Why Diversity Should Matter to Investors

A wave of diversity and inclusion (D&I) is rippling across corporate culture.

As someone that leads a lot of D&I activity in our office, I hear the praises but also the complaints. Too many of these comments miss why diversity is such an important focus for executives, boards of directors, and investors.

Why do companies care? The common view is that bosses want to improve culture and community values in their offices, while giving employees a good feeling and positive reinforcement.

However, as important as it is for companies to have a good corporate culture and retain employees, another big reason is that diversity is being attributed to having a material impact on companies’ financial performances and shareholder values.

The evidence.

Consulting firm McKinsey & Company has been a leader in researching the subject. Its 2018 report, “Delivering through Diversity,” suggested greater diversity across genders and ethnicity was strongly correlated to higher profitability and value creation. A diverse company can help attract top talent, improve customer propositions, and develop better decision-making methodology.

The Harvard Business Review provides a similar distinction, in that diverse company management teams are also better performing. In a 2016 article, “Why Diverse Teams are Smarter,” studies were highlighted that show large cap companies with at least one woman on their board generated a higher return on equity (a measure of profitability) and net income growth (the rate of profit growth) compared to those companies that had no gender diversity.

The evidence also extends to the performance of investment management teams. Morningstar Research performed an in-depth analysis on whether investment performance explains if there is a decline in female portfolio managers.

In one of its tests, it found that when looking at funds based solely on the gender of the management team, performance of all-female fund teams had outperformed mixed-gender and men-only teams. Of course, just because that’s happened before doesn’t mean it will happen again.

Examples in action.

Off hand, I can think of a few instances where I see how the diversity story could play out in a company’s success, or how a lack of it could contribute to risky behavior and financial losses.

Social media companies are currently facing challenges in monitoring their platforms for bots and hate speech. You can argue a lack of diversity of thought and experience within these companies impairs their ability to recognize and manage these conflicts. Not having the cultural awareness to be proactive and acute in handling these challenges could increase a company’s risk of fines, loss of customers, and, ultimately, lower profits.

Another situation that comes to mind is when companies inadvertently create an insensitive ad campaign and then end up in headlines and face possible boycotts. Additionally, there are the wasted funds on ads that have to be pulled.

Maybe having robust diversity and a platform for employees to share their experiences and insights could mitigate risk, while also providing opportunities for growth investing.

As such, diversity is becoming a bigger focus in investment reports. Portfolio managers and analysts are using a company’s diversity statistics and programs to improve inclusiveness as a measure of their success to grow and contribute positive returns to their portfolio.

A strong D&I platform encourages diversity of thought and incorporates this experience in the decision-making process. Homogenous teams that lack diverse standpoints create a sanctuary for agreements to be reached without proper challenges and based on a singular view. As much as you might want a group of people to unanimously agree upon a restaurant for a dinner party, you probably do not want important business and investment decisions being made in the same haste.

Diverse teams provide the platform necessary to challenge and counter hasty conclusions which can negatively impact financial performance. Global companies serving diverse communities simply need to have the cultural insight that integrates different standpoints in order to provide relevant valued services and avoid profit losses.

This is one of the leading reasons we embrace diversity of thought and think more investors should consider diversity and inclusion as an important input in their research and analysis.

Inclusion & Diversity in Finance

Inclusion & diversity (I&D) is critical to the future of the investment management industry. An inclusive environment ensures equitable access to resources and opportunities for all. An inclusive culture that leverages diverse views will be an important element in determining a firm’s success.

Why is Inclusion & Diversity Important in Finance?

A rapidly evolving finance industry demands new capabilities and a more diverse workforce and inclusive workplace cultures. According to CFA Institute’s own definition of I&D, diversity is the spectrum of human attributes, perspectives, identities, and backgrounds while inclusion is a dynamic state of operating in which any individual or group can be and feel respected, valued, safe, and fully engaged. Each of these factors must be deliberately encouraged and leveraged to develop a successful, diverse, and inclusive environment. According to a recent PwC Global survey, 85 percent of financial services CEOs polled said promoting inclusion and diversity helps enhance business performance. Other research also supports the business case for inclusive cultures that lead to increased profitability, creativity, and innovation. Indeed, a 2019 McKinsey & Co. study revealed top-quartile companies for racial and ethnic inclusion outperformed those in the fourth quartile by 36% in profitability.

Diversity in Asset Management

The discussion around motivations for pursuing diversity in investment management often revolves around two main areas: “the business case for diversity” (i.e., with more diverse perspectives, business outcomes will improve) and “because it is the right thing to do.” Overall, asset management firms tend to be in a reactive phase of diversity and inclusion, meaning that actions are taken primarily to comply with local laws and social pressure.

CFA Institute Recruits Industry Partners to Drive Inclusion & Diversity in Asset Management

CFA Institute seeks to drive I&D efforts in the investment management industry toward more progressive policies and to demonstrate best practice to create more inclusive investment profession. Through the CFA Institute-led Experimental Partners Program, more than 40 participating firms (representing $17 trillion in assets under management) are committed to incorporating more diverse perspectives into how they run their businesses, and into investment decision making to improve investor outcomes. They are also encouraging the industry to embrace different viewpoints.

A key area of focus is on managing biases, including in hiring and advancement. The impact of the coronavirus pandemic has shown that those firms that have stressed inclusive leadership, built trust through leveraging Employee Resource Groups, and supported regular unconscious bias training for managers adapted more quickly to widely adopted work-from-home arrangements.

The Other Diversity Divided

Originally published July – August 2018

When managers and scholars talk about diversity’s impact on organizations and teams, they’re usually referring to the effects on collective accuracy and objectivity, analytical thinking, and innovativeness. On “harder” measures of financial performance, researchers have struggled to establish a causal relationship with diversity—particularly when studying large companies, where decision rights and incentives can be murky, and the effects of any given choice on, say, profits or market share can be nearly impossible to pin down.

