Take Five: Goodnight Vienna

A selection of the major stories impacting ESG investors, in five easy pieces. 

A big step forward was taken this week by Europe to protect nature, or was it?

Viennese waltz – Sighs of relief rather than celebratory cheers greeted the formal adoption of the Nature Restoration Law (NRL) by the Council of the European Union. The NRL, which commits to restoring at least 20% of member states’ land and sea areas by 2030, had failed to secure sufficient backing from governments in March. And it only scraped through this week after Austria’s climate and environment minister defied senior coalition partners, prompting fury and threats of legal action from Chancellor Karl Nehammer. It remains possible that the NRL – which barely survived a bumpy passage through the European Parliament last year – could yet face a reverse. This would be embarrassing for Europe to say the least, and far from helpful to efforts in Colombia in October to build out the Global Biodiversity Framework, particularly given the limited progress made on setting COP16’s agenda at an interim summit in Kenya last month. Even if the NRL remains untrammelled by Austrian political strife, intergovernmental negotiations on how its objectives are met via member states’ national restoration plans will be instructive, given Europe’s recently redrawn electoral landscape.

The next big thing – It can take a long time to become an overnight success. And many other factors besides. Chipmaker Nvidia took 25 years to reach a market capitalisation of US$1 trillion, before more than trebling in value to US$3.3 trillion in 12 months, overtaking Microsoft and Apple this week to become the world’s largest company. The firm’s meteoric rise stems from its strong positioning to profit from the explosion of investment in AI, which is rapidly expanding beyond the IT sector to early adopters in fields such as finance and healthcare, and predicted use cases elsewhere. But does Nvidia deserve a place in a sustainable investment portfolio? The California-based firm’s ESG scores are impressive, which is not a given for a sector known for resource consumption, especially water. But a bigger sustainability question might be raised with regard to Nvidia’s client base, which has yet to prove it can deliver on AI’s promises reliably or ethically. Governance concerns and social risks have worried policymakers and investors increasingly, with rules being introduced in multiple jurisdictions and questions being asked at the recent

South Korea’s Gas Gamble Risks Stranded Assets

IEEFA Energy Finance Specialist Michelle Kim explains why the country’s East Sea gas development will not strengthen its energy security.

South Korea’s Yoon Suk-yeol administration recently announced the exploratory drilling of potentially massive oil and gas reserves in the East Sea, estimated to hold up to 14 billion barrels of oil and gas. This project aims to address the country’s natural gas demand for 29 years and oil demand for four years.

The government will launch the project, which costs around ₩100 billion (US$73 million), by the end of the year, with initial results expected in the first half of 2025. However, as South Korea’s natural gas demand declines, large oil and gas developments in the East Sea could become stranded assets due to the country’s accelerating decarbonisation efforts.

In the long term, the transition to clean energy will better support national energy security and sustainability rather than an overreliance on fossil fuels.

Declining gas demand amid energy transition

By the time the East Sea gas field becomes commercially operational around 2035, South Korea’s natural gas demand will have significantly decreased due to the energy transition. The country’s natural gas demand is already declining, falling 4.9% in 2023 due to higher nuclear and renewable power generation and reduced city gas demand, impacted by high import costs.

Given South Korea’s strengthened decarbonisation targets, this trend will persist in the coming years. The recent 11th Basic Plan for Long-Term Electricity Supply and Demand (BPLE) implementation guideline indicated that the share of liquefied natural gas (LNG) in the power mix will decline to 11.1% by 2038, a substantial drop from 26.8% in 2023.

South Korea’s Ministry of Trade, Industry and Energy also estimates that natural gas demand will decline to 37.66 million metric tons per annum (MTPA) by 2036, with an average annual decline of 1.38%, due to a shrinking population and slowing economic growth rates.

In addition, the global natural gas market is expected to face an oversupply from 2026 onwards, driven by massive expansions from the US and Qatar. The Institute for Energy Economics and Financial Analysis (IEEFA) estimates that the world’s total nameplate liquefaction capacity could reach 666.5 MTPA by 2028. This suggests that cheap natural gas supply will be available in the market, with existing contracts and purchases from the glutted spot market able to cover future gas needs.

Growing stranded asset risks

Investing taxpayers’ money

Horses for Courses

Winning the renewables race is all about location, according to Richard Lum, Co-CIO, Victory Hill Capital Partners.

