Sustainability, Clean Energy, Recycling & ESG

The exhibit below shows in stark terms what would be required. The column on the left is 50% of the sector emissions from 2005 according to the EPA, and this what we need to get to by 2030 to meet the pledge. It is only the Power Generation sector that has seen meaningful reductions since 2005 and consequently a 50% target from 2019 is the average needed from the other segments. We discuss the challenges (which are significant) and some possible solutions in today's ESG & Climate Report

We have talked at length in several pieces of work published this year and last year about the risk that the ESG investor leadership in the climate debate could have unintended consequences, especially if they paint their “bad” ESG group with too broad a brush and include industries that are essential to the energy transition process. We have focused on the US mid-stream industry, which has a central role in providing logistics for more natural gas, more LNG, CO2, and hydrogen, but which will struggle to provide the infrastructure if they are thrown in the fossil fuel bucket and cannot get access to reasonably priced funding. Now we are seeing the same with the miners, many of whom are looking to expand to increase production of materials needed to aid in energy transition also – such as silver, copper, and aluminum.

The focus for today and tomorrow in this section as well as the focus of next week’s ESG and climate piece will be the environmental summit that is being held today and tomorrow and the possible ramifications of pledges that will inevitably come from it. We must start with President Biden’s emissions pledge: “This is the decisive decade,” Biden said at the summit on Thursday morning. “This is the decade that we must make decisions to avoid the worst consequences of the climate crisis.” The administration put forward a goal of reducing US emissions by 50% by 2030. “This is a moral imperative. An economic imperative. A moment of peril, but also a moment of extraordinary possibilities,” the president said.

The ESG crowd is in the driving seat for stock investments and debt issuance, and we see no reason for this to let up. While there are contrarian investors, they run the risk of buying unloved high cash flow and high yield stocks that just see the yields expand over time. These companies can buy back stock and potentially outperform through the excessive return of cash to shareholders, or they could be taken out in a consolidation, but it could be a long wait. If we assume that ESG scrutiny is here to stay and that data gets better, as does the analysis and comparability of the data, the “getting better” fund may be the more interesting path. Companies with good cashflows but also good strategies to improve their standing on the environmental and sustainability front may offer the best of both worlds – a potential ESG kick in multiple eventually, plus a high payout while you wait. The recently announced Blackrock funds which we discussed a couple of weeks ago seem to foot the bill. We are assuming that Blackrock will not be alone in this game and companies that have made it into these funds could see more demand for their stock as other managers mimic Blackrock.  

The ExxonMobil carbon capture announcement has stolen some of the thunder from the weekly ESG and Climate piece we have lined up for tomorrow, where we focus on what is ideal versus what is “good enough”. While CCS allows the fossil fuel industry to keep operating for longer, and in pockets possibly permanently, the ideas that we should move straight to renewable power and hydrogen are extremely naïve in their expectations around timing. We fully agree with ExxonMobil that CCS is the most logical and fastest way to make a meaningful dent in carbon emissions, especially in the US, quickly. This has been a consistent message in our work, and you can read more about it tomorrow.

In yesterday’s Sunday Recap (Free to read – linked here) we highlighted some of the many unusual challenges facing important business strategy decisions today, both for traditional businesses and for new entrants in the climate change and sustainability-related industries. For the traditional industries all the current data may be meaningless and a poor predictor of what is to come, while the economics of NOW is still driving investment decisions. For the new industries, unrealistic assumptions around future economics will likely lead to plans not becoming projects and/or projects losing money. We are busy helping companies identify what is irrational exuberance versus what is real, and we can help more. More than at any time in our 35 years of consulting and research experience, a second opinion is necessary.

The chart in the Exhibit below can have multiple interpretations, but one is a far greater risk to the US economy and US geopolitical influence than others. The fossil fuel supporters in the US will point to the 15% and say that the US is not the problem and China and India (which is growing rapidly) have more to do. The FT article linked, would cause you to look at the chart differently. The article talks about China using aggressive climate change action to gain favor with the rest of the world and increase its influence on the global economic debate and economic progress. This could come at the expense of a disorganized US, which ultimately risks becoming the laggard in climate change and lose influence as a consequence. China has a bigger carbon footprint, but this may play to the country’s advantage if central decisions drive investment quickly and push carbon progress faster than others. This could help China’s global leadership ambitions, especially if they help other countries lower their carbon footprints either through direct investment or through the supply of “low carbon” materials.

In the UK we have the phrase “all mouth and no trousers”. When moving to Texas I was delighted to find their own phrase “big hat – no cattle”. They mean the same thing – all talk and no action. The chart in the Exhibit below is supposed to be about carbon capture, but it is a much better illustration of “big hat – no cattle”, and we think that it is very relevant today, not just for carbon capture but for many of the other energy transition announcements that we see – especially for hydrogen. In the chart, the carbon capture projects announced by 2020 called for 200 million tons of sequestered carbon, while less than 40 million tons have been implemented (20%), and almost all of that in enhanced oil recovery (EOR).

Carbon values are rising around the world and are prompting activity as they do. The expectation of a high carbon tax in Canada has spurred investment plans for low carbon fuels, methanol, hydrogen, and ammonia all using carbon capture, and the rising European carbon price is an indication that carbon credit demand will increase to the point that many of the CCS plans in Europe make better economic sense.