So we’ve zeroed in on diversity’s effects in the venture capital industry, which presents fewer barriers to understanding. VC firms are fairly flat in structure, composed primarily of investment partners and relatively few junior professionals. Every investor is a decision maker, and choices have clear business consequences. We know which firms make what investments, and for the most part we can identify the individuals leading those investments, because they usually take seats on the boards of portfolio companies. Using publicly available information, we can analyze VC professionals’ “endowed traits,” such as gender and ethnicity, and “acquired traits,” such as schooling and work history. In other words, we can see how similar or different these decision makers are and compare the quality of their decisions on the basis of their investments’ performance. Because their incentives are aligned and readily discernible—compensation for VCs is largely determined by profit sharing, ensuring that they and their investment partners have the same goals—the analysis is not clouded by inscrutable interests. The goal of every venture capital investor and firm is to choose and groom the companies that will yield the best possible outcomes.

All in all, we couldn’t have asked for a better “lab rat” than the VC world. Over the past several years one of us (Paul Gompers) has examined the decisions of thousands of venture capitalists and tens of thousands of investments, and the evidence is clear: Diversity significantly improves financial performance on measures such as profitable investments at the individual portfolio-company level and overall fund returns. And even though the desire to associate with similar people—a tendency academics call homophily—can bring social benefits to those who exhibit it, including a sense of shared culture and belonging, it can also lead investors and firms to leave a lot of money on the table.

In this article we’ll describe the research behind those findings and provide recommendations for reaping the business benefits of diversity. Decision makers fare best when they openly acknowledge and address homophily early on, understand that small adjustments in mindset and behavior can have lasting ripple effects, and diversify their personal as well as professional networks.

The Impact on Business Results

The gender and racial makeup of the venture capital industry is staggeringly homogeneous. A comprehensive data set of every VC organization and investor in the United States since 1990 shows that the industry has remained relatively uniform for the past 28 years. Only 8% of the investors are women. Racial minorities are also underrepresented—about 2% of VC investors are Hispanic, and fewer than 1% are black. Those groups have seen significantly increased representation in other fields and in advanced professional and scientific degree programs, but not in the VC industry. It’s against that backdrop that venture capitalists choose their collaborators at other firms, investing their money side by side and joining the boards that guide the start-ups. Most investors specialize in a particular industry or sector, so potential partners are easy for researchers like us to identify: They are investing in the same types of deals at around the same time. And venture capitalists are far more likely to partner with people if they share their gender or race. They’re also significantly more likely to collaborate with people if they share their educational background or a previous employer. Belonging to the same racial group increases the propensity to work together by 39.2%, and having a degree from the same school increases it by 34.4%. Not only is the likelihood of collaborating on any one deal greater, but VCs tend to keep teaming up with those who share their traits.

What does all that mean for performance? How do the financial outcomes of homogeneous partnerships compare with those of diverse collaborations? The difference is dramatic. Along all dimensions measured, the more similar the investment partners, the lower their investments’ performance. For example, the success rate of acquisitions and IPOs was 11.5% lower, on average, for investments by partners with shared school backgrounds than for those by partners from different schools. The effect of shared ethnicity was even stronger, reducing an investment’s comparative success rate by 26.4% to 32.2%.

To understand why homogeneous teams have worse investment outcomes, it’s critical to determine exactly when decision making suffers. Interestingly, projects selected by both homogeneous and diverse sets of investment partners were equally promising at the time the decision to invest was made. Differences in decision quality and performance came later, when the investors helped shape strategy, recruitment, and other efforts critical to a young company’s survival and growth. Thriving in a highly uncertain competitive environment requires creative thinking in those areas, and the diverse collaborators were better equipped to deliver it.

Of course, the industry’s homogeneity is continually reinforced by individual firms’ hiring decisions. Because these organizations are small (they usually have three to five investment professionals), and spots open up infrequently (every two to four years), even a slight preference for candidates who are similar to existing partners has a lasting effect. Here’s just one example: Many prominent venture capital firms were founded by Harvard Business School alumni, and now nearly a quarter of all VCs with MBAs come from Harvard. To put that into perspective, only 9% of VCs with MBAs are from Wharton, and just 11% are from Stanford—both top-tier schools.

Prospects are even worse for female candidates. Remember that only 8% of venture capital investors are women. It’s no wonder, since nearly three-quarters of VC firms have never hired a woman in that role. What separates that overwhelming majority from the firms that have hired women? One powerful factor is the gender of the partners’ children. When a firm’s partners have a higher proportion of daughters, the likelihood that a female investor will be hired goes up significantly. Simply replacing one son with a daughter would increase the probability of hiring a woman by 25%.

Only 8% of VC investors are women. Fewer than 1% are black.

Of course, we aren’t suggesting that male VCs should have daughters to reduce gender bias and increase diversity in their firms. But because the gender of one’s child isn’t a choice, the finding offers a tighter lens on diversity’s effects. When the “daughter effect” does bring more women into the fold, it has a strong impact on performance. Venture capital firms that increased their proportion of female partner hires by 10% saw, on average, a 1.5% spike in overall fund returns each year and had 9.7% more profitable exits (an impressive figure given that only 28.8% of all VC investments have a profitable exit).

The economic impact of diversity isn’t limited to the VC world. A recent NBER analysis of highly skilled occupations (in fields such as law, medicine, science, academia, and management) shows a positive relationship between diversity and the value of goods and services produced in the United States. The study looks at GDP trends beginning in 1960, when significant barriers prevented white women, black women, and black men from entering those professions. Though we’re still nowhere near parity, gender and racial diversity have increased markedly in such fields over the past 50 years—and the U.S. economy has grown in that same period. Using a model that assumes innate skills are evenly distributed across gender and racial groups, the NBER analysis attributes about 25% of the GDP growth per capita to the uptick in white women and black Americans of both genders. In short, the authors argue, the United States began making better use of the talent at its disposal.

