The Sustainable Investor (issue 45)

20th October 2022

Topics - Europe plans for the winter, construction lags on emissions, latest energy storage forecasts, electric roads for HGV’s, forced labour, smart cities and fire safety, ESG reporting practice in the US and cleaning up soil and water with plants.

The Sustainable Investor: our weekly summary of the key news stories, developments, and reports that are impacting investing in sustainability, the climate related transitions, and a greener/fairer society. The important word in this sentence is investing - unlike many other blogs our focus is on the issues we think investors need to be aware of and think about.

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Starting from this week, we are moving to a slightly different format. So, more topics (aiming for 7 or 8) with briefer summaries. But fear not, we will still be writing the longer “our take on this”, it’s just we will be publishing these as separate blogs. We have also started our long blogs (the first was on AMR), the more detailed looks at specific investible topics. This is part of the move to our new web platform (coming soon), which will make searching for the blogs on your favourite topics much easier. Ok - on with the news.

Energy use: how is Europe responding to the crisis?

National energy policy responses to the European energy crisis (Bruegel)

What is the big investing theme - transitioning from fossil fuel use to cleaner alternatives is a really important element of nearly every government’s net zero policy. But in most cases, there is little detail on the “how we will get there”. For investors, this is an important topic. It’s very possible that direct supply suppression (ie stopping new O&G exploration) at any sort of scale, will turn out to be just too hard. This potentially leaves encouraging the use of greener alternatives as our main transition tool. Aside from the obvious question (when do fossil fuel-based assets become stranded?) it also should lead us to think more about how long greener alternatives might take to reach dominate market shares.

In a nutshell - what does the story say?

• Russia’s invasion of Ukraine has triggered a quick and profound reorientation of energy policy in Europe. The aim is to decouple Europe from Russian fossil fuels, while accelerating the green transition. Russia cut about 80% of its gas supplies to Europe during spring and summer 2022, making the reorientation increasingly urgent. Unsurprisingly, the short-term policies include unprecedented measures to diversify gas supply. Several European countries have new gas deals with alternative suppliers of both liquified natural gas (LNG) and pipeline gas, and have started the construction of new gas infrastructure

• By contrast longer-term policies have mainly focused on accelerating the green transition, which is seen as a structural response to fix Europe’s over-dependency on fossil-fuel imports. A wide range of longer-term energy policy measures have been announced, from the fast-tracking of renewable energy projects, to an accelerated roll-out of clean-tech solutions including heat pumps and electric mobility.

Why do we think it is important for investors?

• Transitioning to greener alternatives is a viable alternative to Europe’s energy (fossil fuel) import dependence. But it was always going to need a lot of mid-term government support, through financial incentives and regulation. So far, outside of renewable electricity generation and in EV’s, these have been largely inadequate to drive the sort of change needed. In Europe, the reaction to the Russian gas crisis opens the possibility that the region will accelerate its shift to green energy. Crucial energy policy decisions have largely been taken by individual EU countries at a national level, given that there has been a lack of accord on a common way forward for the region. This can make it tough for investors to keep track, with up to 27 different national plans. It’s this challenge the report helps to overcome.

• From a long-term investor perspective, the report highlights two main areas of planned action. These are energy efficiency (the perpetual theme Cinderella) and an acceleration of efforts to roll-out renewable energies and clean tech solutions. On energy efficiency, if the plans are implemented, then the immediate gas saving potential could be 60 bcm by October 2023 and up to 205 bcm a year by 2030 (or about half of 2020’s total gas demand). But then we have all heard this story before. Plans are great, but its implementation that really counts.

• On renewables and clean tech, the focus of country level plans is mostly on improving regulation, so site identification, plus fast tracking of authorisations and permitting, combined with extra financial support. Under the Temporary Crisis framework, EU countries will be allowed to set up schemes for investments in renewable energy (ie solar, wind, renewable hydrogen, biogas and biomethane), storage, and renewable heat (including heat pumps). Plus, the framework introduced simplified tender procedures to fast-track the otherwise long permitting process, from construction permits to environmental impact, site identification, assessment, and spatial planning.   This part of the plan looks more deliverable.

Health & wellness: Construction lagging on PM10 emissions improvements

Reducing air pollution from construction sites (Impact on Urban Health)

What is the big investing theme - The built environment is an important sustainability theme, both as an integral part of societal existence but also a major decarbonisation (40% of energy-related GHG emissions) and resource consumption problem (40% of global raw materials) that needs investor attention. Including residential and commercial buildings, communal areas such as parks, and supporting infrastructure such as energy networks, mobility, and water supply, it can have significant impacts on our health, well-being and equity & inclusion. 

