The Sustainable Investor (issue 47)
5th November 2022
Measurement to reduce food waste, trying to keep industry in Europe, truely sustainable living, electricity interconnectors in Asia, transition as important as endgame & insurance industry creating impact
A focus on measurement to reduce food waste
What is the big investing theme - Waste has been an inevitable problem of the traditional linear production and consumption model. Reducing and eliminating waste is a big source of decarbonisation in energy and with finished goods such as food - waste less, consume less, generate less. What we do with that waste can also contribute to harmful emissions. Food waste entering landfills, for example, is estimated to generate between eight and ten percent of global GHG emissions. The circular economy and other recycling paradigms offer one route. Other innovations from the technological to the economic to the behavioural can also help.
The Journal of Cleaner Production reports on a study across six countries (UK, Netherlands, Germany, Belgium, Canada and the US) that found that the use of meal boxes (containing precisely measured ingredients and recipes) reduced total meal waste by 38 percent compared with meals cooked with store-bought ingredients. In particular the amount of food left in pots and pans was reduced by 34 percent. Interestingly the amount of food wasted as leftovers on plates was increased by 15% with meal box dinners.
Why do we think it is important?
The amount of household food waste may surprise you. It is much higher than retail food waste. According to the UNEP’s Food Waste Index 2021 report, the estimated household food waste per capita is 59kg in the United States, 77kg in the UK (that’s one of Sandy!), 81kg in Sweden, 64kg in China and 102kg in Australia.
Despite this waste, the World Food Programme estimates that 828 million people go to bed hungry every night across the globe and even in countries like the UK, it is estimated that 4.7 million adults struggle to afford to eat every day. This is a huge social problem that has knock on effects to education, health and ultimately productivity. Environmentally it is also important. The UNEP estimates that between eight and ten percent of global GHG emissions are associated with food that is not consumed and ends up in landfills.
There are a number of problems to solve. Firstly, reducing the amount of ingredients that are not used - this is essentially the key finding from the study. Meal boxes do this for the consumer, but the consumer can also take control. More accurate measurement or using frozen ingredients, either shop bought or prepped (for example chopping and freezing onions), makes it easier to use only the exact amount needed when cooking. There are ways to be more energy efficient when freezing. Check this out, which we shall cover in a more extensive blog - ischoric versus the traditional isobaric.
Secondly, the issue of food left on the plate can be solved by a combination of portion control (behavioural) and having adequate food storage (I remember Korea’s LocknLock from my Asia days).
Thirdly, stopping the food waste getting to landfill where it can release GHGs. Home composting (particularly with aerobic digesters) or municipal composting (particularly with some form of methane capture) will typically have a lower GHG footprint than landfill. Social enterprises such as The Felix Project collect surplus food from retail stores including supermarkets and turn it into pre prepared meals for those in need.
Overall, monitoring what we consume, and minimising what we waste could have social, environmental and economic benefits.
Trying to keep industry in Europe ?
What is the big investing theme - Where industry is located, especially when a new plant is being considered, has always been a “battle of the subsidies”. Companies understandably encourage countries or regions to compete. But, at the end of the day, its often fundamentals that win out. Where does it make economic sense for manufacturing to take place, does the region have a skilled workforce, does it have good access to raw materials and end markets, and increasingly now, what does regulation look like and how cheap (or expensive) are energy costs.
The BBC reports that BMW has said its hatchback and small SUV electric Minis will start being built in China. Plus, its electric Countryman model will be built in Leipzig, Germany. A UK transport minister has said BMW's decision to move production of electric Minis to China was "very unfortunate", but that she was "not concerned" about the future of electric car production in the UK.
Why do we think it is important?
The UK minister might be right when she said that “some companies will come into the market and some will leave". But there seem to be more companies than usual thinking of leaving. BASF recently announced that it was seeking permanent cost cuts in Europe, quoting “the triple burden of sluggish growth, high energy costs and over regulation”. In its third-quarter results, the company said it would reduce annual costs by E500m in Europe up to 2024, including job cuts. The cutbacks in Europe contrast with a E10 bn chemical complex that BASF plans to build in Zhanjiang, southern China, to run entirely on renewable energy.
A recent FT article suggests that executives from a range of heavy industries are warning politicians that they could be forced to move production to parts of the world that can offer cheaper and more reliable energy. And there is increasing concern about the impact of the US Inflation Reduction Act on competition, with worries that benefits for American electric vehicle makers would put vehicles made in the EU at an unfair disadvantage in the lucrative US domestic market.
We don’t suggest that investors should assume that all those threatening to move will do so. But Europe has a lot to lose if well paid jobs in industry are lost. Under pressure from member states, the rules on state aid are being relaxed, which was almost inevitable after Germany announced its latest subsidy package of up to €200 billion, meant to shield its companies and households from soaring energy prices.