Reaping Diversity’s Benefits

Given that homogeneity imposes financial costs and diversity produces financial gains, a natural next step is to assess what managers can do to increase representation across groups. Here are some evidence-based recommendations:

Start early.

Timing is a crucial and often overlooked factor. Founders and entrepreneurs in particular may place diversity low on their list of early priorities, viewing it as a concern that can be addressed once their firms have grown. But it is far easier to build a diverse organization from the ground up than to diversify a large, complex, homogeneous machine.

Stacy Brown-Philpot, the CEO of the freelance-job site TaskRabbit, made that point when she reflected on her early days as a financial director at Google. “When I joined Google, it was 1,000 people,” she said. “It took me two and a half years to look around and realize there weren’t a lot of people like me. So [my colleague] David Drummond and I…put together a group. It was really late. I think that’s part of the challenge [at Google].” When Brown-Philpot moved to TaskRabbit, she took a different tack with the young company, partnering with the Congressional Black Caucus’s CBC TECH 2020 initiative to bring more black workers into the tech industry. In 2016 Brown-Philpot publicly committed to increasing TaskRabbit’s black workforce from 11% to 13% of employees by the year’s end, to ensure proportional black representation at the company.

Sociology scholarship underscores the flaws in a delayed approach. In one study researchers used e-mail as a proxy for social connections at a university. They discovered that over multiple “generations” of interaction, such as taking new classes or joining new activities, even minor individual tendencies to interact with similar people could have a large cumulative effect, resulting in striking levels of group homogeneity. The result suggests that an already homogeneous organization will tend to become even more so as it scales up. So it’s important to encode diversity in a company’s DNA at the earliest stages.

This is not to say, of course, that it’s impossible to improve diversity in an established company. Standardized processes, such as blinding résumés during hiring and using objective metrics during performance reviews (as long as they’re constantly refined through iterative development), can have a big impact in organizations looking to ameliorate bias. But when the teams developing and refining those processes are themselves unrepresentative of the broader universe of candidates, they must take special care to ensure that they aren’t institutionalizing their individual biases.

Recognize that subtle, intentional shifts can have ripple effects.

This is true not just in venture capital and entrepreneurship but in any setting where small groups of people wield outsize decision-making authority. Bringing just a few talented women or racial minorities into a group like that changes the relative balance of power. And recent findings suggest that if those individuals make hiring decisions, they will affect the group’s future makeup. In an online simulation, participants were placed in “employer” and “potential hire” buckets. Choosing between one woman and one man, female employers hired the woman 50% of the time, while men hired her only 40% of the time.

That might be interpreted as evidence of affinity, suggesting that the homophilic biases that can hamper diversity when exhibited by overrepresented groups can bolster it when exhibited by underrepresented ones. Or the results might suggest that people who have been historically disadvantaged in recruiting are less likely to discriminate against those who share their endowed traits. Both explanations are probably true to some extent. But one of us (Gompers) actually found in a recent study that members of traditionally underrepresented groups were more likely than white men to seek out people unlike themselves when forming entrepreneurial teams. That result implies that qualified members of dominant groups aren’t in much danger of being locked out of diverse organizations. Combined with the fact that group homophily tends to compound over time, it also suggests that if the goal is proportional representation over the long term, it’s better to overcorrect for bias early on, by hiring more people from traditionally underrepresented groups, than it is to undercorrect.

To accomplish that, companies need not explicitly favor a particular race or gender when hiring. Sometimes simple adjustments in the selection process can increase diversity. In one study led by the behavioral economist Iris Bohnet, of Harvard Kennedy School, students were assigned the role of an employer asked to select an employee who would do well on a future math or verbal task. Even though gender was not predictive of performance, “employers” evaluating individual candidates were likely to be swayed by stereotypes, exhibiting a preference for women on verbal tasks and men on math tasks. But when they assessed two candidates side by side, gender suddenly became irrelevant. Evaluators instead focused on past performance—an actual indicator of future success.

We’ve seen similar results in blind evaluations of prospective hires. Most of us have heard that auditioning musicians behind screens has dramatically increased the percentage of women who make the cut for symphony orchestras. Here’s an example from another industry: When the political satire show Full Frontal with Samantha Bee was gearing up to hire writers, then-showrunner Jo Miller combined other shows’ evaluation processes, making minor tweaks consistent with her goals. In a first-round call for script submissions, detailed formatting instructions were included so that superficial indicators of experience would not overshadow talent, taste, and potential. Those scripts were evaluated blindly, and an unusually large number of applicants made it to a second round, in which previous work and other factors, including gender and ethnicity, were considered. The result was a strikingly diverse team for late-night comedy: 50% women and 30% people of color.

Though these were basic process adjustments, another important ingredient is intention. Both Miller and Bee felt that a diverse writers’ room was a priority for the show, given its subject matter and irreverence. The hiring process was deliberately designed to support that goal. But that’s not the case in most organizations.

Consider the typical newsroom. The American Society of News Editors’ 2017 Newsroom Employment Diversity Survey found that almost every major newspaper in the nation, from the New York Times to the Boston Globe to the Washington Post, is whiter than its audience city. When the New York Times Magazine reporter and 2017 MacArthur fellow Nikole Hannah-Jones was asked to offer advice to journalists of color in light of the troubling report, she instead issued a call to newsroom managers to examine whether “their stated goals are really their goals.” She added: “If newsroom managers wanted diverse newsrooms, they’d have diverse newsrooms.”