The transition to a low-carbon economy is creating a once-in-a-generation dislocation in energy markets, fundamentally bringing the longevity of current energy infrastructure into question. For example, whereas energy systems designed for oil, coal and gas were predicated on centralised power generation, there is now a burgeoning need to upgrade or reform power grids to a distributed model, accommodating the growth of renewable energy sources as we progress towards net zero goals.

This gap between legacy energy infrastructure and a sustainable, low-carbon future provides an opportunity for astute investors. But capitalising upon uncertainties like supply security and price volatility at peak times is not as simple as swapping every coal-powered energy plant for a wind farm. Globally, the energy transition is taking place at varying speeds in different locations, leading to profound differences in how renewables assets perform.

These differences are partly due to inherent regional characteristics that render some methods of clean energy generation more effective than others depending on where you are. For instance, France’s robust nuclear power infrastructure, supported by strong policy and regulation, has lessened the demand for new sources of renewable energy in its electricity grid. Or China, where expansive land mass and suitable climate conditions have allowed renewables developers to build 2,919GW of solar capacity.

But identifying beneficial investment opportunities requires more than locating wind farm projects where there is wind, and solar fields where there is sun, or ‘copying and pasting’ one lucrative project framework into regions with physical and regulatory similarities.

The value drivers are local

While a broadbrush approach to green infrastructure investment might go some way towards meeting global energy needs, the drivers of value are inherently local. Taking a broad approach could come at the cost of investor returns, ultimately jeopardising the long-term financing prospects for the transition. Investors will need to evaluate each project at a granular level, assessing its merits in consideration of its location by looking at everything from weather, geography, politics and regulation, to the stage of the energy transition journey that the country is currently in.

In other words, varying market conditions mean that to fruitfully participate in transition projects globally, investors must account for the fact that renewable technology will perform differently in different places, with direct knock-on effects on performance and investor returns.

A good example

Take Five: Balance of Power

A selection of the major stories impacting ESG investors, in five easy pieces. 

A stark message in Bonn underlined the tensions between electoral cycles and long-term sustainability.  

Climate “collusion” – Republican politicians faced off against US institutional investors on Capitol Hill this week, in the latest round of the war on ‘woke’ capitalism. Having published a report claiming “bullying” of members by the investor-led Climate Action 100+ (CA100+) coalition, the House Judiciary Subcommittee on the Administrative State, Regulatory Reform, and Anti-trust heard from investor network Ceres, shareholder advocacy group As You Sow and CalPERS – the US’s largest public pension fund. Ceres CEO Mindy Lubber opened her testimony asserting: “Climate change, water scarcity and pollution, and nature loss … pose material financial risks to investment portfolios, business operations and supply chains, thus to the long-term stability of our markets and the economy.” As a member of its global steering committee, Lubber was also representing CA100+, which insisted its members “act as independent fiduciaries, responsible for their individual investment and voting decisions”. The stated purpose of the hearings was to decide whether current laws are sufficient to “deter anti-competitive collusion” to promote ESG-related goals in the investment industry. A legal memo recently secured by the US Sustainable Investment Forum found that firms and investors acting in concert on climate risks “are not violating fiduciary duty and are at negligible risk for anti-trust claims”. Even so, the hearings could be contributing to rising outflows from sustainable investment vehicles, with investor behaviour in the US diverging from elsewhere. Among the evidence cited for reduced appetite was the closure of several funds by BlackRock, some sustainability focused, others – less so, including one targeting opportunities arising from remote working. But it’s far from clear whether the world’s largest asset manager has given up on sustainable investing, given its launch this week of a series of climate transition-focused exchange-traded funds.

Slightly right – The rightward shift of the European Parliament following last week’s elections has prompted divergent views on its implications for the Green Deal that MEPs spent much of the past five years constructing. Centre- and far-right parties swelled their presence largely at the expense of the Greens and the moderate liberal Renew grouping – albeit with voting outcomes contrasting vastly across member states. There is scope for this new cohort to weaken some measures that are still being finalised, such as the

Take Five: Modi Feels the Heat

A selection of the major stories impacting ESG investors, in five easy pieces. 

Climate wasn’t high on the ballot in India’s election, but Modi must soon face uncomfortable truths on coal.

