Water: An Opportunity for Impact

Recent issues of The Wall Street Journal (September 12th’s edition ran “ESG Does Neither Much Good nor Very Well”) and The Economist (July 23rd’s cover was “ESG: Three Letters that Won’t Save the Planet”) illustrate a growing backlash against “ESG” even as scrambled supply chains suffer further interruptions from droughts and flooding. A 60/40 portfolio, made up of the SP500 SPX and the Barclays U.S. Aggregate, lost 16% in 2022; after 2008’s 21% loss, this was the second worst performance since 1976, Barron's reports. Seemingly disparate recent headlines relating to ESG, water troubles, and market trends may in fact offer opportunities for investors. The water industry, in particular, warrants a closer look.

Global water security is a significant impact and investment opportunity. The World Economic Forum lists finance as a key to achieving global water security as called for within Sustainable Development Goal 6 on water and sanitation. Investors may in particular seek opportunities in initiatives related to irrigation, distribution, and water treatment, and especially now, as investors look for recession-proof businesses to help portfolios during periods of market and economic weakness. The public sector alone is unable to bridge vast gaps in water-related investment. The Environmental Protection Agency notes that water infrastructure in the United States needs over $400bn in new investment to achieve water security for the future. Many countries face the same problems, prompting even the World Bank to support water utility privatization. European countries, such as the United Kingdom, France, Portugal, Spain, Italy, and Switzerland, are all beginning to spearhead privatization initiatives of water management companies with success.

Not everyone agrees that water should be under private control. Thomas Stephens, an environmental justice activist, told listeners of Democracy Now that “the very essence of life itself, water, is being privatized and being subjected to a corporate bottom-line approach that is in violation of the human rights of the people, [especially] the most vulnerable people” While the privatization of the water industry can improve overall water security, less equitable access to water can result. The Guardian underscores that “water isn’t a private commodity, but a necessity of life, making access to it a public good. And steps need to be taken to ensure that access remains open.” Private water suppliers generally operate their businesses with little economic regulation and tend to raise prices. Thus, growth in private water companies could lead to socioeconomic inequities and, on a global scale, create conflict between developed and developing nations. Nevertheless, as Israel shows, a solution may exist. Improving security solely by increasing supply will be extremely difficult and expensive. Instead, governments will need to focus on managing demand by raising the price of water. Israel charges a high price for water but achieves its goal of water security while remaining fair to its people by subsidizing water costs for those on social welfare. Water’s high price encourages Israelis to conserve water or implement technological advancements to improve water-use efficiency. By contrast, water is extremely cheap in most other parts of the world. Low prices, while convenient for consumers, lead to immense waste. Israel has a remarkably low leak factor of about 7-8%, because it is cheaper to fix leaky pipes than waste water. In contrast, some areas in the United States have supply systems that lose up to 50% of the water flowing through them.

Other niche opportunities for investments by private capital investors lie in the development of cutting-edge technologies that monitor how water is used and provide insight into best practices for water security. McKinsey found that “Israel has leveraged its culture of innovation to establish itself as an international hub for water-technology development, increasing its water security while establishing a local multibillion-dollar industry.” Given the inherent scarcity of water, technological innovations made by these companies are indispensable. Desalination, wastewater treatment, and water recycling technologies are all areas with high growth potential. In fact, the water and wastewater treatment market is projected to grow from USD 301.77 billion in 2022 to USD 489.07 billion in 2029 at a CAGR of 7.1%, according to one study. In sum, investors are positioned to create positive change while simultaneously generating consistent returns. Water investments, with appropriate safeguards to protect the most vulnerable, can have real impacts on sustainability goals, address water security crises, and may produce solid financial returns.

ESG and Investment Performance

Hello from Impact Delta.

Enjoy our periodic newsletter, containing insights and news related to ESG and impact investing. In this edition, we look at the growing body of evidence that ESG correlates with better operational performance and better returns, and Vanguard’s exit from the Net Zero Asset Manager alliance, apparently to avoid confrontation with Republicans now controlling the House. Also, the UN Biodiversity COP 15 conference is underway, beginning a month after the COP 27 for climate.