Other prominent figures in the media shared this assessment. The New York Times columnist Charles Blow reflected in a recent tweet, “As a newsroom manager from age 25 to 37, [I] was always struck by how the ‘soft skills’ [people] favored were in many ways culturally exclusive.” The broadcast journalist and producer Soledad O’Brien passionately concurred. “It is not brain surgery,” she noted.

Diversify beyond the workplace.

Because social and professional circles often overlap, homogeneous personal networks can have a deleterious effect on organizational diversity. That’s why some companies have deemphasized referrals, or at least cautioned against their pitfalls. But reliance on personal networking is still crucial to the functioning of certain industries. A survey of venture capitalists, for example, showed that social connections are essential to generating deal flow. But investors’ personal networks tend to be closed, given that most VCs have the same educational background, are the same gender and race, and have worked at similar firms. Consequently, they can miss a lot of opportunities.

Though assigned mentorship and other professional programs can help decrease bias and increase diversity in organizations by exposing managers and employees to more people who are less like them, such relationships are by nature hierarchical and may actually aggravate individuals’ prejudices. In one study, when white participants were assigned the role of “superior” over a black subordinate, their racial bias increased. Situational power in same-race pairs had no impact on racial attitudes.

At the individual level, extensive social contact on an equal footing is a better strategy for lessening bias. One representative study demonstrated that friendships with homosexual individuals were effective in reducing sexual prejudice. Another study found that white participants’ friendships with Latinos or African-Americans reduced their implicit biases toward those groups.

The most generous interpretation of homophilic tendencies is that they arise from a seemingly innocuous desire to interact with people like ourselves. But the analysis of entrepreneurial team formation mentioned earlier revealed that endowed traits had a stronger homophilic “pull” than acquired traits. Social interactions can compel people to reevaluate what it means for someone to be “like them,” beyond such easily discernible demographic indicators. The benefits of these interactions carry over to the workplace, where expanded networks and mindsets can improve both individual and organizational performance.

A willingness to openly recognize and tackle bias is at the heart of all our recommendations. When people choose to ignore bias or deny that it exists, they keep seeking out business partners, team members, and employees who share their traits, and they miss out on the quantifiable benefits of diversity.

Social science research suggests that people tend to react with anger and irritation when confronted about their biases—particularly when those biases are accurately labeled as such. Although such interactions may be unpleasant, they also tend to lead to behavioral change, and so should be welcomed as opportunities for growth. Bias is a measurable condition, but it is not a permanent one, on either the individual or the organizational level. By acknowledging it we can counter it, expanding our pool of potential collaborators and improving financial performance.

The U.S. added more new energy capacity from wind than any other source last year

Originally published 8.31.2021

KEY POINTS

  • 42% of new electricity generation capacity in the U.S. came from land-based wind energy — more than from any other source — according to numbers in a series of reports from the Department of Energy (DOE) this week.
  • According to research by DOE’s Lawrence Berkeley National Laboratory, a record 16,836 megawatts of new utility-scale land-based wind power capacity was added to U.S. energy infrastructure in 2020, representing about $24.6 billion of investment in new wind power.
  • Last year, the DOE noted, wind energy was able to provide more than half of in-state electricity generation and sales in a few states. Iowa led the pack with wind power providing 57% of its in-state electricity generation.

Last year, 42% of new electricity generation capacity in the U.S. came from land-based wind energy — more than from any other source — according to numbers in a series of reports from the Department of Energy (DOE) this week. By contrast, solar amounted to only 38% of new capacity last year.

This measures capacity, which is the maximum amount of electricity that can be produced under ideal conditions, while actual energy generation can be much less than that ideal amount as wind varies.

While both capacity and electricity generation from wind can vary regionally, land-based wind is now a strong, intermittent energy source across the U.S. According to research by DOE’s Lawrence Berkeley National Laboratory, a record 16,836 megawatts of new utility-scale land-based wind power capacity was added to U.S. energy infrastructure in 2020, representing about $24.6 billion of investment in new wind power.

Last year, the DOE noted, wind energy was able to provide more than half of in-state electricity generation and sales in a few states. Iowa led the pack with wind power providing 57% of its in-state electricity generation. However, Iowa has a lot of wind turbines, and not a very big population.

More typically, wind is used to generate electricity for the electric power industry during fall and spring nights, and the winter season. (Along the Gulf Coast in Texas, wind energy shows up in the late afternoon or early evenings during the summer.)

The growth of land-based wind energy in the U.S. last year was driven partly by production tax credits that are poised for a phaseout, encouraging development before that event horizon.

Wind technology improvements also helped encourage land-based wind development. Compared to older wind turbines, the latest models feature taller towers with longer blades that can produce more energy by reaching into higher winds.

In addition to land-based wind farms, myriad off-shore wind developments are underway domestically. But last year, off-shore wind farms still weren’t operational across most of the U.S.

The DOE’s 2021 Offshore Wind Market Report instead focuses on the “pipeline” of offshore initiatives. In 2020, the offshore pipeline “grew to a potential generating capacity of 35,324 megawatts (MW),” a 24% increase from the prior year, that report says.

The Block Island Wind Farm off of Rhode Island, and the Coastal Virginia Offshore Wind pilot project (off the coast of Virginia Beach) are the first two off shore wind farms to become operational in the U.S. One other project, Vineyard Wind 1, south of Nantucket, Mass. has received all permits and locked in contracts to sell their power and deliver it to the grid.

There are 15 other offshore wind projects in the pipeline that have reached the permitting phase, and seven wind energy areas that can be leased at the discretion of the federal government in the future, the DOE report said.

The Biden administration wants to expand U.S. offshore wind capacity to 30 gigawatts by 2030 as part of its goal to achieve a carbon pollution-free power sector by 2035.

Other forms of clean energy will be needed, alongside all forms of wind power, to fulfill electricity demand in the U.S. while decreasing greenhouse gas emissions.

