been renamed the “Clean Hydrogen Partnership”. The new public-private partnership objectives remain lofty but they have become less concrete: to “produce clean hydrogen at ~€1.5-3/kg” and to reduce the distribution “costs to less than €1/kg at scale,”. This differs from an earlier target, which was to “bring the cost [of hydrogen] below €1.8 per kilo by 2030”.
Gniewomir Flis, hydrogen expert at German think-tank Agora Energiewende, says “the change of name reflects the shifting of priorities away from mobility towards the less controversial no regret applications”. According to the think tank, no regret applications for hydrogen are in industrial use as reaction agents and feedstock, long-haul aviation, maritime shipping, back-ups for renewable energy and in large-scale heating grids.
Our take on this
Writing about green hydrogen is always a bit of a balancing act. Our view has always been that (sadly) the potential has consistency been over stated. This is not to say that there is not a real job to do – just replacing the existing uses of “dirty” hydrogen is a c. 70m tonne pa market, that would cut GHG emissions by c. 830m tonnes pa. On top of this we can see long term potential for applications in hard to decarbonise transport, although our analysis suggests long term potentially means well into the 2030’s. Plus we see (again long term) applications in making steel, and potentially in generating high temperature industrial heat.
The “easy bit” of the analysis is where green hydrogen really has only a limited chance of being economically the best option. In our analysis this is hydrogen cars (where EV’s are much more likely to dominate) and home heating. In what is rapidly becoming the new benchmark for discussions around the applications of hydrogen (the clean hydrogen ladder V4) Michael Liebreich has hydrogen fuel cells cars in the lowest rung (least likely to succeed), while home heating is only one rung higher. This is consistent with the “no regret” hydrogen applications referred to in the Agora Energiewende report (“12 Insights on Hydrogen” ).
So for us, the apparent dropping of fuel cell cars (and probably domestic home heating )from the programme is a sensible move. It still raises some serious economic questions – if green hydrogen is to cost $3/kg (high end of the range) to produce plus $1/kg to transport (by 2030), this makes it very uncompetitive with traditional fossil fuel hydrogen. So a lot will ride on continuing to get costs down further in the 2030’s, plus either some substantial continuing subsidies and/or the successful implementation of the proposed carbon border adjustment mechanism (we are not allowed to call it a tax –found here.
The bottom line for us is that investors should not rely on politicians to identify if green hydrogen can be a viable commodity, they just have too many conflicting objectives.
Electricity grids – could the Voltus SPAC deal be the first of many DER floatation’s ?
Main points of the story as published
Voltus Inc. is going public by combining with a special-purpose acquisition company in a merger that values the electricity-market technology startup at about $1.3 billion, Voltus & Broadscale Acquisition Corp said. Based in San Francisco, Voltus uses software to manage small, decentralized electricity systems known as distributed energy resources for customers such as Coca-Cola Co. and Home Depot Inc.
By partnering with grid operators in the U.S. and Canada to connect DERs to larger markets, Voltus says it saves corporate customers money and delivers more reliable and sustainable electricity. Chief Executive Gregg Dixon compared Voltus to home-rental firm Airbnb Inc. in that Voltus also makes each DER a financial asset, allowing customers to sell their excess electricity back to the grid. Some analysts say widespread adoption of DERs will be critical to reducing the world’s dependence on fossil-fuel-consuming power plants and decarbonizing the economy.
As part of its SPAC merger, Voltus is raising a $100 million private investment in public equity, or PIPE. PIPE investors include Equinor Ventures, the startup investing arm of Norwegian energy giant Equinor ASA, and Ev Williams, co-founder of Twitter Inc. and Obvious Ventures.
Our take on this
Why are we highlighting yet another SPAC, this time a fairly small one (at c. $1.3bn). The answer is in how important we think this technology could be to delivering much higher levels of renewable electricity generation. In simple terms, the more renewable generation we put into a grid, the tougher it is to keep it stable. Note, we say tougher, not impossible as some commentators suggest. A lot of the focus has been on wind & solar, understandable given how much more we need of each if we are to achieve our green energy targets. What has got less profile, perhaps because the story is not so simple, is the massive requirement to invest in our electricity grids, if this planned renewable electricity stands any chance of actually coming on stream. Grid stability support can come from four main technologies – grid reinforcement (including smarter software), electricity storage (mainly Li Ion batteries for <4 hours), interconnectors & demand response.