In a nutshell - what does the story say?

• Joint report from Impact on Urban Health and the Centre for Low Emission Construction (CLEC) highlights that whilst major historical emitters of PM10 particles have significantly reduced their output, the construction industry has largely remained unchanged since the early 2000s and hence its share of emissions has actually been rising. The report calls for the construction industry to improve air quality at its sites, aligned with net zero efforts, and for pollution reduction targets to be introduced.

• Air pollution caused by the construction sector is a leading cause of premature deaths in the UK. In London, for example, construction is estimated to be responsible for around 30% of PM10 in London’s air. 

Why do we think it is important for investors?

• It is predicted that by 2050 more than two-thirds of the worlds population will live in urban areas. Demand for accommodation and the infrastructure to support that is therefore likely to rise. Embodied carbon, or the emissions from taking raw materials and resources and converting them into building or facility that is ready for occupation or use, contributes between eight and ten percent of global emissions.

• From a health and well-being perspective, we have previously highlighted the impact of particulate matter not only on respiratory illnesses but also as a catalyst for cancers. The 67 percent reduction in particulate matter emissions from other sectors in the past 15 years in the UK shows what can be done, so the measures called for in the study will be welcome. Rather than demolition and rebuild, where possible refit and reuse is preferable for buildings that are no longer fit for purpose. Modular construction or holistic construction as well as timber construction could all make repurposing buildings easier.

Electricity generation: how fast could the battery storage market grow ?

Global Energy Storage Market to Grow 15-Fold by 2030 (BNEF)

What is the big investing theme - 100% (or close to) renewable/low carbon electricity generation systems are looking more viable with each passing year, supported in many cases by long distance interconnectors and demand management. But one of the biggest barriers to widespread adoption remains the requirement for economic forms of electricity/energy storage. Li Ion batteries look to be the preferred short and medium storage period technology of choice but coping with infrequent low wind/low solar days will need long duration solutions.

In a nutshell - what does the story say?

• Global energy storage is projected to reach a cumulative 411 gigawatts (or 1,194 gigawatt-hours) by the end of 2030, according to the latest forecast from BNEF. That is 15 times the storage that was online at the end of 2021. The most notable new policies that have driven this higher forecast are the US Inflation Reduction Act, providing more than $369 billion in funding for clean technologies, and the European Union’s REPowerEU plan, which sets ambitious targets to reduce reliance on gas from Russia.

• The US and China are set to remain the two largest markets, representing over half of global storage installations by the end of the decade. Europe, however, is catching up with a significant ramp-up in capacity fueled by the current energy crisis. Although the scale-up of global energy storage capacity is imminent, supply chain constraints could slow additions. On top of pandemic-related supply chain issues, inflation, high transport costs and raw material prices have made battery cells more expensive over the last year.

Why do we think it is important for investors?

• From an investing perspective energy storage was for many years the junior investment theme to renewable generation. That is changing and changing fast. As we highlighted in issue 44, battery storage is going to be an essential element of most countries plans to hit high levels of renewable electricity generation. Batteries, together with interconnectors and demand management, will help the grid bridge periods when we have no sunshine or wind.

• It is expected that most battery storage projects globally will focus on time shifting, although grid balancing activities can also provide additional revenues. Co-located projects (ie solar or wind plus storage) are rapidly becoming the norm, at least in the US. The technology of choice for shorter durations is Li Ion, which already dominates the storage market out to six or even eight hours. While other technologies are being explored, our view is that they are unlikely to take material market share until the late 2020’s or even the early 2030’s.

Transport: Electric roads better option for UK freight ?

New study shows nationwide Electric Road System likely lowest-carbon option for UK freight. (Costain press release)

What is the big investing theme - Transportation has the highest reliance on fossil fuels of any sector. Approximately 95 percent of its energy comes from them. For 45 percent of countries transport is the largest source of energy related emissions and it is the second largest source for the rest. Changing how we transport ourselves and our goods helps with both climate change and with health and well-being issues and is a rich vein for investment.

In a nutshell - what does the story say?

• A study by the Electric Roads Consortium concluded that a nationwide Electric Road System (ERS) would be the most efficient and fastest way to decarbonise the UK freight sector, estimating that a national ERS would remove five percent of the UK’s total GHG emissions. An ERS-powered Heavy Goods Vehicle (HGV) would require three times less energy than a hydrogen-powered one. It would also generate between 10 percent and 20 percent bigger savings in GHG between 2025 and 2050 compared with pure battery solutions.

