Louise Ward, Investor Relations Director at Low Carbon discusses the pillars supporting the trend towards sustainable investment
Over the past couple of years, divestment has become a global movement which has significantly gathered pace. And with high-profile individuals, governments and businesses such as the Rockefeller Institute and Facebook continuing to jump on the bandwagon, it’s looking as though sustainable investment – divesting stocks and equity from fossil fuels and into climate solutions such as solar parks – is the logical next step. But what are the pillars currently in place that can support this trend?
The price of fossil fuels, primarily oil and gas, has been fluctuating dramatically over the last few months. This has affected the industry, and has caused those investors who would normally place faith in fossil fuels to question the risk of holding stranded assets. This is an opportunity for cleaner energy infrastructure – renewable energy technologies have a strong proven track record that’s crucial to delivering impressive returns and high levels of confidence for the savvy investor.
The global agreement made at the Paris Climate Change Conference (COP21) in December 2015 has also helped to drive investment in renewable energy into the mainstream. The Paris Agreement requires countries to keep global temperature increases “well below” 2°C and to pursue efforts to limit increases to 1.5°C. The effect of this was encapsulated by UN secretary general Ban Ki-Moon at the conference: “It marks the beginning of the end of growth built solely on fossil fuel consumption,” he said. “The once unthinkable has now become unstoppable.”
An important trend that has emerged is that across the world, governments and businesses are discarding the idea of sustainability as PR and a face-value step to becoming ‘green’, and viewing it as a financially sound way to fuel growth. Last year, the Financial Times revealed that the six biggest renewable investment funds yield between 5.5% and 7%, which is an attractive risk/returns in the current investment climate.
At January’s UN Investor Summit on Climate Risk, former US vice president Al Gore stated: “A dozen years ago, the best predictors in the world told us that the solar energy market would grow by 2010 at the incredible rate of 1 GW per year. By the time 2010 came around, they exceeded that by 17 times over. Last year, it was exceeded by 58 times over. This year, it’s on track to be exceeded by 68 times over. That’s an exponential curve.”
And the numbers continue to stand up for themselves. Investment in renewable energy accounted for 50% of global power and utilities transaction activity in 2015, as highlighted in EY’s Power Transactions and Trends: 2015 Review and 2016 Outlook report. And in the International Energy Agency’s World Energy Outlook 2015, it’s predicted that by 2040 nearly half of the world’s electricity will be generated through low-carbon technologies.
Overall last year, global clean energy investment hit $329bn, its highest level ever. On the flip side, it was recently revealed that between 2014 and 2015, New York City’s biggest pension fund lost $135m because of its fossil fuel holdings, and activist group Market Forces, reported that investments in fossil fuels cost 15 of Australia’s top pension funds around $5.6bn.
Renewable energy technologies not only provide an attractive and rewarding investment option, but it’s clearly become damaging to invest long-term in fossil fuels in the first place. This leaves businesses in an unprecedented situation, and we hope that the UK government brings in measures to drive a positive investment climate for investing into the renewable energy market in order to propel this global trend.
Divestment or reallocation of capital? Investment risk or opportunity?
Carbon Tracker[i] has successfully articulated the financial risks that a 2o C climate change scenario could have on the demand for fossil fuels and hence the potential impact on associated equity valuations. The 2o Investing Initiative (2ii)[ii] has highlighted that investing in an equity index such as the MSCI World Index will leave you over-exposed to fossil fuels and under-exposed to renewables and electric/hybrid vehicles – two vital sectors that need investment to ensure alignment to a 2o scenario.
How should investors react to these risks and what investment options are available to them?
Some investors have reacted to these financial risks by divesting of coal and, in the case of Norway and AXA[iii] all fossil fuels. As the recent OxPolicy[iv] report on “Divesting Effectively” highlights, divestment ensures that the investment fund itself has minimised the risk and at the same time stigmatises the divested companies and their association with fossil fuels. However, in some instances the companies in question may be a significant player in the industry of climate change solutions, such as SSE, Dong and EON all excluded by Norway but all with significant ownership of renewable energy capacity.