Voltus sits in this last group. They combine the capacity of thousands of electricity consumers (mostly industrial and commercial – but with the the potential to scale up in microgrid’s, smart thermostats, solar plus storage and EV’s), that are willing, in return for an availability fee, to curtail their electricity consumption when demand exceeds supply. This could be when an electricity generating station goes down unexpectedly, or when demand surges. By having the ability to reduce demand to keep the system in balance, the grid operator can save material amounts of money., normally by not having to contract peaking supply.
A good example of this (not a Voltus one), was in Ireland only a week or so ago (coverage in the journal.ie). Here two major gas fired electricity power stations — one in Dublin and one in Cork — unexpectedly disconnected from the national grid within five seconds of each other late on Monday evening, resulting in the loss of 820 megawatts of power. This was the equivalent of 20% of the total national demand for electricity at that time.
What happened – well pretty much nothing. Despite this being a potential “black out generating event”, the sudden loss of electricity generation “did not result in loss of electricity supply to any customers because the power system held up very well for this exceptional event.” Key to that, the spokesperson said, were the contingency measures that individual energy companies have put in place in recent years including battery power storage and demand-response technology. The latter allows EirGrid to communicate with certain customers and ask them to reduce their electricity consumption temporarily to alleviate pressure on the grid. These contingency measures kicked in automatically on Monday, which meant that no customers lost power during the incident, the spokesperson said.
Our expectation is that this is going to become one of the key technologies that will be used to maintain grid stability as we increase the percentage of renewable generation assets. So this is a SPAC launch that is really worth watching.
Insect protein – demand growth accelerating ?
Main points of the story as published
UK supermarket chain Morrisons is replacing soya-based chicken feed with insects at 10 of the 60 farms that supply it with free range eggs. The insects will be produced on-farm in container-based, fully-automated indoor farms, fed on waste from a Morrisons fruit and vegetable processing facility. The chickens’ diet will be supplemented with British-grown beans, peas and sunflower seeds.
By switching feeds, carbon-neutral free-range eggs will help Morrisons reduce its Scope 3 CO2 emissions; it has set a target of being completely supplied by net-zero British farms by 2030. Bought-in feed accounts for more than 85% of an egg’s carbon footprint. Soya is a particularly problematic feed for many livestock farmers given much is sourced from deforested land in Brazil.
Our take on this
Although insects are part of many livestock animals’ natural diet, intensive farming systems have favoured soya-based feeds, partly because of regulation (the EU banned the use of processed animal protein in animal feed in 2001 post the mad-cow crisis) and partly cost (insect protein costs multiples of fishmeal and soya protein).
The use of soya and fishmeal however creates several sustainability issues. Soya-based feeds tend to have high embedded CO2 emissions reflecting land-use change. (salmon farmer Bakkafrost, for example, calculates that vegetable feed ingredients account for 36% of its total Scope 3 emissions.) Brazil accounts for one-third of global soya-bean production and 45% of global soya exports, almost all of which is destined for animal feed. Note – we addressed fishmeal in last week’s blog.
Insects are emerging as an important potential source of feed for several livestock including chickens and fish. As well as being part of their diet in the wild, insects have a better environmental profile (lower CO2 emissions, water and land use etc) while research suggests insect-based feed leads to faster growth rates, stronger immune systems and better animal welfare including reduced behavioural problems. Insect production also lends itself to indoor farming technology, an important albeit capital-intensive agtech, and makes efficient use of food waste streams (one-third of global food production is lost or wasted).
With regulation becoming more favourable (the EU having approved the use of insects in poultry, pig and aquaculture feeds), the main impediment to wider adoption is cost. Insect production is sub-scale (just 500 tonnes are currently produced in the EU) resulting in high costs of c. US$4-6,000 per tonne compared to US$1-2,000 per tonne for fishmeal over the last five years. As production scales, unit costs are expected to fall materially. The IPIFF, an EU trade body, estimates EU insect production will reach 1m tonnes by 2030 generating US$2bn in revenues (implying a more competitive cost of US$2,000 per tonne).
Social and Legal factors
Photo by Mahosadha Ong on Unsplash
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. This week she looks at the likely developments around the UN General Principles (UNGP’s). Before handing you over to Kristina, I wanted to give this debate some context.
For some investors, the social side of investing is only relevant when it becomes a “cost of doing business” ie when rules are breached – so via fines or occasionally reputational damage. They see “ethics” as being something that others (mostly politicians) should address. Moving along the continuum, another group of investors see social values as something that gets picked up in an ESG score, with the monitoring and evaluation effectively outsourced.
