The legislative package, which now awaits President Donald Trump’s signature, would cut the country’s production and consumption of hydrofluorocarbons by 85% over 15 years.
The chemical, commonly used in refrigerants like air conditioners and refrigerators, traps heat more readily than planet-warming gases like carbon dioxide.
Chuck Schumer, D-N.Y., the Senate minority leader, said last week that passing the chemical-reduction measure would be the “single biggest victory in the fight against climate change to pass this body in a decade.”
The bill also has measures promoting technology to capture and store carbon produced by manufacturing and power plants, and would cut diesel emissions from certain vehicles.
“All three of these measures will protect our air while keeping costs down for the American people,″ said Sen. John Barrasso, R-Wyo., who chairs the Senate Environment and Public Works Committee.
The bill also allocates $35 billion for clean energy power from wind, solar and other sources, according to The New York Times.
(These remarks are solely my own. Not representative of my employer or any other affiliated institution or organization)
Some have said the artistic, social, and cultural dynamism known as the Roaring Twenties would not have happened without World War I and the 1918 Spanish Flu Pandemic. I am hoping we experience a similar creative explosion that touches all aspects of our lives, including the way we do business. The pandemic and protests in 2020 prompted many businesses to alter their engagement with their employees, customers, and communities to make unprecedented commitments to fight systemic racism. At the same time, awareness and commitment to the climate crises has pushed many companies and cities to look for ways to drastically curb carbon emissions. I will focus on companies at the intersection of climate change and racial equity and roles investors can play.
The stimulus bill, passed by Congress in December, includes over $35 billion for new energy initiatives. This is the most substantial federal investment in clean energy since 2009 and includes key efforts to fight climate change. It includes provisions to greatly reduce HFCs in refrigerants, support for new solar, storage, nuclear, and wind technologies, and funding for federal energy programs (find more detailed information here, here, and here). This bill should be celebrated for moving the country towards a cleaner future and laying some groundwork for the new administrations’ energy policy. However, this bill will not provide the kind of cultural and structural change we need to truly address our climate and societal crises. The change we seek will only be possible through the concerted effort of diverse visionary business leaders, investors, and policymakers working with communities of color.
Jessica O. Matthews, founder and CEO of Uncharted Power, is undoubtedly one of these leaders. Jessica founded Uncharted Power on the belief that universal access to smart, sustainable infrastructure is a human right. Uncharted Power recently launched its first sustainable infrastructure pilot in Poughkeepsie, NY, of the Uncharted System, a modular serviceable paver that converts city sidewalks and roads into an industrial IoT platform that streamlines the integrated deployment and management of critical infrastructure, from power grids and broadband to sidewalks and water pipes. The company’s proprietary suite of technology creates a platform which can easily interconnect decentralized power applications (residential solar, electric vehicle charging stations, IoT sensors, etc.) into one sustainable network, bridging the gap between standalone smart products and a fully-integrated smart city.
Another such founder is Donnel Baird, CEO of BlocPower. Donnel believes there is no path forward to fight climate change without communities of color. BlocPower provides products and services to communities of color to combat health disparities and climate change, and create economic opportunities. BlocPower makes buildings healthier by replacing fuel and natural gas systems with energy-efficient and renewable technologies. The company has partnered with financial institutions to finance and install these systems in cities such as Oakland and Brooklyn. These projects create jobs in the community, reduce operating costs in the buildings, and provide cleaner air for building occupants.
(To learn more about other minority-led clean energy companies, check out this article by Marilyn Waite at Greenbiz).
Those most likely to launch companies addressing climate justice tend to have firsthand experience of the pain and struggle within communities of color. Unfortunately, these founders also have to overcome disproportional barriers during this journey. After a year that has clearly revealed deep divisions and inequalities in our society, we need to carefully consider the outcomes of our investments. All investments have impacts. If we want to create a more inclusive society, we need to learn about companies that are focused on marginalized or underserved communities, which may require changing the structure of early-stage equity investments, developing new risk models (where race is not implicitly or explicitly a proxy), and creating new opportunities to build connections outside of personal networks. It will also require anti-racist efforts to learn about the struggle of communities of color.