The data indicating good ESG choices are neutral-to-positive to returns is not entirely new - We'd start by saying that the historical data has tended toward ESG being positive, to at worst neutral. The real benchmark for this was a 2015 meta-study that sought to evaluate the impact good ESG choices had on returns. The paper looked at over 2,200 studies over a 30-year period, and found that 8% of the articles found that ESG was negatively related to performance, while 63% had positive findings and the balance found no conclusive evidence. This was updated in a paper that looked at the period 2015-2020 by NYU Stern, where the authors found:
1 - Improved financial performance due to ESG becomes more marked over longer time horizons.
2 - ESG integration, broadly speaking as an investment strategy, seems to perform better than negative screening approaches. A Rockefeller Asset Management study finds that ESG integration will increasingly be demarcated between 'Leaders' and 'Improvers' with the latter showing uncorrelated alpha-enhancing potential over the long term.
3 - ESG investing appears to provide downside protection, especially during a social or economic crisis.
4 - Sustainability initiatives at corporations appear to drive better financial performance due to mediating factors such as improved risk management and more innovation.
5 - Studies indicate that managing for a low carbon future improves financial performance
6 - ESG disclosure on its own does not drive financial performance

LBS study slightly differs - This last point that ESG disclosure on its own does not drive financial performance is not a controversial statement. However, a group of LBS professors recently released research looking at ESG disclosure in private equity with a slightly different conclusion. They examined whether PE firms’ ESG disclosures match their investment activities, finding, for example, that PE firms with high environmental disclosures target portfolio companies with lower environmental toxic releases. Further, the funds of PE firms with highest quality ESG disclosures appear to be related to better returns, even if the causation is not watertight. To quote directly: “We refrain from making causal claims given the potential selection issues around voluntary ESG disclosures. However, we note that our results are robust to controlling for the performance of peer funds, time-varying market-wide PE firm ESG disclosures, fund ages, PE firms’ macroeconomic exposures and a host of fixed effects that hold constant country-trends as well as time-invariant PE firm and fund strategy characteristics. Thus, while suggestive, our findings are consistent with the interpretation that a stronger focus on ESG issues in PE firms’ investment strategies, as proxied by website-based ESG disclosures, pays off for PE firms and their investors in the form of successful exits and, thus, superior fund performance.”

Gender matters – Recent research from Investment Metrics finds that diverse teams, specifically those led by or co-managed by women, have outperformed male-led or -comanaged portfolios. Investment Metrics’ initial research on this was published in August 2021, which looked over multi-year time periods at teams that had female portfolio managers or co-managers. Despite the small number of firms with senior female portfolio leadership (13% of the active equity peer groups had a woman in the lead position or the co-lead portfolio manager position and only 7% had a woman CEO), the performance was no different than that of male only firms on a proportional basis. This seems to underscore that talent is equally distributed, while opportunity is not. Research published last month found that female led or co-led portfolios outperformed their male only counterparts over the last year. Further backing this up, Fidelity looked at the performance by gender of their retail clients and found that women routinely were outperforming the men.

The big institutional investors get it - With the recent backlash against ESG from more conservative politicians, billions of dollars are being pulled from asset managers that are deemed 'woke'. However, the most sophisticated institutional investors have found that ESG (when applied well) can help with risk management and returns. This was recently highlighted by Marcie Frost, the CEO of CalPERS, the largest US pension plan at roughly $500 billion. "Applying the lens of ESG is not a mandate for how to invest. Nor is it an endorsement of a political position or ideology," she said. "Those who say otherwise are actually advocating for investors like CalPERS to put on blinders ... to ignore information and data that might otherwise help build on the retirement security of our 2 million members.”

Vanguard left the Net Zero Alliance??? - Fund management firm Vanguard announced last week it was leaving the Net Zero Asset Manager Initiative(NZAM). This is material: Vanguard represents $7 trillion of the $66 trillion of capital associated with NZAM. However, the motivation may be more political than giving up on the benefits of net zero to the long-term investment performance of their clients. With Republicans now in control of the House, several Representatives have indicated they will investigate companies that have joined associations for ESG reasons as potentially violating anti-trust legislation. Vanguard stated that it remains committed to addressing climate change but feels it will have more independence outside the NZAM. We will be watching to see if their actions match prior climate commitments. If so, this seems to be a way to avoid political risk, and other firms may be following this model.