New York City Is Betting Big on Offshore Wind Turbines

Originally published 9.29.2021

Mayor de Blasio has debuted a nearly $200 million plan to power the city on 100% “clean” electricity by 2030

New York City is making a big investment in renewable energy that will literally change the city’s landscape.

Last week, Mayor Bill de Blasio announced plans for a $191 million investment in offshore wind turbines that will help the city reach a goal of 100% clean electricity production by 2030 and reaching full carbon neutrality by 2050. Developed in collaboration with the New York City Economic Development Corporation, the Offshore Wind Vision plan promises to reduce 34.5 million tons of carbon dioxide, the equivalent of removing 500,000 cars from Manhattan streets, while generating 13,000 jobs and $1.3 billion in average annual investments.

“The climate crisis is real,” De Blasio said in a release. “New York City will serve as the model for taking climate action and growing the offshore wind industry with a real long-term vision plan focused on equity. We have the opportunity now to deliver on promises and set the city on a path towards a sustainable future.”

A map showing both planned and existing wind turbine farms in the New York City area.
A map showing both planned and existing wind turbine “farms” in the New York City Area

New York Senator Charles Schumer praised de Blasio for understanding that “transforming our energy system will drive our economy to new heights.”

“This forward-looking plan to grow the offshore wind industry sets New York City up to reduce emissions while creating good green jobs,” the Senate Majority Leader said in the statement.

To ensure the program benefits the city and its residents while still providing safe and renewable energy, the Economic Development Corporation will establish an advisory council composed of community, business, scientific, and environmental-justice leaders. 40% of jobs and investments will be directed toward women, minorities, and environmental justice communities.

Brooklyn Borough President Eric Adams boasted the infrastructure was already in place to create wind manufacturing hubs at Brooklyn Navy Yard, South Brooklyn Marine Terminal, and the Red Hook Container Terminal. “Building the offshore wind industry from scratch has the potential to make our city more sustainable, more equitable, and more prosperous,” Adams said. “We must seize the opportunity before it blows away.”

Today, offshore wind generates less than 1 % of the world’s electrical power. But according to the International Energy Agency, as countries look to reduce dependency on fossil fuels, the market will expand 15 fold and transform into a trillion dollar industry by 2040. The White House has set a national goal of 30 gigawatts of offshore wind by 2030, which would generate electricity for 10 million American homes while cutting 85 million tons of carbon dioxide emissions.

Offshore wind operations have taken off in Europe, but they’re still a recent arrival in the U.S.: Currently there are only a pair of small-scale operations—a two-turbine project near Virginia Beach, Virginia, and a five-turbine one off Block Island in Rhode Island. The first large-scale offshore project in the U.S. was only given green light this past May, when Vineyard Wind received approval for its $3 billion plan to place more than 60 G.E. Haliade-X turbines off the southern coast of Martha’s Vineyard and Nantucket, Massachusetts, in federal waters. When the 800-megawatt Vineyard Wind 1 farm is up and running in 2023, the company claims, its 853-foot towers will generate enough energy to power 400,000 houses—and reduce carbon emissions by over 1.6 million tons per year. 

In his State of the State address in January, Governor Andrew Cuomo announced New York would break ground this year on two farms off the coast of Long Island, each with more than 90 turbines. One will be located about 20 miles off Jones Beach, New York, and the other 60 miles from Montauk Point, New York. Generating 2,400 megawatts of power, or four times the energy capacity of a typical coal plant, the farms will be the largest two wind energy projects in the country. “Don’t worry,” Cuomo said, “neither will be visible from the shore.”

New York State now has five offshore wind projects in various stages of active development, the largest pipeline in the nation. Their combined capacity will be more than 4,300 megawatts or almost half needed to meet the state’s goal of 9,000 megawatts by 2035.

Wind Energy: Pros and Cons

What Is Wind Energy?

Wind energy is a renewable energy that harnesses energy generated by wind through the use of wind turbines that convert it into it into electricity. Wind technically comes from the sun as a byproduct of differences in temperature. Wind is generated from the uneven heating of the atmosphere, mountains, valleys, and the planets revolution around the sun.[1]

Pros and Cons of Wind Energy

Like all other forms of renewable energy, wind energy has its fair share of pros and cons. Certain renewable enregies work better in different regions of the world for different reasons and circumstances. That’s why it’s important for consumers to know which works best for their part of the country.

Advantages of Wind Energy

Harnessing wind to generate energy has its advantages and is an efficient option for many different parts of the world since it doesn’t depend on direct sunlight exposure like solar energy.

1) Free Fuel

Since wind turbines themselves run strictly on the power of wind generated, there is no need for fuel. Once the turbine is complete and installed, it doesn’t need to be fueled or connected to power to continue working. This also reduces the overall cost to continue to run large-scale wind farms in comparison to other forms of renewable energies, which require may require some energy investment.

2) One of the Cleanest Forms of Energy

Since wind energy doesn’t rely on fossil fuels to power the turbines, wind energy does not contribute to climate change by emitting greenhouse gases during energy production. The only time that wind energy indirectly releases greenhouse gases is during the manufacturing and transport of the wind turbines, as well as during the installation process. U.S. wind power lights homes and businesses with an infinitely available energy.[2]

3) Advances in Technology

The latest advances in technology have transformed preliminary wind turbine designs into extremely efficient energy harvesters. Turbines are available in a wide range of sizes, increasing the market to many different types businesses and by individuals for use at home on larger lots and plots of land. As technology improves, so do the functionalities of the structure itself, creating designs that will generate even more electricity, require less maintenance, and run more quietly and safely.