We suggest this is a good time for European industrial companies to put pressure on governments to provide even more financial aid to accelerate decarbonisation. Taking a longer term view, electrification could become a meaningful driver of competitive advantage for many industries, as the push to net zero gathers pace. Plus, the shift away from gas that it enables could provide a positive boost to energy security. But it could end up being a double-edged sword for the existing industrial powerhouses. A report from Rystad Energy, suggests that “Iberia is well positioned to compete with – and even replace – the current energy industrial hub in northern Europe,”
Truly sustainable living?
What is the big investing theme - We are used to the traditional investment world being divided along industry or sector lines - silos really. Sustainability illustrates how interconnected themes and ultimately industries are. A holistic approach is necessary to enable an effective transition. Smart Cities are a good example of that interconnected thinking, driven up a notch when we consider what would be needed to create self-sufficient and truly sustainable living communities. Multiple disciplines from material science, engineering, IoT, natural capital and agriculture as well as health & well-being will need to be brought to bear.
SmartCitiesWorld reports on how Net zero sustainable cities developers Urb have unveiled designs for a sustainable and smart city in South Africa. The project, called “The Parks” will aim to produce 100 percent of its water, food and energy on site and house 150,000 people. The 1,700 hectare site will comprise mixed use hubs with medical, retail, educational and entertainment as well as 40,000 residential units.
The site is designed to promote “social sustainability and an active lifestyle” and housing will cater for “all income levels” without segregation, aiming to “increase community cohesion” according to the project website. The economy will be automated, digital and green tech driven from an employment perspective, whilst the project from conception to operation is expected to generate more than 40,000 jobs.
Why do we think it is important?
Sustainability is about lasting for a long period of time. Self-sufficiency is one of a number of key sustainability aims but can feel like a conflict with certain capitalist ideals such as the accumulation of capital. Self-sufficient communities when properly designed can avoid global commodity and energy price volatility. For investors the bringing together of many disciplines holistically offers plenty of opportunities to create value both financially and from an ESG perspective.
Urb are involved in a number of sustainability projects in Africa and the Middle East including The Parks project mentioned above, the Nexgen Sustainability City in Cairo and the Xzero City in Kuwait.
There is a project under development in the UK in Norfolk at Ashwicken Lake, an 80 hectare former quarry. The £35 million private sector investment aims to create a self-sufficient eco-wellness resort with leisure and accommodation (154 floating and lakeside lodges). It is expected to create more than 300 local jobs and an estimated £8 million boost to the local economy. The accommodation will be passive and so have very low energy demands with the clubhouse built to the “very good” BREEAM standard and energy efficient lighting where needed throughout the resort. The resort will be car free with walking and cycling encouraged although there will be electric vehicles, including electric water taxis to offer low carbon transport around the resort.
However, the longer-term sustainability thinking of the project is what caught our attention. The broader site includes forestry providing both building materials and biomass for energy generation with the resulting biochar feeding back into the land. In addition, the site will combine multiple renewable energy generation technologies including solar and have waste recycling as well as sustainable drainage systems.
Finally, the biodiversity of the area will be protected, for example preserving native wigeon bird breeding areas, along with new nature planting too. Ashwicken is in the pre-planning stage so hopefully in the next 12 months we start to see the reality of this local example of how to generate sustainable environmental, social and economic returns.
Interconnectors in Asia - boosting availability of hydropower
What is the big investing theme - As countries move toward electricity generation systems dominated by renewables, the need for supporting infrastructure becomes greater. This will include battery/long term storage, demand management and interconnectors, which will enable balancing renewable electricity to be brought in from adjacent regions to offset periods of local shortage.
A report in the Singapore Business review highlighted the completion of the upgrade of the electricity interconnector between Singapore and Malaysia, which doubles the capacity of electricity flow to c. 1,000 MW. As well as supporting bidirectional flow between the two systems, the interconnector will also be used for cross-border power trade in the Lao PDR-Thailand-Malaysia-Singapore Power Integration Project, that imports up to 100 megawatts of renewable hydropower from Lao PDR to Singapore through interconnections in Thailand and Malaysia.
Why do we think it is important?
Regular readers will know that we see massive long-term potential for electricity interconnectors, those high voltage cables that connect the various electricity systems and allow the trading of surplus electricity. Their importance will only increase as we see more variable renewables be added to the grid, as they allow short falls in one region (no sun or wind) to be fulfilled by surpluses elsewhere. This is an industry in which Europe has a strong position, with Nexans and Prysmian and NKT being among the global leaders.
However, as with many things renewable, China is very active, particularly in ultra high voltage (UHV) cables, which allow electricity to be transported vast distances, with limited line losses. China's State Grid plans to invest more than 150 billion yuan ($22 billion) in the second half of 2022 in UHV power transmission lines, and looking further out construction of eight new UHV projects is planned to connect China's far western regions, where solar, wind and hydropower plants are mainly located, to its mega cities in the east. The entire Chinese grid upgrading project might end up costing $300bn, spent over 30 years.