Other investment funds, such as experienced corporate engagers Hermes[v], advocate maintaining current fossil fuel investment levels while committing to a long term engagement strategy that can potentially reduce companies’ future expenditure into fossil-fuels and hence reduce carbon related risks. However, European utilities are stuck with material legacy coal assets[vi] on their balance sheets which they are heavily protecting and collecting the last of the available subsidies (such as capacity payments) to maintain returns to shareholders. It’s noteworthy that the UK’s Big Six energy providers own no UK solar generation assets and are currently “divesting” of many of their UK wind assets as was recently the case with SSE’s sale of its £355m stake in the Clyde wind farm[vii].
In addition to the discussion on divestment or engagement, Investment funds need to be actively participating in re-investing for the future to provide future stable and secure cashflows to their beneficiaries. Moreover, this re-investment drive will support the build out of new energy generation capacity appropriate for the second half of the century when all electricity generation will have to be zero carbon. Bloomberg New Energy Finance (BNEF) estimated that $329bn globally was invested in clean energy in 2015, including $7bn in Europe, yet more needs to be done. There are a few investors in the space, finding financially attractive opportunities such as BT Pension Scheme’s investments in on-shore wind and the Environment Agency Pension Fund’s commitment to the space. However, there are significantly more investment opportunities available than there are investors bidding. These assets are not overvalued like many assets buoyed by QE[viii] or by bidding wars like city airport’s £2bn valuation.
Renewable energy assets in the UK generate highly prized UK inflation-linked cashflows with UK government guaranteed ROC payments. In fact, in excess of £10bn of UK solar assets are now operational in the UK[ix] – all producing strong inflation-linked cashflows. These cash generative real assets are “great investments for pension schemes with inflation linkage and better returns than equities”[x]. With UK investors increasingly becoming the assets’ long-term owners, it ensures that the government’s renewable energy subsidies will remain in the UK, supporting UK pensioners’ incomes.
It’s a matter of time before we see more headlines like “UK pension schemes investing in UK renewables”. Now that is a lovely thought!
[i] Carbon Tracker’s first report in March 2012 http://www.carbontracker.org/library/#carbon-bubble
[ii] 2 Degree Investing Initiative “assessing the alignment of portfolios with climate goals” http://2degrees-investing.org/IMG/pdf/2dportfolio_v0_small.pdf?iframe=true&width=986&height=616
[viii] QE (Quantitative Easing) led to £375bn of UK government bonds being purchased by the UK government driving up bond and listed equity prices.
[ix] A significant amount compared to the £325bn inflation-linked gilt market.
[x] Large pension scheme at PLSA conference 2016 http://www.plsa.co.uk/Conferences_and_Seminars/Investment_Conference/Conference-videos.aspx
Louise Ward, Investor Relations Director at Low Carbon discusses the current volatility of oil prices and how investments into climate change solutions can present strong returns
One only has to scan the headlines to see how global oil prices are rapidly fluctuating. Recent research from trading house Banc De Binary found that the oil and gas industry has spent £10bn over the last year in an effort to protect dividends. Moreover, the value of assets and cash held by oil and gas companies listed on the London Stock Exchange has significantly decreased (from £151.8bn in February last year to £141.5bn today). It is clear that the falling price of oil is contributing to uncertainty amongst the global investor community.
However, it’s not just ‘uncertainty’ that is to account for divestment from fossil fuel stocks. Recent analysis and number-crunching by The Ecologist revealed that the energy produced by solar panels is worth about three times as much per kWh as oil energy in transport applications. Burning oil generates heat energy, but solar panels generate electrical energy. Electric cars, for example, can convert that solar energy into motive power at an efficiency of approximately 80%. This is in contrast to gasoline-powered cars that turn their oil into motive power at only 25% efficiency. The statistics and viability of renewables are there for all to see. Bloomberg New Energy Finance estimates that investment in renewable energy rose to a new record high of $329bn globally in 2015, up 4% on 2014 levels.
But what does this all mean for the investor community? Efficiency and output is all very well and good – but what many institutional investors don’t know is that climate change solutions such as solar PV and onshore wind projects can stand up for themselves financially. Climate change solutions are not volatile to the same extent as oil and their marginal cost of energy production is zero – no other power generation plant such as oil or gas can say the same. And even if investors don’t actually believe in climate change, these investments in climate solutions stand up on their own financially. They are generally long-term, inflation-linked contracts which generate attractive returns.