UN Biodiversity COP 15 started on Wednesday December 7th - In our last newsletter, we highlighted the challenges that the Climate Change COP 27 was facing with geopolitical tension making cooperation less likely. Claims of loss and damage by the majority of countries against the US and Europe for their emissions did indeed get more focus. We now shift to how the world will focus on biodiversity. Although climate change dominates dystopian projections, biodiversity deserves growing attention, as a growing body of research has identified that biodiversity loss is directly correlated with the depredation of ecosystem services needed for humanity. What we have found interesting is that the most sophisticated institutional investors that were focusing on carbon and climate risk 10 years ago are now focusing on biodiversity in their portfolios. Linking this back to the articles on ESG performance correlating with investment performance (including our own, in September), Paul Polman and Andrew Winston highlighted one of the challenges investors face is looking at individual investments over the short term, versus investing in systems over a longer time horizon. This is where some of the most sophisticated institutional investors seem to be focusing.

As this is our last newsletter of the year, we wish you a wonderful holiday season and Happy New Year!

The Impact Delta Team
contact@impactdelta.com

About Impact Delta
A secular shift towards a more responsible capitalism is underway. Impact Delta is a specialist consultancy founded to help investment firms capitalize on this shift. We believe good environmental and social thinking helps investment firms raise capital

ESG and impact strategies – and their returns

After five years of positive flows into ESG-focused strategies in the public markets, it is unsurprising that sustainability-oriented investing (here, we use “ESG” and “sustainable” interchangeably) is coming under scrutiny. For example, the Jul 23, 2022 edition of The Economist ran a cover that said “ESG: Three letters that won’t save the planet.” Bloomberg, in June, reported on how ESG funds had fared less badly than the broader market in 2022 so far, despite owning relatively more technology names and relatively fewer energy stocks. Yet it also noted that over the last five years, Global, US and European ESG portfolios had each not kept up with their broader respective markets. (No extra information about how funds were categorized into either ESG or non-ESG groups was included, but Bloomberg did point out the finding was consistent across geographies.)

This conclusion is at odds with work that looks at performance over longer time periods. A 2015 paper noted that studies up to that point had generally only reviewed a fraction of the available literature, and sought to remedy this by extracting “all provided primary and secondary data of previous academic review studies.” And, the authors continue, “through doing this, the study combines the findings of about 2200 individual studies” which date back to 1982. This work found that overall, about 9% of the prior papers found a negative relationship between ESG and what they label corporate financial performance, or “CFP.” 63% of the studies found a positive relationship, and the balance could find no relationship at all. Of note, this conclusion is stable over time, across different geographies, and across asset classes. Some studies looked at E, S, and G separately, and some together, some focused on equities, or fixed income, or real estate, or were portfolio-wide.

Another paper, from about the same time, looks at the question of sustainability and financial performance from a different angle. Eccles and his co-authors created 90 matched pairs of firms, where one of the pair was labeled “high sustainability” and the other “low sustainability”, but in most other respects – such as industry, size, capital structure and growth opportunities – were very similar. Companies were placed in one category based on whether they had adopted a “substantial number of policies…for a significant number of years (since the early to mid-1990s), reflecting strategic choices that are independent and in fact, far preceded the current hype around sustainability issues.” As one would expect, “high sustainability” companies are more likely to create a dedicated committee at the board level to supervise sustainability-related questions, and to tie the pay of company leadership to customer satisfaction, social and environmental performance. Most notably, the “high sustainability” group outperformed their peers over the 1993 to 2009 time span, “both in terms of stock market and accounting performance” – such as return on equity and return on assets. Furthermore, this difference is more marked among companies that sell based on reputation/brand, “business-to-consumer” companies, and those that make “substantial use of natural resources.”

Given how quickly the space has been evolving, it is worth looking at more recent research, even if it examines shorter time frames. A paper from mid-2022 does just that, and focused its analysis on papers that were published since the 2015 meta-analysis referenced above. It found roughly the same number of unique studies as did the 2015 paper, which looked back over 30-plus years. The main conclusions from this work are twofold. First, there is a good evidence to connect ESG with superior corporate financial performance at the level of an individual operating company. This is consistent with the findings of Eccles et al. Second, the study found that “the financial performance of ESG investments is indistinguishable from conventional investments.” As the authors note, this inconsistency is puzzling. Various possible explanations exist, and each is supported by some evidence. These include:

“ESG investing” is too broad a concept to be useful here. It blends strategies that are ethics-driven, and not returns-maximizing, with those ESG strategies that do seek to maximize-returns.
ESG investors can’t implement their strategies effectively because they don’t have access to good sustainability performance data. (The inconsistency of ESG disclosure and data aggregation approaches is well documented.)
The superior corporate financial performance associated with high sustainability companies may quickly be priced in, making it hard to distinguish between the returns of an “ESG portfolio” and a “non-ESG” portfolio over certain time periods.