Like many people, I was happy to see witness the end of 2020. In a year that provided an excess of heartache and pain, I also witnessed incredible resilience that was driven by love and compassion for our neighbors, both on our block and around the world, with a collective resolve to build a more equitable society. As Nipsey Hussle said, “sometimes you have to take two steps back to take ten forward.” I hope we move forward together in 2021.
BlackRock CEO Larry Fink said Tuesday in his annual letter to CEOs that the “tectonic shift” toward sustainability-focused companies is accelerating in the wake of the coronavirus pandemic.
“More and more people do understand that climate risk is investment risk. …When finance really understands a problem, we take that future problem and bring it forward,” the head of the world’s largest asset manager said on “Squawk Box.”
BlackRock is asking companies to disclose how their business model will be compatible with a net-zero economy.
The world’s largest asset manager is pushing companies to disclose how they will survive in a world of net-zero greenhouse gas emissions.
″Because better sustainability disclosures are in companies’ as well as investors’ own interests, I urge companies to move quickly to issue them rather than waiting for regulators to impose them,” BlackRock CEO Larry Fink said Tuesday in his annual letter to CEOs.
The corporate world is waking up to the fact that so-called ESG factors — environmental, social and governance metrics — pose financial risk, and companies that don’t adapt will be left behind.
Indeed, Fink said in his letter that as investors tilt their holdings toward companies focused on sustainability, “the tectonic shift we are seeing will accelerate further.”
“More and more people do understand that climate risk is investment risk. …When finance really understands a problem, we take that future problem and bring it forward. That’s what we saw in 2020, and what we’re seeing now,” Fink said Tuesday on CNBC’s “Squawk Box.”
“The flows even in January into sustainability funds are growing, not shrinking, and this is going to continue in 2021,” he said.
ESG investing became widespread during the bull market boom, leading many to view it as simply a bull market phenomenon. But amid the sell-off in stocks as the coronavirus roiled markets in March, investors piled into sustainability-focused funds. Many of these wound up outperforming their peers.
Last year, from January to November, investors in mutual funds and exchange-traded funds invested $288 billion globally in sustainable assets, a nearly 100% increase from the whole of 2019, according to BlackRock.
“They [investors] are also increasingly focused on the significant economic opportunity that the transition will create, as well as how to execute it in a just and fair manner,” Fink wrote in his letter.
“No issue ranks higher than climate change on our clients’ lists of priorities,” he wrote. “They ask us about it nearly every day.”
Amid the jump in ESG fund flows, some have said it’s reached bubble-like territory and that valuations are beginning to look stretched for some of the most popular pure-play names related to the energy transition.
But Fink said that as in any new trend there will be some winners and some losers. He compared the sector to technology companies over the last 20 years, noting they ultimately grew into their earnings.
This isn’t the first time Fink has sounded the alarm on the corporate world’s role in climate change.
In his 2020 letter, he said a reshaping of finance was underway, and said the firm was overhauling its investing strategy in order to place sustainability at the center.
His 2019 and 2018 letters also focused on the idea of stakeholder capitalism, or that companies should seek a greater purpose beyond lining their shareholders’ pockets.
Critics of ESG investing argue that it’s difficult to score a company given the subjective nature of some of the metrics, as well as an overall lack of data disclosure.
In a bid for greater transparency, BlackRock said it is asking companies to state how their business model will be compatible with a net-zero economy.
In a separate letter to clients, BlackRock said it will help investors identify companies leading the charge by employing a “heightened scrutiny model” in its actively-managed portfolios. The firm will also create a “focus universe” of holdings that are particularly susceptible to climate-related risk.
With $8.68 trillion in assets under management, BlackRock’s words and actions carry weight, and some argue the company’s push toward a greener future is too little, too late.
Of course, its myriad offerings, including ETFs that track the S&P 500, mean it’s difficult to unilaterally sell stocks of companies that engage in activities that might not align with a customer’s values.
“It’s encouraging to see BlackRock finally willing to remove companies from active funds as a consequence of moving too slowly on climate,” said Gaurav Madan, senior forests and lands campaigner at Friends of the Earth. The environmental group is one of the partners in BlackRock’s Big Problem, a global network of NGOs and financial advocates pressuring asset managers for change.