• The study finds that an ERS comprising 5,500 single lane-km and 2,100 static charging stations could support UK logistics operations without any significant changes to current practices. It also has the potential to create or support 15,000 jobs in the UK. The consortium comprises Costain, Siemens Mobility, Scania, the Centre for Sustainable Road Freight, Ove Arup, Milne Research, Possible, SPL Powerlines UK, Box Energi and Clarke Infrastructure Planning.

• Editors note: An ERS typically involves overhead electric cables and a catenary system on the roof of the vehicle that can extend upwards to make contact with the cables to provide power to the drivetrain and other electrical systems.

Why do we think it is important for investors?

• Let’s park for a moment the fact that this report comes from a consortium with a clear interest in making it happen. The idea might still be worth investors keeping an eye on. In the EU in 2020, road freight transportation accounted for 77.4 percent of the total inland freight transport followed by rail (16.8 percent) and inland waterways (5.8 percent). HGVs emit around 18 percent of all road vehicle CO2 emissions in 2021 according to UK Department for Transport figures, despite only representing 1.2% of the total number of vehicles on the road and five percent of total miles driven. 

• Consortium members, Siemens Mobility, Scania and SPL have trialed smaller electric road systems in Germany and Sweden. In Germany, the National Platform for the Future of Mobility (NPM) recommends equipping 300km of autobahns with overhead contact lines by 2023 and electrifying a total of 4,000km by 2030 to help the country reach its climate target of reducing greenhouse gas emissions in the transport sector by 40 percent. 

Human Rights: Moves to ban products made with forced labour

Commission moves to ban products made with forced labour (European Law Monitor)

What is the big investing theme - Avoiding human rights abuses in supply chains is becoming increasingly important. This is partly about addressing inequalities and related social issues such as poverty, lack of access to education, health and housing. But its increasingly becoming an economic and financial risk. Investors need to ensure that the companies they are involved with are taking the necessary measures to address exploitation in their supply chains. 

In a nutshell - what does the story say?

• The European Commission has recently proposed to prohibit products made with forced labour on the EU market. The proposal covers all products, namely those made in the EU for domestic consumption and exports, and imported goods, without targeting specific companies or industries. This comprehensive approach is important because an estimated 27.6 million people are in forced labour, in many industries and in every continent.

• The proposal builds on internationally agreed definitions and standards and underlines the importance of close cooperation with global partners. National authorities will be empowered to withdraw from the EU market products made with forced labour, following an investigation. EU customs authorities will identify and stop products made with forced labour at EU borders.

Why do we think it is important for investors?

• This is clearly important as another step in ensuring that companies carry out effective due diligence on human rights issues. The proposal reinforces the requirement to make sure that reporting and monitoring is effective and that it is not a “tick-the-box” compliance issue, but a true and complete exercise which is seen as crucial by the companies.

• For investors it is becoming riskier to invest in companies who do not “do their human rights homework”. The risk is that not only will imports into the EU be blocked but there will be "spill over" effects into countries where the production takes place. In this context it is opportune to recall that measures such as these do not require companies to pay wages equal to wages in Europe, but instead that living wages and standards around decent work must be observed within the context of where production take place.  

Built environment: Convergence of IoT, wireless sensors and CCTV to improve city fire control.

Pilot fire safety project for the mobility impaired and vulnerable (SMG)

What is the big investing theme - The built environment is an important sustainability theme, both as an integral part of societal existence but also a major decarbonisation (40% of energy-related GHG emissions) and resource consumption problem (40% of global raw materials) that needs investor attention. Including residential and commercial buildings, communal areas such as parks and supporting infrastructure such as energy networks, mobility, and water supply, it can have significant impacts on our health, well-being and equity & inclusion. 

In a nutshell - what does the story say?

• The Seoul Metropolitan Government has launched a pilot project using the internet of things (IoT) and CCTV cameras to improve fire detection and response in residential facilities for the mobility impaired and vulnerable, including children, disabled people and the elderly. The system uses wireless sensors to detect a fire and motion detection to track its source and the location of those inside. Mobility impaired users press wireless emergency bells to send alerts to the Seoul Emergency Operations Centre via a wired fire service network and fire safety platform. The situation room can also check CCTV footage. The project will be expanded to 844 facilities by 2024.

Why do we think it is important for investors?

• Smart Cities are ultimately about making urban areas operate more efficiently by improving the quality of life for its residents and those interacting with it. This latest initiative in Seoul does exactly that, improving response times, minimising loss as well as enhancing the sense of security and well-being of vulnerable residents. 