Based on all this, what conclusions can investors draw? A key principle is understanding the nuances. It is generally preferable to seek portfolios that integrate ESG factors in investment decisions rather than apply inflexible screening rules – and that this integration should rest where possible on the traditional tools of alpha-seeking active portfolio management, whether in the public or private markets. These techniques include engagement with company leadership as well as selectively with the rank and file, comprehension of key industry-wide trends, and the identification of catalysts that can unlock near-term value. For as long as ESG disclosures and ratings systems are hard to trust, these tools may be particularly valuable.

Do ESG Investors Stick Around?

Flows data suggest ESG assets are stickier.

Hello from Impact Delta.

Enjoy our periodic newsletter, containing insights and news related to ESG and impact investing. In this edition, we look at how the Biden administration is forced to balance short term inflation with long term climate impacts, how investors are valuing fast fashion and alternative proteins despite their opposite environmental profiles, and does the data indicate ESG investors are more patient than others?

US SPR activity might encourage oil industry to develop more capacity - The US is in the process of selling 200 million barrels of oil from the Strategic Petroleum Reserve (SPR) in an attempt to reduce the inflationary pressures of higher oil and gasoline prices. A proposal to replenish these barrels by purchasing them in 2023 and 2024, but at current prices, is what's counter to the climate objectives of the Biden administration. The motivation for this is to encourage more production that isn't happening as producers are concerned the price will decline over the next year. This illustrates the political reality that fighting near term inflation is more compelling than addressing climate change by reducing fossil fuel production. The average cost of oil in the SPR is $29.70/barrel against a July 26th WTI price of 94.98. So, if prices do fall, the cost of replenishing the reserves will be a bigger cost to the government under this plan, effectively providing a multi-billion dollar subsidy to the industry.

Fast Fashion - The recent fund raise of the Chinese fast fashion company Shein at a $100 billion valuation illustrates investor appetite for the industry. However, it's environmental footprint is equally as sizable as its valuation. A World Bank report identifies that the fashion industry is responsible for 20% of wastewater worldwide, and it contributes to 10% of greenhouse gas emissions, which is more than air and maritime transit combined. Shein's valuation implies that investors are not anticipating any carbon tax or other environmental constraint to the fast fashion industry, to which we would reply, caveat emptor.

Alternative Protein - Unlike the continued enthusiasm for fast fashion, The VC funding for alternative proteins has slowed dramatically compared to the past few years. This is despite increased uptake of alternative proteins across both dairy and meat products. A recent research report from Global Markets Insights predicts 17% compound growth from $60 billion in 2021 to over $190 billion in 2028. It will be interesting to watch if the perceived economic slowdown affects the adoption of these new protein solutions, and if the VCs pullback will look wise in retrospect.

Are ESG investors 'sticky'? - As we noted in the last new letter, oil ETFs have outperformed clean energy ETFs by roughly 35% in 1H 2022. Surprisingly, the most recent data from Morningstar indicates that sustainable funds have continued to have net inflows in 1H 2022, while the main fund market saw slight outflows. The more notable shift is from active sustainable funds to passive sustainable funds, largely reflecting the recent outperformance of the passive strategies. With the underperformance of the sustainable funds due to exclusion of oil and gas, it's surprising that the outflows haven't shifted the other way, implying sustainable fund investors may be more long-term oriented and therefore 'sticky' than other investors.

Feedback is always encouraged and welcome. If this was shared with you, you can subscribe here.

About Impact Delta

A secular shift towards a more responsible capitalism is underway. Impact Delta is a specialist consultancy founded to help investment firms capitalize on this shift. We believe good environmental and social thinking helps investment firms raise capital and earn better returns. More about us here.

Tesla’s E and S link

Sourcing key metals directly can help with traceability.

Hello from Impact Delta.

Enjoy our periodic newsletter, containing insights and news related to ESG and impact investing. In this edition, the temporal impact of oil and gas vs renewable investment performance, continued momentum in electrification of transit, and earth day pictures from Google that underscore climate change.