“This is a welcome shift in BlackRock’s strategy,” said Madan. “But that threat alone is not enough at this stage of the pending crisis.”
ANSWERAs an investor, it is important to understand energy and infrastructure-related investments are long-term investments. Thus, the bill could be higher in the short-term, but over time it will pay back. It will allow the investors to contribute to the decarbonization effort directly, and the health of the population indirectly. This also helps investors to choose research and development of renewable energy, battery storage, water management efficiency (all types of energy (including nuclear energy) and are water inseparable) and related long-term projects.
ANSWERWe also need to collaborate with city mayors, lawmakers, and other organizations to create a clear systematic structure to decrease HFC and GHG emissions. Moreover, investors need to pay attention to left off industries like nuclear Energy and their safety, specifically nuclear waste, etc. On top of that, it’s significant to push energy efficiency-focused policies and projects.
QUESTION”What’s in the bill?”, “What does allow us to do?” and “What still needs to be done?”
ANSWERNimet Vural, Freelance Sustainability, Accountability and Corporate Governance
ANSWERThe Bill is aggressively fighting both the Pandemic and Climate Change. The Investment Industry seeks returns as its primary objective and today some of the most convincing opportunities for growth and returns come from a transition to a more sustainable economic model that both harnesses and preserves nature. We need to see Innovation and creativity among the Investors looking to address Social Inequalities on a more Systemic basis.
QUESTION”What’s in the bill?”, “What does allow us to do?” and “What still needs to be done?”
ANSWERCombining the economic cost of physical climate risks from floods, fires and storms, with the economic impact of transition climate risk like the COVID-19 pandemic, has brought the U.S. Congress together in a rare bipartisan moment related to energy policy. I expect to see more of the same as both physical and transition climate risks continue to multiply in the next two decades. And investors will play an increasingly important role in this process by voting with their retirement assets, investing in companies that produce and use clean and renewable energy products and services.
QUESTION”What’s in the bill?”, “What does allow us to do?” and “What still needs to be done?”
ANSWERThis is a significant development in the fight against climate change but we still have much more to do given that models still require less than a 2 deg C rise in global temperatures, especially in specific regions of the world.
Investor demand is rising for strategies that integrate environmental, social or governance (ESG) considerations with financial objectives.
Multi-asset-class portfolios can now be transformed through an ESG-first approach, with the capability of core, impact and tactical allocations.
Taking such an approach using MSCI solutions meaningfully improved the ESG characteristics of a hypothetical portfolio without significantly altering the risk-return profile.
The new Biden administration in the U.S. and ESG-related disclosure regulations and guidelines slated to take effect across Europe will likely increase investors’ focus on sustainability. We’ve seen already, however, that to help counter the effects of climate change or reallocate capital to companies that contribute to positive environmental, social or governance outcomes, investors have increasingly pursued strategies that unite financial objectives with ESG considerations.
How could an “ESG-first” portfolio take shape?
Leading with ESG
We can examine an approach to integrating measurable ESG and climate considerations with financial objectives into hypothetical portfolios. This ESG-first approach can comprise three components:
1. A core allocation to a mix of equities and bonds that broadly integrates ESG and climate considerations
2. An impact allocation to a mix of assets that reflects the investor’s specific ESG preferences
3. A tactical allocation that includes decisions around other considerations, including regions, sectors, style factors, durations, credit ratings or currencies
Transforming a Portfolio Through an ESG-First Approach
Starting with a Solid Core
The foundation of the framework proposed here rests on the core allocation, which aims to deepen the integration of ESG without disturbing the risk-return trade-off. It can be incorporated early in the investment process, at the benchmark or strategic asset-allocation level, by substituting ESG equity and fixed-income benchmarks (such as the MSCI ACWI ESG Leaders Index and the Bloomberg Barclays MSCI Global Aggregate Sustainability Index) for their standard market-capitalization-weighted counterparts.1
Such a substitution improved the MSCI ESG Rating of our hypothetical portfolio to “leader” (AA) from “average” (A), raised its ESG score by 13%, cut overall carbon intensity (Scope 1 and 2 emissions) by almost 10% and increased the green-to-brown-revenues ratio by more than 50%.2 Over the back-test period, the trade-off between risk and return was almost unchanged, with the core allocation marginally reducing risk, by 30 basis points (bps), and slightly improving performance (20 bps), with low tracking error (70 bps).3
Better Sustainability with Low Tracking Error
Having an Impact
The impact component of the ESG-first hypothetical portfolio contains a mix of equity and fixed-income holdings that aim to translate investor preferences into corresponding investment solutions.