If you sit in ether of these camps, you probably find this section of the blog interesting but not really relevant to your investment decisions. In a way, this section is largely written for the next group on the continuum, those who worry about future risks AND who see social factors as being an important part of their investment appraisal process – either because they see them as drivers of long term value creation and/or because they want to aid their clients in aligning their investments with their values (as well as generating a fair financial reward).
We think such a group wants to not only keep up with current regulation, but also get ahead of the curve. Our view is that this last group is growing fast. One future for active management is to make this process of blending sustainability with financial returns more of a partnership, a process that should benefit both asset managers and asset owners (a topic we will keep coming back to). Enough from us, over to Kristina.
As part of its mandate to promote the UNGPs, the Working Group on Business and Human Rights (the WG) launched a project in July 2020 to take stock of implementation of the UNGPs to date and chart a course for action in the decade ahead. This is known as the “UNGPs 10+” or “next decade BHR” project. In its report to the Human Rights Council July 2021 (A/HRC/47/39) the WG stated that : the plan was clear: “establishing universally applicable and yet practical Guiding Principles on the effective prevention of, and remedy for, business-related human rights harm”, knowing full well that the unanimous endorsement of the Guiding Principles on Business and Human Rights by the Human Rights Council would, “by itself … not bring business and human rights challenges to an end”.
Instead, the endorsement of the Guiding Principles would mark the end of the beginning: by establishing a common global platform for action, on which cumulative progress could be built, step by step, without foreclosing any other promising longer-term developments. Designed as a foundational framework to support further evolutionary progress, the Guiding Principles are now 10 years old – and its worth taking stock of where we are now.
Some of the findings of the review included: while the call to declare traditional “corporate social responsibility” dead might have been presumptuous considering the number of awards still given every year, the Guiding Principles have clearly articulated the different but complementary roles of States and business. They have reminded States of their human rights obligations as they relate to business and clarified the responsibility of businesses themselves to respect human rights, even when States may not live up to their own duties. The past decade also highlights that, fundamentally, the “governance gaps” that created the need to develop the UNGPs still allow too many instances of business-related abuses across all sectors and regions. Further, the lack of policy coherence within States but also in business and in multilateral institutions and forums remains a key challenge.
Looking ahead, the mandatory human rights due diligence wave and the increasing focus on effective regulation offer opportunities and drivers. The onus is on States to develop effective laws and regulations, but also to use the wider range of policy tools – a “smart mix” – to incentivise responsible business and due diligence. In parallel, there is a need to leverage the financial sector and the momentum of the increasing focus of investors on environmental, social, and governance (ESG) factors, though major gaps remain also in this sector. There is a need to move beyond leaders and for wider investor action to respect human rights.
The WG clearly states that “overall integration of human rights due diligence into projects financed by development finance and international financial institutions remains low, including as a tool for managing risks to people in mega-infrastructure projects” – it shows how effective HRDD is still very much a new concept which many private actors struggle to perform – and perhaps even to start, not fully understanding the how nor where to start. However, as the WG also notes during the last ten years there has been a growing understanding of the need for legal requirements based on the Guiding Principles.
Such “hardening” of soft law instruments is a normal evolution of norms, evolving from a practice of the few, to a broader uptake, to a soft and then a hard rule. While these evolutions are expected, they are usually very slow. The fast emergence of a broad consensus on the need for legal requirements based on the Guiding Principles – from civil society, union organizations and national human rights institutions, being joined by significant numbers of investors and business themselves – is thus particularly noteworthy, with mandatory human rights due diligence efforts developing at the national, regional and international levels. There is no doubt that effective HRDD is going to be a necessity for investors and companies a like – EFFECTIVE being an operative word!
One last thought
It appears that when it comes to saving the planet, one whale is worth thousands of trees. Many proposed solutions to global warming, such as capturing carbon directly from the air and burying it deep in the earth, are complex, untested, and expensive. What if there were a low-tech solution to this problem that not only is effective and economical, but also has a successful funding model? An example of such an opportunity comes from a surprisingly simple and essentially “no-tech” strategy to capture more carbon from the atmosphere: increase global whale populations. The carbon capture potential of whales is truly startling. Whales accumulate carbon in their bodies during their long lives. When they die, they sink to the bottom of the ocean; each great whale sequesters 33 tons of CO2 on average, taking that carbon out of the atmosphere for centuries. A tree, meanwhile, absorbs only up to 48 pounds of CO2 a year.
A similar point can be made about peat bogs, these underappreciated features of our environment. Apparently peat bogs make up make up only about 3% of the Earth’s land mass, but collectively they store 30% of all land-based carbon. That’s twice as much as the world’s forests. Makes you think doesn’t it.