Modi feels the heat – Conducted in record temperatures, the world’s biggest exercise in democracy dealt a blow to the ego of incumbent Prime Minister Narendra Modi, but it’s less clear how the outcome of India’s general election will impact its net zero transition. Stock prices were down this week on the assumption that reliance on coalition partners would slow the pace of the infrastructure investment plans of Modi’s ruling Bharatiya Janata Party (BJP). The impact of the election on India’s climate policy might be less significant, for a number of reasons. First, other priorities regularly topped polls of voter concerns, notably inflation and unemployment, although this has evolved recently, partly due to increased instances of climate-induced physical impacts, from landslides to floods to severe crop losses. Second, both the BJP and its leading opponent, Congress, are strongly committed to India’s continued adoption of renewables, albeit via different means – with the challenger party promising in its manifesto a new green transition fund and more resources for India’s National Adaptation Fund. A third reason, which leads on from the first two, is that neither major party has been forced to properly address India’s biggest climate problem – vast and rising emissions from coal. Indeed, current policy is for domestic production to increase up to 2040 to reduce reliance on imports. Coal – and Modi’s close relationships with the controversial Adani Group – notwithstanding, the BJP’s record on solar and hydrogen investments, and fossil fuel subsidy reductions is impressive. But regardless of the make-up of the coalition, India’s next government will need to up the ante to have a hope of meeting even its existing climate commitments, such as installing 500GW of renewables, which will handle 50% of electricity demand, by 2030.

Down, not out – Support for climate-related resolutions at the AGMs of US firms has been closely watched this proxy season for further signs of a “stewardship depression” witnessed since 2021. But climate votes only tell part of the story, with a high number of social-themed filings also vying for investor backing. These include four shareholder proposals seeking more action and transparency on pay, working conditions and racial equity by Walmart, the world’s largest private employer. Prior to

Storage Systems can Empower Emerging Markets

Andrea Webster, Senior Advisor at SustainFinance, says innovation must disrupt the status quo in traditional energy systems.

Idealists imagine clean renewable energy powering a content and peaceful world around us. Solar panels adorn rooftops and wind turbines swoop to catch the breeze. Reality paints a very different picture; we not only need to re-think and re-engineer the world around us, we also need to persuade many people it is a priority that needs paying for. While the cost of renewable energy is falling, resistance to re-engineering our daily lives is growing.

This is a battle for the narrative. One size does not fit all and motivations to embrace change differ depending on where you are sitting in the world.

For developed economies, the energy transition means replacing existing reliable but high-carbon energy sources with a clean and affordable alternative. Meeting national net zero commitments creates the imperative; however rises in inflation, interest rates and supply chain woes have pushed up the cost of living and reset priorities. We are seeing this reflected in politics with a move to the right.

For developing economies, the challenge is building new sources of affordable energy to meet increasing demand. Reliable energy is fundamental to economic development because it generates prosperity which ultimately helps underpin social order. Providing reliable, clean supply to millions on a low income is a political challenge for many governments.

Fundamental changes

While the global push toward renewable energy has made remarkable strides, with solar and wind power leading the charge, it is simply not fast enough. This was finally acknowledged in Dubai, reaching a new level of global consensus on the need to tackle climate change. COP28 did not go far enough for the scientists, but it was historical in its commitment to phase down unabated coal power. This text will translate into a scaling of fundamental changes in how electricity is generated, stored and distributed; in other words, it will accelerate the structural shifts taking place in electricity supply across the world.

Within the electricity supply chain, energy storage stands out as the crucial piece in building trust with end users and governments to reshape our power supply systems. Robust storage is needed to integrate and manage renewable energy sources to smooth out the intermittent nature of renewable generation. Being able to manage the peaks and troughs of changing user demands and ensuring a reliable power supply from

Take Five: Twin Peaks

A selection of the major stories impacting ESG investors, in five easy pieces. 

Developed countries have belatedly reached a target for climate finance, only to be set a new one for nature.