4) Doesn’t Disrupt Farmland Operations

Energy suppliers can build their wind turbines on pre-existing farmland and pay the farm owners to build on their property in the form of contracts or leases. This is a great boon to farmers who can use some extra income, and it wind turbine footprints take up very little space at the ground level, so it doesn’t disrupt their farm’s production. At present, less than 1.5% of contiguous U.S. land area is used by wind power plants. However, given all the plains and cattleland available on the interior of the country, there’s a lot of opportunity for expansion if landowners and government land managers are up for it.[3]

5) Reduces Our Dependence of Fossil Fuels

Energy generated from fossil fuels not only contributes to climate change, but we’ll one day run out of it. As long as the sun heats the planet, then there’s an endless supply of wind.[4] Furthermore, developing and investing in technology that can only run on a finite resource—that we may run out of our lifetime—is a terrible waste of human capital, private funds, and tax dollars.

Disadvantages of Wind Energy 

Although wind energy is a renewable, greener option of energy, it still has its disadvantages and limitations.

1) Dangerous to Some Wildlife

Wind turbines are known to pose a threat to the wildlife. Flying birds and bats whose habitats or migratory paths could be injured or killed if they run into the blades that turn on the fanlike structure of wind turbines when they are spinning. The deaths of birds and bats are a controversial subject at wind farm sites, which has raised concerns by fish and wildlife conservation groups.[5] Aside from the wildlife that flies through the air, wildlife on the ground may also affected by the noise pollutions generated from whirring blades. Although wind turbines can cause problems for wildlife, other things such as skyscrapers and large windows are also hazardous and continue to be built without question or similar outcry.

2) Noisy

Wind turbines can be quite noisy, which is why they’re mostly found in very rural areas where most people don’t live. Depending on the location of the turbine, such as offshore, noise isn’t an issue. With advancements in technology, newer designs have been shown to reduce the noise complaints and have a much quieter presence.

3) Expensive Upfront Cost

If you can imagine, these massive structures are often hundreds of feet tall and require substantial upfront investment. The placement of wind turbines in rural areas requires further investment in underground lines to send power to more populated areas like towns and cities where it’s needed. The majority of the cost is the initial installation and building stage, but after that, wind energy produces an endless supply of energy as long as there is wind.

4) Unreliable/Unpredictable

Wind energy suffers from what is called intermittency, which is a disruption caused by the inconsistency of the wind itself. Since wind can blow at various speeds, it’s hard to predict the amount of energy it can collect at a given time. This means suppliers and cities need to have an energy reserve or alternative sources of power in case the winds die down for longer lengths of time.

Supporting Sustainable Energy

As technology continues to advance, so will our choices of sustainable energy. JustGreen is a simple energy option that we offer as an add-on to our energy plans. When you choose green energy options like JustGreen, you’re offsetting your energy usage with renewable energy credits that stem from sustainable sources like wind, hydro, and solar energy.

Brought to you by justenergy.com

Resources:

  1. Office of Energy Efficiency & Renewable Energy, Wind Energy Basics, https://www.energy.gov/eere/wind/wind-energy-basics
  2. American Wind Energy Association, January 30, 2017,  https://www.aweablog.org/the-truth-about-wind-power/
  3. Office of Energy Efficiency & Renewable Energy, Wind Vision: A New Era for Wind Power in the United States, https://www.energy.gov/eere/wind/maps/wind-vision
  4. Office of Energy Efficiency & Renewable Energy, Wind Energy Basics, https://www.energy.gov/eere/wind/wind-energy-basics
  5. Wind Energy Development Programmatic EIS, Wind Energy Development Environmental Concerns, http://windeis.anl.gov/guide/concern/index.cfm

Investing in Water for a Sustainable Future

Originally published 10.8.20

SUMMARY

  • The world is facing critical water shortages, and companies that focus on addressing the growing water crisis could represent key long-term growth opportunities.
  • Listed companies involved in water-related business activities, as represented by the S&P Global Water Index, have historically exhibited higher risk-adjusted returns than the broad global equity market.
  • Allocation to water can be systematically captured by rules-based, transparent index construction. Market participants could utilize index-linked water strategies to gain exposure to water, manage water risk, express their sustainability views, or allocate as part of a broader natural resource theme.

THE CASE FOR INVESTING IN WATER

Water is essential to the production and delivery of nearly all goods and services.  Many businesses are reliant on a sufficient flow of clean water to operate and realize their growth ambitions.  Overconsumption of water, water pollution, environmental degradation, and changing climatic conditions are making clean water an increasingly scarce resource. As the world population grows and competition for water resources between industry sectors intensifies, nations are set to experience a 40% shortfall in water by 2030.

https://www.spglobal.com/spdji/en/documents/education/education-investing-in-water-for-a-sustainable-future.pdf

What Infrastructure Investors Need To Know About The Latest Climate Change Report

Originally published: 8.9.2021

The latest report of the Intergovernmental Panel on Climate Change (IPCC) is out, and it’s not pretty: “Climate change [impacts are] widespread, rapid, and intensifying.”

Climate scientist Michael Mann summarizes the latest findings in three basic points: 1. The “hockey stick” of rising global temperatures is continuing at unprecedented rates; 2. The impacts are now widespread, with more extreme weather events; and 3. It’s still not too late to do something to blunt the worst of the potential impacts.

None of this will come as a significant surprise to most professional infrastructure investors at this point. Many institutional investors I speak with are already keenly aware of the climate change megatrend affecting their markets, and it’s one reason so many institutions are shifting their investments from fossil fuel projects into renewables.

However, while that shift is highly visible in power generation project finance, investors need to also heed the warning from the IPCC on all their other categories of infrastructure as well. Because the rapidly-growing effects of climate change no longer allow investors to think about their long-term infrastructure assets in the same way.

One useful case study may be Iceland. The country is renowned for its past transition from a mostly fossil fuel powered electric grid, to one that is largely hydropower and geothermal powered. It’s held up as an example to policymakers. Major energy-intensive industries like aluminum smelting and now cryptocurrency mining have been shifting operations into Iceland because of its abundantly available low-cost, renewable electricity and geothermal heating. Iceland would appear to be in an advantaged position as the world shifts to more sustainable energy sources.