The impact allocation may include investments that target one or more of the U.N. Sustainable Development Goals (SDGs), such as gender equality or climate action, as reflected in a company’s products and operations. To help fine-tune allocations with the goal of maximizing impact, investors may look to tools such as MSCI’s SDG Alignment Tool, which assesses the alignment of about 8,500 companies around the world with each of the SDGs. The impact allocation may also look to track so-called megatrends, such as smart cities, or include green bonds issued by companies that earn a significant share of revenue from alternative energy or green buildings.
Moving to an ESG-First Portfolio
The final component of the three-part portfolio construction process aims to preserve the manager’s ability to make tactical calls across regions, sectors, style factors, durations, credit ratings or currencies as they manage portfoliowide financial exposures. The performance of many of those decisions can be represented via indexes designed to reflect a specific strategy and integrate ESG norms.
The exhibit below uses indexes as proxies to illustrate a hypothetical ESG-first portfolio that includes all three components. The core objective remains ESG improvement with a focus on climate risk. The impact allocation expresses the investor’s personal preferences such as environmental issues and gender diversity. The tactical portion leaves room for specific investment calls.
The hypothetical ESG-first portfolio is designed to enhance the investor’s objectives. As the exhibit below shows, the three steps of the portfolio allocation process, taken together, improved the MSCI ESG Rating to “leader” (AA), brought the total improvement in its ESG score to 15%, cut its carbon footprint (Scope 1 and 2 emissions) by 30% and enhanced the portfolio’s green-to-brown-revenues ratio 5.6 times, compared with the market-cap benchmark.6
Enhanced ESG and Climate Objectives
Data from Dec. 30, 2016 to April 30, 2020
The portfolio also added 1.5% of annualized active return over the back-test period, with a tracking error of 1%. While picking up a bit more volatility due to the slight equity overweight, it achieved a better risk-return trade-off overall.
The outperformance of the equity portion of the portfolio can be mostly attributed to a combination of ESG, quality and low-volatility factors (+50 bps, +30 bps and +20 bps, respectively), as well as sector exposures, such as an underweight to energy.7 It should be noted that the back-test period included the first months of the COVID-19 crisis, through April 2020.
Illuminating ESG Characteristics
To help assess how an ESG-first portfolio aligns with their preferences, investors can use tools, such as those from MSCI, to deconstruct and display the portfolio’s ESG characteristics and performance against the benchmark. That may include visualizing the impact of the portfolio for each set of environmental, social and governance factors, as well as tailoring the reporting to address unique preferences and the degree to which investments may align with the EU’s forthcoming standards for environmental sustainability.
While no one knows for sure where the new administration in the U.S., regulations in Europe or interest in ESG will lead, an ESG-first approach supports the integration of ESG and climate strategies into the investment process. It is one way to prepare for the effects of the reallocation of capital to ESG investments on the pricing of financial assets. It may also be an option for those who view the path to producing financial return as one and the same with the goal of a greener and more sustainable society.
1The indexes in this example may be used as a benchmark for performance measurement or by a portfolio manager seeking to replicate the index through investment in either funds tracking the index or the purchase and sale of individual securities.
2MSCI ESG Research rates companies on a scale from AAA (best) to CCC (worst), according to their exposure to ESG-related risks and how well they manage those risks relative to peers. Our ESG Ratings range from leader (AAA, AA) to average (A, BBB, BB) to laggard (B, CCC) and correspond to ESG Scores ranging from 10 (best) to 0 (worst). The green-to-brown-revenues ratio is the ratio of the weighted average revenue from clean-technology solutions, or “green revenue,” to the weighted average fossil-fuel revenue, or “brown revenue,” defined as the weighted average percentage revenue derived from fossil-fuel-related activities — including thermal coal mining, oil and gas extraction, thermal coal-based power generation and oil- and gas-based power generation. Please see the Further Reading section at the end of this post for more information.