• At a high level this could potentially be extended to include broader logistics including route optimisation and environmental control, such as identifying where pollution buildups are occurring to be addressed both tactically and strategically in terms of city design. Concerns around privacy need to be managed as well as cyber security vulnerabilities particularly around wireless sensors and other IoT devices. But giving the double trends of increasing urbanisation, and the rise in elderly and vulnerable people living alone, this could become a big theme trend.

Sustainability transitions: What’s ESG got to do with it

What’s ESG Got to Do With It? (Harvard Law School)

What is the big investing theme - We think sustainability is a whole lot more than just ESG (either scoring or measurement). To us, it’s about investing in the companies providing the goods and service of the future, and/or engaging actively with the companies that need to adapt if they are to continue to have a future. But we do agree that it’s very important that companies provide meaningful and useful ESG data. The key words here are meaningful and useful.

In a nutshell - what does the story say?

• The authors believe it is imperative for companies to stay sharply focused on the ESG issues that are most important to their businesses and stakeholders. Large investors have expressed a strong belief that certain ESG factors can have a material impact on a company’s long-term financial health, and there are no signs that investors are backing away from that stance.

• Regulators are also cracking down on so-called “greenwashing” – trying to hold companies accountable to ESG commitments. Investors are likely to continue demanding that companies proactively manage their material ESG risks and opportunities appropriately. However, as companies continue to act on ESG, questions remain over what companies should disclose and how.

Why do we think it is important for investors?

• Yes, a big part of the debate needs to be about materiality. Companies should focus their efforts and communication “time” on the things that are “the most important to their businesses and stakeholders”. And yes, we understand that there are two types of materiality (the topic of an upcoming long blog).

• But the other part needs to be about the detail of how companies put together their ESG reports, and how what they are doing compares with their peers and competitors. We know it shouldn’t be the case, but our experience is that the best pitch to a board as to why they need to do more is ….”your competitors are doing more and shareholders like it”.

• This report is a useful summary of what current practice looks like (in the US), with a pretty useful 10 point summary of strategic considerations. Perhaps unsurprisingly, we like consideration 2 (We Are (Still) Living in a Material World) and consideration 7 (It’s A Matter of Trust). We would add No 11 - focus, investors don’t have a lot of time and avoiding padding out your message helps everyone.

• You may also find this report from the TCFD useful, buried on page 62 is an interesting chart covering which disclosures respondents found the hardest to deliver. Unsurprisingly, scope 3 emissions are up there at No 2, but No 1 (so the toughest) is resilience of strategy - pretty important we would have thought.

Ag & natural capital: cleaning up soil and water with plants

We can clean up soil and water with plants (Geo)

What is the big investing theme - Human activities have been causing damage to both land and aquatic natural capital, impacting the symbiotic balance that helps to sustain us. Reforming practices such as agriculture is a big deal, in terms of greenhouse gas emissions, environmental impact, food security and rural society. But it’s going to require massive social and economic change and disruption, to production methods, to supply chains and to employment. This may include finding innovative solutions to protect and sustain media such as our soil. Many larger investible companies rely on our agricultural supply chains (think food producers and supermarkets for instance), so it’s a big long-term issue all investors should be considering

In a nutshell - what does the story say?

• Claude Grison, director of the CNRS bio-inspired chemistry and ecological innovations laboratory received the European Patent Office European Inventor Prize 2022 earlier this year for revolutionising decontamination methods. 

• Metallophytes, plants that can tolerate high levels of heavy metals, can also extract metallic elements, most notably zinc, nickel and manganese, through their roots and stored in other parts of the plant. This “eco-catalysis” can be used for decontaminating both soil and water and can preserve wetlands. Indeed, some invasive aquatic plants such as water primrose and Japanese knotweed can be used as raw materials for eco-catalysis filters.

Why do we think it is important for investors?

• “Soil pollution affects the food we eat, the water we drink, the air we breathe and the health of our ecosystems,” the FAO Deputy Director-General warned in 2018. About 95 percent of the food we eat comes from the soil. Soil contamination comes from different sources including industrial pollution, some agricultural practices, mining and urban pollution.

• Soils are the largest active store of carbon after the oceans and so are a vital part of the solution to the adverse impacts of climate change. Globally it has been calculated that between 110 and 130 gigatons of carbon have been lost from agricultural soils.  Wetlands, another important carbon store (in fact they have the ability to store the largest quantities of carbon per unit area of ecosystem), can also be preserved as invasive species can be cleared, processed and used to decontaminate the water.

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