And yet, as I heard firsthand on a recent trip to the country, climate change is actually creating major threats to the country’s economy. The country’s famous glaciers, covering large portions of the island, are in full retreat. This is already impacting tourism to a small degree (it takes the tour operators significantly longer than even just a decade ago to reach glaciers for short trips), but would have a potentially major impact on tourism earnings over time.

The glacier melt is also having some less obvious impacts. As one article from two years ago described, even then the glacier melt was having operational impacts on the country’s fishing industry.

More directly relevant to infrastructure investors and anyone planning to rely longterm upon cheap, renewable electricity, the glacial melt is having significant impacts on hydropower. While geothermal power generation gets all the attention when people think of Iceland, it’s actually hydropower that provides the majority of the power. And the massive glacial melt is currently overwhelming the country’s hydrodams, so that they’re not able to fully utilize the potential power… and yet within a few decades the expectation is that the loss of glaciers will result in much LOWER levels of waterflow, threatening the available power supply. By 2200, the expectation is that all of the glaciers will be gone, and available hydropower capacity will be stuck at 1990 levels. Indeed, another study concluded that “the regression of their glaciers will render a multitude of Iceland’s hydroelectric power stations inert within the turn of the century, and decrease their total electric production by over 70%.” And of course, these projections came before today’s IPCC report and its indications of even more accelerated climate change than previously expected.

Thus, Iceland becomes a cautionary microcosm for infrastructure investors. First, in that the effects on power generation projects are not likely to be linear or easy to predict. What seems like an advantaged long-term project today may not be, even just a decade from now. Certainly over longer time periods, as most large power generation projects are planned for. Planning and projecting is now really difficult for such investments.

Secondly, all infrastructure, not just power generation projects, are going to face significant impacts from climate change. The above-mentioned impacts on ports are just one obvious example, but extreme weather events will also have an impact on any type of project. And just think about all the effort that has gone into relocating industrial operations to Iceland in search of cheap, renewable power, if the power is no longer cheap as hydropower resources melt away.

With fishing, tourism and cheap renewable power all under threat from climate change, Iceland no longer looks so advantaged in the shift to a more sustainable global economy.

One key takeaway for infrastructure investors is that flexibility and resiliency are going to be increasingly important. And that means smaller, more distributed infrastructure could be advantaged over the next few decades. Multi-decadal climate effects are going to be more easily dealt with by distributed generation than by big, 50-year centralized power plants. On an island like Iceland, it’s also more obvious how dependent their economy is on long supply chains (for food, fuel, etc), so efforts such as indoor agriculture can also provide resiliency.

What today’s IPCC report shows is that we’re already in a period where climate change is going to have rapid impacts on economies and infrastructure, and unfortunately this will be non-linear and difficult to predict. As Iceland’s example shows, this will have a significant impact on the infrastructure asset class, sometimes in counter-intuitive ways. Infrastructure investors need to make sure they are not thinking about this in a siloed way – climate change as strictly a powergen issue, with other infrastructure categories still business as usual as if they won’t also be impacted. And investors also should be thinking about ways their strategies and allocations could better incorporate distributed, flexible and resilient approaches.

Understanding water scarcity

Originally published 1.7.2009

Physical water scarcity occurs when there is not enough water to meet all demands. Arid regions are most often associated with physical water scarcity, but an alarming new trend is an artificially created physical water scarcity due to over allocation and overdevelopment of water resources. Symptoms of physical water scarcity include, among other factors, severe environmental degradation and increasing occurrence of conflicts.

Economic water scarcity is caused by a lack of investment in water or a lack of human capacity to satisfy the demand for water, even in places where water is abundant. Symptoms of economic water scarcity include inadequate infrastructure development: people have trouble getting enough water for domestic and other purposes; high vulnerability to seasonal fluctuations: floods and drought; and inequitable distribution of water, even when infrastructure exists.

Why electric cars will take over sooner than you think

Originally published 6.1.21

I know, you probably haven’t even driven one yet, let alone seriously contemplated buying one, so the prediction may sound a bit bold, but bear with me.

We are in the middle of the biggest revolution in motoring since Henry Ford’s first production line started turning back in 1913.

And it is likely to happen much more quickly than you imagine.

Many industry observers believe we have already passed the tipping point where sales of electric vehicles (EVs) will very rapidly overwhelm petrol and diesel cars.

It is certainly what the world’s big car makers think.

Jaguar plans to sell only electric cars from 2025, Volvo from 2030 and last week the British sportscar company Lotus said it would follow suit, selling only electric models from 2028.

And it isn’t just premium brands.

General Motors says it will make only electric vehicles by 2035, Ford says all vehicles sold in Europe will be electric by 2030 and VW says 70% of its sales will be electric by 2030.

This isn’t a fad, this isn’t greenwashing.

Yes, the fact many governments around the world are setting targets to ban the sale of petrol and diesel vehicles gives impetus to the process.

But what makes the end of the internal combustion engine inevitable is a technological revolution. And technological revolutions tend to happen very quickly.

This revolution will be electric

Look at the internet.

By my reckoning, the EV market is about where the internet was around the late 1990s or early 2000s.

Back then, there was a big buzz about this new thing with computers talking to each other.

Jeff Bezos had set up Amazon, and Google was beginning to take over from the likes of Altavista, Ask Jeeves and Yahoo. Some of the companies involved had racked up eye-popping valuations.

For those who hadn’t yet logged on it all seemed exciting and interesting but irrelevant – how useful could communicating by computer be? After all, we’ve got phones!

But the internet, like all successful new technologies, did not follow a linear path to world domination. It didn’t gradually evolve, giving us all time to plan ahead.