The vast majority of climate change solutions projects are, at their essence, infrastructure projects. The terminology ‘green’ or ‘renewable’ don’t often have to be mentioned at all, which can be the difference in convincing reluctant investors of their viability as reliable investments. These technologies are not a ‘gimmick’ that will pass and they should be overlooked because they are not the status quo just yet – we are confident that they will become so.
The falling price of oil needn’t spell doom and gloom for global economies and the investor community. Its volatility only reinforces how other energy investment opportunities, such as solar PV, should be explored, seriously considered and pursued.
Quentin Scott, Marketing Director at Low Carbon, shares thoughts from a recent Guardian Live Debate
Fresh from COP21, we attended a debate run by Guardian Live, which aimed to discuss the topic of business action on climate change, and whether it was authentic and adequate in today’s society.
The panel comprised of a range of perspectives and figureheads within the sustainability sphere, from Katherine Garrett-Cox, CEO of Alliance Trust and a high-profile city advocate on climate change, to Caroline Lucas, Green Party MP and long-time campaigner on climate change. Other panellists were Steve Howard, head of sustainability at IKEA, which has made a variety of climate pledges, Kevin Anderson, from the Tyndall Centre for Climate Research and Sasja Beslik, from Nordea Responsible Investments, which plans to end some of its coal investments.
Conversation began with the current state of play and the fact that actually, most companies do deliver on the targets that they set. But the question remains that in a world of growing scrutiny on corporate giants and their ‘green’ initiatives, are these targets sufficient? And what about those that don’t set targets at all? We need to foster an environment of both holding companies to account, but also where the corporate sector takes the lead in sustainability measures.
Who exactly companies should be held accountable to remains a question for debate. We aren’t going to be able to solve anything until the corporate and commercial sector is involved, as they are fundamental to change. Businesses have the power to change conversations and take a stand for regulation, strong policy and enforced targets and accountability. This movement cannot be led by altruism or volunteers alone, we need strong leadership from the corporate sector. But the practices that businesses put in place must also make solid business sense and be based on commercially sound practices. As a result, we will create a culture of sustainable business both economically and environmentally.
On a deeper level, several of the panel members called for an overhaul of entire business models. If businesses shifted their production processes to sell durable, long-lasting products, then they would be more sustainable. As can be expected, a lot of them don’t want to have this discussion as it will mean a reduction in profit, and a slowing of growth. Similarly, individuals should revaluate their own personal value chains, and build these around experiences and lifestyle, rather than products. Achievable goals for both businesses and individuals include embracing the circular economy, and using methods such as reusing, reducing and recycling waste in order to increase levels of sustainability.
A couple of the panel asked whether it is at all possible to achieve ‘green growth’. Or can we decarbonise growth and can we do it quickly enough? Again, the focus here should be on achieving commercially viable business models which pay attention to sustainability measures. Hopefully the days of associating these with ‘hippies’ or ‘tree huggers’ are over, as its realised that they can make real business sense. However, perhaps the conversation needs to turn towards efficiency instead. Developing countries need growth and the developed world needs to lead the way. 50% of emissions are produced by 10% of the global population currently, which is a stark truth to come to terms with.
We hope for a future where renewables can not only change this, but eradicate energy poverty altogether. As an investment community we need to all work together and not leave it to the usual few to vastly increase the scale of investment in renewable technologies. This can be done whilst emphasising the real returns that can be gained through sustainability, as well as its business value.
Last year will surely be seen as a tipping point for action on climate change, if only because of the agreement that came out of COP21. But many are sceptical as to whether this is really enough to catalyse the change that needs to happen to slow down or stall the heating up of our planet. Many companies are putting plans in place for 2050, when we need to see action by 2020, and there is still too much corporate lip service regarding these issues overall. We need to see obligations rather than targets, CSR teams and initiatives shouldn’t be marginalised but embedded into business objectives and standard practice. In the meantime, both businesses and individuals need to make profound changes to their everyday lives in the short term, without impacting on profitability or the quality of experience associated with organisations, if we are to get serious about combatting climate change.