Ten years after – It might have taken them a little more than a decade, but at last they got there. Developed nations mobilised US$115.9 billion of climate finance for developing countries in 2022, it was revealed this week, exceeding for the first time the US$100 billion annual level set in Copenhagen in 2009. According to the Organisation for Economic Co-operation and Development (OECD), last year saw a record 30% annual rise in climate finance, meaning the target – originally unveiled at COP 15 – was reached two years late. The total includes more than US$20 billion in attributable private finance, as well as bilateral and multilateral public sector funding, plus export credits. Importantly, adaptation finance accounted for US$32.4 billion of the total – three times the 2016 level. Discussions on a New Collective Quantified Goal (NCQG) on climate finance for the post-2025 period, which made little progress at COP28, should progress next week’s Bonn Climate Conference, where the agenda will also include carbon credits, adaptation finance and the Global Stocktake, ahead of COP29. In anticipation of the NCQG, the OECD released an analysis recommending use of public sector interventions to directly or indirectly finance climate action. But measures to support the goals of the Paris Agreement must now sit alongside those needed to realise the objectives of the Global Biodiversity Framework (GBF). At a Nairobi summit that concluded yesterday, the UN Convention on Biological Diversity called for investments of at least US$200 billion a year from all sources, and for reform of US$500 billion in harmful subsidies to achieve the GBF’s Goal D: invest and collaborate for nature. These and other recommendations will be discussed at COP16 in Colombia in October.

Gap analysis – A lack of progress on gender equality in the workplace has been underlined by the International Labour Organization (ILO) in a report reflecting fewer jobs and lower pay for women, especially in low-income countries. According to an update to the ILO’s annual World Employment and Social Outlook, the ‘jobs gap’ – which measures the number of persons without a job but who want to work – stands at 22.8% for women in low-income countries, versus 15.3% for men. This contrasts with a gap

US Seeks to Boost Carbon Market Credibility

Policies and principles aim to heighten VCM participation and support investment in developing markets’ clean energy transition.

New guidelines unveiled by the US government will improve trust in the voluntary carbon market (VCM) by reinforcing the need for high integrity carbon credits, according to market participants. Three US government departments issued a Joint Statement of Policy and new Principles for Responsible Participation which outlined practices to support…

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Visualized: The Growth of Clean Energy Stocks

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May 28, 2024 Article & Editing Graphics & Design The Growth of Clean Energy Stocks

Over the last few years, energy investment trends have shifted from fossil fuels to renewable and sustainable energy sources. Long-term energy investors now see significant returns from clean energy stocks, especially compared to those invested in fossil fuels alone.

For this graphic, Visual Capitalist has collaborated with EnergyX to examine the rise of clean energy stocks and gain a deeper understanding of the factors driving this growth.

Sustainable Energy Stock Performance

In 2023, the IEA reported that 62% of all energy investment went toward sustainable sources. As the world embraces sustainable energy and technologies like EVs, it’s no surprise that clean energy companies provide solid returns for their investors over long periods. 

Taking the top-five clean energy stocks by market cap (as of April 2024) and charting their five-year cumulative returns, it is clear that investments in clean energy are growing:

CompanyPrice: 01/04/2019Price: 12/29/20245-Year-Return % First Solar, Inc.$46.32$172.28272% Enphase Energy, Inc.$5.08$132.142,501% Consolidated Edison, Inc.$76.55$90.9719% NextEra Energy, Inc.$43.13$60.7441% Brookfield Renewable Partners$14.78$26.2878%

But how does this compare to the performance of fossil fuel stocks? 

When comparing the performance of the S&P Global Oil Index and the S&P Clean Energy Index between 2019 and 2023, we see that the former returned 15%, whereas the latter returned an impressive 41%. This trend demonstrates the potential for clean energy stocks to yield significant returns on an industry level, sparking optimism and excitement for potential investors. 

A Shift In Returns

With global investment trends moving away from traditional, non-sustainable sources, the companies that could shape the energy transition provide investors with alternative opportunities and avenues for growth. 

One such company is EnergyX. The lithium technology company has patented a groundbreaking technology that can improve lithium extraction rates by an incredible 300%, and its stock price has grown tenfold since its first offering in 2021.

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Options Still Open for Fossil Fuel Engagement

Patience is a virtue when engaging with the oil and gas industry on climate, but opinions are mixed on whether investor efforts are paying off. 

It’s no secret that the oil and gas industry has been slow to act on the climate crisis.   But with the sector accounting for around 15% of global greenhouse gas (GHG) emissions, and science dictating that oil and gas demand must peak by 2030, the need for drastic action to…

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