The tradeoffs of divest vs invest - The growth of investment in renewables over the past few years has led some investors to consider divesting from oil and gas, while others have chosen to remain invested, but engage with the companies through proxy voting. The divestment argument had gained momentum, as investors that were underweight oil and gas were outperforming with oil and gas lagging the broader market for much of the last 5 years. However, year to date, that has switched, as evidenced by the performance of one of the leading clean energy ETFs against a leading oil and gas ETFs.

It will be interesting to watch how this evolves over the next few quarters as raising interest rates, the Ukraine war and other factors cause volatility in the market short term.

But the long-term trend toward renewables is still clear - Shell recently announced a partnership with ABB to develop electric vehicle charging infrastructure. The objective is to have 500,000 chargers by 2025 and 2.5 million chargers globally by 2030. This is similar to a move BP made last year in partnering with Volkswagen to develop charging infrastructure, often at company owned retail stations. So even if the companies are currently minting money in oil and gas, these investments indicate they understand where the world is headed in the long-term.

Mining and minerals are likely the next frontier - Inflation has grabbed the headlines of late, with Tesla as no exception. The base price of a Tesla model 3 has jumped 30% over the last year, trending with the increased prices of lithium, cobalt and nickel. Despite this, Tesla has outlined in its impact report details on which mines deliver these materials to its battery manufacturing partners. More importantly, the company has outlined how it is able to source a majority of its battery supplies directly from mines, enabling greater control and traceability. As EV adoption accelerates, this focus on supplies may become a key differentiation.

Speaking of Tesla, they are now more profitable than GM or Ford - In the first quarter of Q1, Tesla earned $3.31 Billion, compared to $2.93 Billion and $2.3 Billion for Ford. This is despite selling far fewer vehicles (310k vs. 980k for Ford and 1,427k for GM). Regulatory credit revenue was a significant contribution ($679 Million of revenue), helping make the company more profitable, although Tesla remains more profitable per vehicle than either legacy automaker.

Images of Climate Change in Action - Around Earth Day (April 22), Google released this series of contrasting images from Greenland, Mt Kilimanjaro, the Great Barrier Reef, and the decimation of a forest in Germany.

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About Impact Delta

Quantifying the ‘S’: Gender Equity Metrics in the Workplace

This paper explores the metrics that companies can use to measure the experience of women in the workplace more consistently. We take stock of the current state of measurement by evaluating the current parties involved in reporting: Governments, ESG Ratings Providers, Accounting and Disclosure Framework Boards, and Exchanges. We then present a robust suite of metrics that companies should strive to collect and report. This set of metrics, Four for Women, buckets metrics into Representation, Pay, Health, and Satisfaction and comes from Wharton’s Social Impact Initiative.

Emissions Must Peak by 2025

…and be cut by 45% by 2030 to stay sub-1.5 degrees.

Hello from Impact Delta.

Enjoy our periodic newsletter, containing insights and news related to ESG and impact investing. In this edition, we look at the link between E and S, more reports on ESG and investment performance, as well as the latest SEC and IPCC activity.

IPCC Working Group II: Distinctions between 'E' and 'S' can be a false dichotomy - The IPCC released the Working Group II contribution to its Sixth Assessment Report on February 27. This looks at the impacts of climate change, and capacity of the natural and human world to adapt. In its summary for policy makers, it placed climate change in the context of a complex global system, highlighting the "interdependence of climate, ecosystems and biodiversity, and human societies” and its goal of integrating “knowledge more strongly across the natural, ecological, social and economic sciences than earlier IPCC assessments." Put another way, E and S are almost always linked, and best addressed in combination rather than isolation.

IPCC Working Group III: “It’s now or never” On April 4, The IPCC released the Working Group III contribution to its Sixth Assessment Report. This provides an update on climate change mitigation progress. The punchline? The window to stay under 1.5 degrees is closing. GHG emissions must peak by 2025, and need to be reduced by 45% by 2030, while current stated commitments will only reduce emissions by 14%. But the authors note “we have options in all sectors to at least halve emissions by 2030.”

The debate about ESG and investment performance tradeoffs continues – HBR published an article (An inconvenient truth about ESG investing) that contradicts other recent studies that claim a strong commitment to ESG is associated with investment outperformance. The HBR piece pointed to work from the University of Chicago, which found that high-ESG-rated mutual funds did not deliver superior investment returns relative to poor ESG performers (based on Morningstar ESG ratings) – although they did attract more capital. The idea that investors would be willing to trade off return (e.g., superior performance) for better ESG outcomes could explain this. However, a recent survey of investments in ESG-branded funds and non-ESG funds “found that the companies in the ESG portfolios had worse compliance record for both labor and environmental rules” and that “companies added to ESG portfolios did not subsequently improve compliance.” ESG done poorly, in other words, may be the worst of all worlds. And greenwashing continues.