3The back-test covered the period from Oct. 31, 2013, through April 30, 2020.
4In 2015, the United Nations adopted 17 UN Sustainable Development Goals in an effort to end extreme poverty, reduce inequity and protect the planet by 2030. See “Transforming our World: the 2030 Agenda for Sustainable Development.” United Nations Department of Economic and Social Affairs, Oct. 21, 2015.
5The analysis and observations in this report are limited solely to the period of the relevant historical data, back-test or simulation. Past performance — whether actual, back-tested or simulated — is no indication or guarantee of future performance.
6Exposure to carbon-intensive companies is based on Scope 1 and Scope 2 emissions. Equity and fixed-income (ex-sovereign bonds/Treasurys) in tons of CO2/USD million of sales, fixed-income sovereign/Treasurys in tons of CO2/ million USD of GDP nominal.
7For the attribution, we use MSCI’s Global Total Market Equity Model (GEM), which also includes ESG as a factor.
As momentum towards net zero rises around the world, this report provides much needed transparency on the importance of land use and the role of Negative Emissions Technologies (NETs) in the transition.
The report analyses the growth in corporate climate commitments and probes some of the key assumptions in major climate scenarios to uncover opportunities for investors – particularly in forest related nature-based solutions – while also highlighting the risks and uncertainties associated with some negative emissions technologies. It finds:
Negative Emission Technologies (NETs) are the next investment frontier and offer trillion-dollar upside opportunities for investors.
Within NETs, Nature-based solutions (NBS) to the climate crisis focused on reforestation and afforestation are the most viable near term opportunity and could generate US$800 billion in annual revenues by 2050 with assets valued well over US$1.2 trillion, surpassing the current market capitalisation of the oil & gas majors.
Investments in avoided deforestation will present additional opportunity as measuring, reporting and verification (MRV) mechanisms and compensation schemes reach scale. However, reputational risks may dampen investor enthusiasm unless forest laws are vigorously enforced or tightened to end deforestation.
Technical solutions, such as Direct Air Carbon Capture, Use and Storage (DACCS) and bioenergy with CCS (BECCS), are ones to watch longer term and could generate an additional annual revenue of US$625 billion by 2050.
An ‘inevitable’ part of achieving Paris
The report shows that alongside deep decarbonisation, all climate scenarios rely on so-called negative emissions technologies (NETs). In 2018, the International Panel on Climate Change (IPCC) set out four representative pathways that align to a global temperature rise of 1.5oC. Alongside deep decarbonisation, all rely on negative emission technologies.
Even the most ambitious in decarbonization terms, P1, relies on carbon removal to sequester 2.5 GtCO2/year in 2050.
In the IPCC’s ‘slower’ P4 scenario, total negative emissions are 16 GtCO2 in 2050, roughly around half of CO2 emissions from combustion of fossil fuels today. The reliance of the climate scenarios on NETs increases further in the second half of the century.
Beyond the models – corporate commitments are driving demand
In less than a year, there has been a three-fold increase in the number of companies committed to net zero, from 500 recorded in 2019 to 1,541 in 2020. The pace of ambition is particularly marked among the highest emitting sectors and those worst hit by the pandemic – in oil & gas, steel, cement, automobile, and food.
Companies have already started to channel their resources to forest-related NBS projects
To fulfil these commitments, companies will require deep decarbonization efforts, with residual emissions balanced by investment in carbon removal activities. This has driven demand for natural and technological solutions that actively suck carbon from the atmosphere, which in turn is driving the demand for nature-based carbon credits. From 2017 to 2018, the value of forestry and land-use-related credits traded in the voluntary offset market tripled to US$172 million, increasing the share of forestry and land-use-related offsets in the total voluntary offset market by 23%, from 52% to 64%.
Many companies have already started to channel their resources into forest related natured based solutions to help achieve new net-zero targets (Figure 1).