Its growth was explosive and disruptive, crushing existing businesses and changing the way we do almost everything. And it followed a familiar pattern, known to technologists as an S-curve.

Riding the internet S-curve

It’s actually an elongated S.

The idea is that innovations start slowly, of interest only to the very nerdiest of nerds. EVs are on the shallow sloping bottom end of the S here.

For the internet, the graph begins at 22:30 on 29 October 1969. That’s when a computer at the University of California in LA made contact with another in Stanford University a few hundred miles away.

The researchers typed an L, then an O, then a G. The system crashed before they could complete the word “login”.

Like I said, nerds only.

S-curve

A decade later there were still only a few hundred computers on the network but the pace of change was accelerating.

In the 1990s the more tech-savvy started buying personal computers.

As the market grew, prices fell rapidly and performance improved in leaps and bounds – encouraging more and more people to log on to the internet.

The S is beginning to sweep upwards here, growth is becoming exponential. By 1995 there were some 16 million people online. By 2001, there were 513 million people.

Now there are more than three billion. What happens next is our S begins to slope back towards the horizontal.

The rate of growth slows as virtually everybody who wants to be is now online.

Jeremy Clarkson’s disdain

We saw the same pattern of a slow start, exponential growth and then a slowdown to a mature market with smartphones, photography, even antibiotics.

The internal combustion engine at the turn of the last century followed the same trajectory.

So did steam engines and printing presses. And electric vehicles will do the same.

In fact they have a more venerable lineage than the internet.

The first crude electric car was developed by the Scottish inventor Robert Anderson in the 1830s.

But it is only in the last few years that the technology has been available at the kind of prices that make it competitive.

The former Top Gear presenter and used car dealer Quentin Willson should know. He’s been driving electric vehicles for well over a decade.

He test-drove General Motors’ now infamous EV1 20 years ago. It cost a billion dollars to develop but was considered a dud by GM, which crushed all but a handful of the 1,000 or so vehicles it produced.

The EV1’s range was dreadful – about 50 miles for a normal driver – but Mr Willson was won over. “I remember thinking this is the future,” he told me.

He says he will never forget the disdain that radiated from fellow Top Gear presenter Jeremy Clarkson when he showed him his first electric car, a Citroen C-Zero, a decade later.

“It was just completely: ‘You have done the most unspeakable thing and you have disgraced us all. Leave!’,” he says. Though he now concedes that you couldn’t have the heater on in the car because it decimated the range.

How things have changed. Mr Willson says he has no range anxiety with his latest electric car, a Tesla Model 3.

He says it will do almost 300 miles on a single charge and accelerates from 0-60 in 3.1 seconds.

“It is supremely comfortable, it’s airy, it’s bright. It’s just a complete joy. And I would unequivocally say to you now that I would never ever go back.”

We’ve seen massive improvements in the motors that drive electric vehicles, the computers that control them, charging systems and car design.

But the sea-change in performance Mr Willson has experienced is largely possible because of the improvements in the non-beating heart of the vehicles, the battery.

The most striking change is in prices.

Just a decade ago, it cost $1,000 per kilowatt hour of battery power, says Madeline Tyson, of the US-based clean energy research group, RMI. Now it is nudging $100 (£71).

That is reckoned to be the point at which they start to become cheaper to buy than equivalent internal combustion vehicles.

But, says Ms Tyson, when you factor in the cost of fuel and servicing – EVs need much less of that – many EVs are already cheaper than the petrol or diesel alternative.

At the same time energy density – how much power you can pack into each battery – continues to rise.

They are lasting longer too.

Last year the world’s first battery capable of powering a car for a million miles was unveiled by the Chinese battery maker, CATL.

Companies that run big fleets of cars like Uber and Lyft are leading the switchover, because the savings are greatest for cars with high mileage.

But, says Ms Tyson, as prices continue to tumble, retail customers will follow soon.

How fast will it happen?

The answer is very fast.

Like the internet in the 90s, the electric car market is already growing exponentially.

Global sales of electric cars raced forward in 2020, rising by 43% to a total of 3.2m, despite overall car sales slumping by a fifth during the coronavirus pandemic.

Electric car sales

That is just 5% of total car sales, but it shows we’re already entering the steep part of the S.

By 2025 20% of all new cars sold globally will be electric, according to the latest forecast by the investment bank UBS.

That will leap to 40% by 2030, and by 2040 virtually every new car sold globally will be electric, says UBS.

The reason is thanks to another curve – what manufacturers call the “learning curve”.

The more we make something, the better we get at making it and the cheaper it gets to make. That’s why PCs, kitchen appliances and – yes – petrol and diesel cars, became so affordable.

The same thing is what has been driving down the price of batteries, and hence electric cars.

We’re on the verge of a tipping point, says Ramez Naam, the co-chair for energy and environment at the Singularity University in California.

He believes as soon as electric vehicles become cost-competitive with fossil fuel vehicles, the game will be up.

That’s certainly what Tesla’s self-styled techno-king, Elon Musk, believes.

Last month he was telling investors that the Model 3 has become the best-selling premium sedan in the world, and predicting that the newer, cheaper Model Y would become the best-selling car of any kind.

“We’ve seen a real shift in customer perception of electric vehicles, and our demand is the best we’ve ever seen,” Mr Musk told the meeting.

There is work to be done before electric vehicles drive their petrol and diesel rivals off the road.

Most importantly, everyone needs to be able charge their cars easily and cheaply whether or not they have a driveway at their home.

That will take work and investment, but will happen, just as a vast network of petrol stations rapidly sprang up to fuel cars a century ago.

And, if you are still sceptical, I suggest you try an electric car out for yourself.

Most of the big car manufacturers now have a range of models on offer. So take one for a test drive and see if, like Quentin Willson, you find you want to be part of motoring’s future.