The SEC has set in motion revised ESG reporting requirements - The SEC released its report on "The Enhancement and Standardization of Climate-Related Disclosures for Investors” in March. If adopted, the proposed reporting would be integrated into public filing (10-K annual reports and 10-Q quarterly reports). This would apply to all classes of securities, meaning all publicly traded companies. What's particularly notable is that the integration of the reporting in formal filing documents puts this non-financial data on the same footing as financial reporting. This implies that unlike current voluntary climate disclosures, any misinformation in climate data in filings will carry the same liability as financial data misrepresentations.

Asian debt is decidedly exposed to ESG risks – In an article in Environmental Finance, the authors identify $4 trillion of Asian debt that is exposed to ESG risks. For comparison, this represents roughly 80% of Japan's GDP in 2020. Among the risks identified, roughly 2/3 of the exposure is related to environmental factors, with increasing sea level being a substantial driver given the percentage of the population living near shorelines.

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About Impact Delta

Newsletter: ESG and Bonds

ESG factors can help explain downgrades.

Hello from Impact Delta.

Enjoy our periodic newsletter, containing insights and news related to ESG and impact investing. In this edition, we look at the latest research on how ESG factors are affecting pricing and returns of bonds, ratings and real estate.

ESG is getting material -The adoption of ESG factors by investors has increasingly been influenced by the material impact it can have on financial performance. Adding further credence to this movement, a recent study found that bonds earmarked for a 'potential credit rating downgrade' because of environmental, social or governance (ESG) concerns were more than twice as likely to be downgraded during 2021 than bonds red-flagged for other reasons.

But positive ESG ratings do not mean carbon free – With ESG factors increasingly affecting ratings more broadly, the exposure to carbon and fossil fuels is becoming one of the negative factors that can depress a rating. And yet, several of the largest banks received ESG upgrades, despite tens of billions of loans to oil and gas companies. JP Morgan was upgraded for ESG reasons, having underwritten the largest volume of 'green bonds' compared to their peers. And yet, the bank is also the largest lender to oil and gas companies since the Paris Accord was signed in 2015. The justification is that oil and gas lending as a percentage of the total loan portfolio determines the 'green' score, which basically means smaller banks can't lend to fossil fuel companies and keep their rating, while larger banks can.

ESG factors affect sustainability bond performance – A Morgan Stanley study of ESG bond pricing found that bonds with more rigorous sustainability targets and substantive penalties for non-attainment typically had superior price performance for the first 30 days after an offering. Conversely, less stringent criteria typically underperformed. After 30 days, gains were less correlated with rigorously assessed sustainability features of the bond, suggesting primary issuance investors are increasingly taking ESG seriously.

Green real estate also starts to see a 'green premium' – Over the last several years, opinion has been divided as to whether ESG factors affect the pricing of real estate. Perhaps putting this debate to rest, Cushman and Wakefield evaluated the premium that LEED buildings commanded, holding other factors constant (urban/suburban, asset age, size, etc.). The data indicated that these buildings commanded a 25% premium per square foot on average.

Feedback is always encouraged and welcome. If this was shared with you, you can subscribe here.

About Impact Delta

10Gt of CO2 per year

How much we have to remove to hit 1.5 degrees.

Hello from Impact Delta.

Enjoy our periodic newsletter, containing insights and news related to ESG and impact investing. In this edition, a nod to carbon capture and the growth in electric transit.

Look to the air and water - The US Department of Energy has transitioned the department of Fossil Energy to include Fossil Energy and Carbon Management, with the core focus now on climate change. A recent emphasis of this work is to support R+D for carbon capture and storage from the air. This shift from solely focusing on reducing carbon from fossil fuels is in recognition that even with carbon emissions reductions, the planet will still require a removal of 5-15GT/year of carbon by 2050 to avoid overshooting temperature increases above 1.5 degrees.

Electric Vehicles (EV) continue to go mainstream – Despite Tesla's success in scaling EV sales, most legacy automakers have cautiously introduced low volume EV models relative to their core internal combustion products. Ford may have finally found religion, as the Mustang-E has continuously exceeded production targets, with the company now investing to triple current production capacity for this car by 2023. This is on top of getting over 200,000 advance reservations for the F-150 Lightning EV pickup.