Win-win: profiting from an end to deforestation
While many corporate commitments are focusing on reforestation, stopping deforestation is critical to climate action and could also present a large investable opportunity – comparable to afforestation and reforestation – if markets can be developed and commercialised. Yet, data suggests deforestation has doubled during the pandemic.
As well as constraining a large investible market, companies with deforestation in their supply chain expose investors to significant financial risk in terms of potential regulatory action, loss of market access, loss of customers in the short term, and failing to adapt to the transition to a low-carbon economy in the longer term (Ceres, 2020). Analysis from the Inevitable Policy Response project suggest that risks associated with legal action, market access, and consumer pressure could decrease a company’s valuation by around 15%.
Bioenergy: unrealistic and dangerous assumptions
Bioenergy with carbon capture and storage (BECCS) is the leading negative emission technology in all Paris-aligned scenarios, because of its double gains through energy generation and CO2 sequestration. But producing high levels of bioenergy to the degree assumed necessary is likely to push the world to its planetary boundaries in terms of water and land availability. In some of the less ambitious pathways to Paris (IPCC P4), negative emissions by BECCS exceed 16 GtCO2/year by mid-century. Yet this is over three times the estimated sustainable scale, when other land use requirements such as food are taken in to consideration.
To limit such negative side effects, most studies suggest that BECCS needs to be limited to a sustainable scale, around 0.5 – 5 GtCO2/year (2). To avoid these blind spots, the report provides decision makers with the transparency they need on the use of negative emissions technologies in net zero pathways, as well as a realistic scenario that fully integrates land use systems.
Investors can proactively shape the market to unlock opportunities
Investors who move early have a unique opportunity to support the forestry market’s institutional development by engaging with policymakers and companies while developing innovative business models and financing mechanisms to channel finance:
Pressure companies to commit to climate action, invest in NBS and ensure deforestation free supply chains.
Stop investing in companies with deforestation in their supply chain.
Move early in the rapidly growing NBS market
Support NBS market and institutional development by engaging with policymakers.
…When day comes, we step out of the shade, aflame and unafraid, the new dawn blooms as we free it. For there is always light, if only we’re brave enough to see it. If only we’re brave enough to be it.
Amanda Gorman, National Youth Poet Laureate Excerpt from “The Hill We Climb” (read at the 2021 Biden inauguration)
In this issue #9 of the Socially Inspired Investor Digestand companion Podcast, we look at how – in an unlikely bi-partisan way – Congress steps up to make an unequivocal stance supporting the fight against climate change, and significantly puts up billions to also make it a meaningful action for jobs and economic recovery. Funding for renewable energy and credits to consumers could make this legislation a critical turning point.
But wait, there could be more! In addition to re-joining the Paris Accord, President Biden is proposing more clean energy enhancements in his $1.9 trillion COVID relief proposal. We shall see what the final bill will include but we believe many of the provisions around environmental sustainability haves a decent chance of surviving.
In our SPOTLIGHT ON section, we asked our team of industry experts to weigh in on the key take-aways from the legislation – How it helps and what is still needed. The tie-in to job creation seems to be a critical component in building support.
But here is the point for investors. Criteria historically used to evaluate investment options are changing. Desmond Wheatley who is featured in this month’s Podcast points out that an additional factor to consider is companies meet the “inevitability” of change. That sounds right as we seem to be in the golden age of companies of all types publicly announcing their commitments to achieving net zero carbon.
Many companies will need to adapt or unfortunately see their relative value diminish if they cannot keep up. Portfolios should be evaluated not only on previous results but also where in the changing landscape find these companies in 10, 20, 40 years.
The environmental provisions in the December, $900 billion stimulus bill includes $35 billion funding for renewable technology and energy efficiency.
$4 billion for solar, wind, hydropower and geothermal research and development.
$1.7 billion to help low-income families install renewable energy sources in their homes.
$2.6 billion for the Energy Department’s sustainable transportation program.
and $500 million for research on reducing industrial emissions.
It also authorizes $2.9 billion for the Advanced Research Projects Agency-Energy, a program that funds high-risk, high-reward research.1
Welcome to 2021. Time to freshen up those portfolios.