Transition as important as endgame for industrial revival
What is the big investing theme - The transition to greener and more sustainable industries and way of life can require significant change and disruption. It is important to understand where that disruption may be contributing to the problem that the development of greenfield or redevelopment of brownfield sites are designed to solve. This could flag potential future liabilities.
An article in The Conversation reports on how thousands of crabs and lobsters washed up on the north-east coast of England last year were either dead or dying. An initial report from the Department of Environment, Food & Rural Affairs (DEFRA) concluded that Harmful Algal Blooms (HABs) were to blame.
However, further research conducted by amongst others the University of York and University of Newcastle, suggest that pyridine, an industrial solvent used in manufacturing and a by-product of coking coal, could be to blame. It has been found to be highly toxic to crabs and could have been released by dredging being carried out to widen and deepen the Teesport shipping canal which released as much as 150,000 tonnes of sediment.
Due to the highly volatile and water solubility of pyridine, although pyridine was found in the crabs examined by DEFRA’s Environment Agency, they did not detect it in the water samples taken and hence dismissed it as a potential cause.
Why do we think it is important?
In this story the longer term aim is to regenerate and revive a once vibrant industrial area. However, is that coming at a cost to biodiversity? There is a risk of throwing the baby out with the bathwater. It is not the greening of industry that is causing the harm but rather the methods used to get there. In this case the dumping of dredged mud and rock.
This is not just a water-based challenge. With the rising urbanisation that we have discussed previously, the need for an increase in suitable housing is clear. Some of that will come from repurposing existing construction but new property will likely be needed too. In the UK, One Public Estate partnering with the Department for Levelling Up, Housing and Communities has provided funding for investments for new homes on derelict and underused brownfield land. Of the original £1.8 billion investment, £75 million was allocated under the first Brownfield Land Release Fund (BRLF) with a further £180 million set for release under BRLF2.
However, how brownfield sites are developed is key. Dealing with contamination, in particular, can be problematic and costly, with threats to human health, harm to fauna and flora, plus polluted groundwater. Investors need to understand measures undertaken by such projects to ensure liabilities are not created further down the line.
More broadly, looking at the green transition, there is much discussion about green technologies such as EV batteries and the environmental costs of moving to an electrified mobility future. In particular certain elements and the mining practices to secure them bring both an environmental and social cost. This is where technology plays a role. While problematic elements such as cobalt are currently needed for EVs there are new developments that could reduce the need within chemical batteries. More in a longer blog. However, governance plays an important role too in ensuring that the transition is a just and effective one.
The insurance industry creating impact and risk-adjusted returns
What is the big investing theme - The finance industry can play an important role in the transition through its funding and investing activities. Insurance companies can play a triple role through their choice of projects to underwrite, their choice of investments and activities in the sustainability space that ultimately reduce the risk they are underwriting.
A story in asiaone covers how QBE Asia extended the Premiums4Good programme (originally launched in selected regions in 2015) to the region. At no extra cost to the customer, a proportion of their premiums are invested in projects that create social and environmental impact whilst making a financial return. Chief Underwriting Officer for QBE Asia commented that "Premiums4Good demonstrates … how social value can integrate perfectly with business value to deliver both attractive risk-adjusted returns and positive social and environmental impact."
As of 31 December 2021, QBE has invested US$1.4 billion through the Premiums4Good programme with a target of investing US$2 billion by 2025. An example of such an investment is in the Asian Development Bank’s Gender Thematic Bond allowing communities to fund social protection and health programmes to support prevention and response to gender-based violence.
Why do we think it is important?
I am sure you will have seen and possibly participated in the well documented debate about whether fiduciary duty would be breached by actors in the financial system. There were some prescient insights from Tom Gosling on GFANZ in particular. At a broader level, Alex Edmans has also commented that “...Finance 101 has always stressed how a company’s worth is the present value of all its cash flows, including those in the very distant future, and must take into account any factor that affects future cash flows. A company’s relationships with its employees, customers, communities, suppliers, and the environment are highly value-relevant."
Extending that last point to insurance companies, there are three ways insurance companies can create impact. Firstly through choosing not to underwrite projects that adversely impact the transition, for example insurance companies walking away from the Adani Carmichael coal mine project or Canada’s Trans Mountain pipeline. From a pure returns point of view such action may result in better or worse returns over the lifetime of the project to the insurance company. It depends on the project.
However, secondly and thirdly, programmes such as QBE’s Premiums4Good aim to generate both returns (good for the investment side of the business) and impact to help with the sustainability transition can also help reduce their underwriting risk too by, for example, investing in sustainable energy to reduce the risk of outages. This is not necessarily new. Look at the gamification of fitness by health insurance companies offering discounts for activity (as measured by your fitness tracker) or telematics enabling insurance companies to reward safer drivers with lower insurance premiums. In both cases, their aims are to reduce the likelihood of a payout event occurring. So perhaps risk, reward and impact are more common bedfellows than at first glance.
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