Impact EV SPAC – In a similar theme of electric transit going mainstream, impact investing has not been left out of the latest trends of electric transit and Special Purpose Acquisition Companies (SPAC). Bridges Fund Management and AEA private equity firms jointly raised $400 million for a SPAC in September 2021. The SPAC recently completed a merger with Livewire, the electric motorcycle division of Harley Davidson. Having also come around to the value of electric transit, Harley Davidson will retain a 74% stake in the company.

But is it equitably allocated? – With most EVs starting well north of $40,000, and even the Livewire motorcycles having premium pricing, it's often wealthy individuals who have been able to switch to electric transit. Despite this, recent research from several Nobel laureates published at the Paris School of Economics has found that the world's 'top 10%' are responsible for 50% of carbon emissions. By contrast the bottom 50% are responsible for 12% of carbon emissions. No doubt, billionaire space joy flights aren't offset by the fact you have a new Tesla......

Feedback is always encouraged and welcome. If this was shared with you, you can subscribe here.

About Impact DeltaA secular shift towards a more responsible capitalism is underway. Impact Delta is a specialist consultancy founded to help investment firms capitalize on this shift. We believe good environmental and social thinking helps investment firms raise capital and earn better returns. More about us here

Climate Impact vs. Capital Flows

Solutions for 50% of emissions are getting 10% of the capital

Hello from Impact Delta.

Enjoy our periodic newsletter, containing insights and news related to ESG and impact investing. In this edition, we look at the focus (or lack thereof) of capital to address climate after COP 26.

Taking the long view - Building on the massive increase in investing in artificial intelligence (AI) and machine learning (ML), Stanford University recently launched a Research Initiative on Long-term Investing. The concept behind this center is to help capital allocators better understand ESG metrics in financial risk terms. Traditionally investors have relied on backward-looking trends to identify and model risk; however, with no historical data on climate change, the traditional approach cannot work. By combining the latest in technological tools (sensors, AI and ML, large-scale scenario planning, etc.), the initiative will generate new value-at-risk tools to better align large, long-term infrastructure investing with ESG risk.

But not investing in the right areas – On the back of the COP 26 meeting in Glasgow, Generation Investment Management released a research report that quantified where capital is flowing relative to its climate impact. It seems that progress is underway as roughly $130 trillion of investment capital has committed to net zero under the Glasgow Financial Alliance for Net Zero. This should be sufficient for the estimated $3 trillion of annual investment necessary to keep temperature rise below 1.5C. However, only $0.5tn is currently spent annually on clean energy, and the solutions for 50% of global emissions are only getting 10% of the capital.

The kids won’t be alright – Distance learning for an entire year has many analysts concerned about lost academic performance for school children. The National Center for Educational Statistics recently released the latest data that is even more disturbing. From 2012 to 2020, test scores for 13-year-olds in both math and reading went down on average for the first time in 50 years. Equally concerning is the widening gap in performance between the lowest and highest performers. It will be interesting to watch if this trend can be reversed by the growth in education technology investments and innovative school solutions.

How green are your bonds? – With the green bond market reaching an estimated $750 billion in 2021, it’s not surprising that almost every company is seeking to tap into this financing. However, NN Investment Partners released a report that 15% of issuers are involved in controversial practices. Among the issuers this year are Saudi Aramco ($1.36B), Qatar Energy (~$2B) and the largest UAE bank (government owned), despite the UAE government owned oil company announcing it will invest to increase oil output by 25% by 2030. As green bonds have outperformed the broader bond index in 5 of the last 6 years, it will be interesting to see if these more controversial green bonds will perform similarly or diverge from other green bonds.

Carbon Credits: A New Farm Product? As this recent New York Times article discusses, global cropland has the potential to sequester up to 570 million metric tons of carbon dioxide per year. But there are many challenges to overcome, including the accuracy of today’s estimates of soil-based carbon removals, permanence, additionality, and regulation. Our partner Jim Bunch is quoted.

Feedback is always encouraged and welcome. If this was shared with you, you can subscribe here.

About Impact Delta A secular shift towards a more responsible capitalism is underway. Impact Delta is a specialist consultancy founded to help investment firms capitalize on this shift. We believe good environmental and social thinking helps investment firms raise capital and earn better returns. More about us here.