Roy Bedlow, Chief Executive and co-founder of renewable energy investment company, Low Carbon, discusses the post – COP21 environment and why sporting organisations can do more to combat the harmful effects of climate change
The Paris Climate Change Summit (COP21) saw world leaders and large businesses gather to decide upon a global deal to help mitigate the negative effects of climate change. Amongst the key outcomes of this conference was a landmark deal, agreed by all 195 nations to cut greenhouse gas emissions to a level which will ‘cap’ the global average temperature to a rise below 2 degrees. Furthermore, $100 billion a year in climate finance will be made available for developing countries by 2020.
It’s clear to see that real progress is being made, but it isn’t just politicians and businesses such as Google and IKEA that can lead the way in making ‘carbon neutral’ pledges. All sectors and areas of industry across the world can make sustainable changes to help fuel the low carbon economy. The sporting industry in particular can lead by example and make a positive impact in the fight against climate change.
Football and rugby teams for instance are all cherished by their fans – many dedicate their lives to whole-heartedly following their clubs through each highly-anticipated game. But there is a golden opportunity for the influence of sport clubs to extend beyond what is played out on the pitch. Sports clubs across the UK should take the opportunity to become fully sustainable outfits in 2016 and beyond.
The state of play
Land Rover BAR is an example of a sporting organisation at the forefront of sustainable best practice. At Low Carbon, we are proud to have partnered with Land Rover BAR to help reduce the emissions from the team’s base. Furthermore, the flagship Portsmouth facility also promotes sustainability throughout with a solar PV installation which will save more than 60 tonnes of CO2 per year.
It’s not just impressive renewable energy installations that make this building so innovative. The team are taking things further by actively engaging with the local community, school pupils and visitors with sustainability projects and renewable energy technology and their benefits. It is this kind of engagement that can truly help people make sustainable and ‘energy-saving’ changes in their own daily lives – a vital component in the fight against climate change.
In 2016, we hope to see more sporting organisations follow in Land Rover BAR’s footsteps, taking the opportunity to turn commercial buildings such as stadiums and clubs into highly energy efficient ones, and to inspire future generations to be more energy efficient.
Team Principal and Skipper Ben Ainslie said: “We are in a really unique position to raise awareness and accelerate the adoption of solutions to combat our reliance on unsustainable resources. We are committed to reducing our own environmental footprint and working with our partners to identify new innovative solutions to deliver further positive change and communicate this widely.”
If COP21 taught us anything, it’s that all areas of industry from business to investment companies need to re-imagine their approach to tackling climate change. It’s smaller changes that can often count the most, from encouraging employee behavioural change to harnessing technology for stronger insights into carbon footprints.
Land Rover BAR is a prime example of company using technology to aid in protecting local habitats. In partnership with Newport Rhode Island -based organisation 11th Hour Racing, the Land Rover BAR team is taking measurable steps in promoting the health of marine environments for future generations. For example, sending data from their boats back to a team of sustainability designers at the headquarters, rather than needing polluting powerboats to follow the sailing team all of the time, is significantly reducing the team’s environmental impact on local waters. This is but one vital step to becoming the most sustainable sports team in the world.
Wendy Schmidt, 11th Hour Racing Co-Founder commented: “As the Exclusive Sustainability Partner for Land Rover BAR, 11th Hour Racing has stepped up to demonstrate how social, economic and environmental responsibility can be built in–not as afterthoughts, but as key ingredients to a successful sports program.
There is a sense of accomplishment for everyone involved, knowing that sporting triumphs can be pursued while looking after the world’s precious marine resources and habitats, advancing new technologies in energy, water, and material management systems, and enriching local communities. We think this message can resonate with a wide public audience that is already engaged with The America’s Cup and with Sir Ben Ainslie. How really exciting it would be to equate success in one of the world’s most competitive sailing races with efforts to make our waters and the oceans healthier and cleaner?
On land, it’s been a pleasure working with Low Carbon to find practical solutions to power Land Rover BAR in its America’s Cup campaign. This is a great example of how focused organizations can further their missions within the guidelines set by the Paris Agreement.”
What lies ahead
It is not just the responsibility of global governments, investors and businesses to take the charge on reducing greenhouse emissions post COP21. Sports clubs arguably hold some of the most privileged positions in society and have a tremendous opportunity to inspire and educate the next generation on how to be truly sustainable. Large and influential sports club should look to create a long-lasting culture which aims to drive sustainability and eco-friendly actions through as second nature.