Is the world facing a cooling crisis?!

Okay, I know what you’re thinking- this is counterintuitive given the record-breaking temperatures recorded last week in France, or this research from NASA which practically suggests the world is on fire:


Source: https://data.giss.nasa.gov

Then you have the WHO estimating an additional 255,000 deaths per year by 2050 from extreme heat waves if we continue on our current trajectory.

So as our world warms up, we must cool down.

And what’s the solution? … Air Conditioning. (AC)

The International Energy Agency (IEA) estimates that 1.6 billion air conditioning units are in use around the world right now, a figure that has tripled since 1990. And of the 2.8 billion people inhabiting the hottest areas of the world, AC penetration is less than 10%.

So, how is this going to work with warmer temperatures, and an increasing demand for AC?

China, India and Indonesia will account for the majority of this due to growing population and income levels, coupled with lower AC costs.

AC units are energy intensive and if this extra demand isn’t met with renewables it leads to more emissions, more global warming, and again, more demand for cooling, more emissions, more global warming….the loop goes on. China for example, meet almost all of their energy demand for cooling by burning coal right now.

Bloomberg New Energy Finance (BNEF) predicts; “air-conditioning demand reaches 4,764TWh in 2050, or 12.7% of total demand. This is 2,564TWh higher than today, an increase equivalent to almost as much as the European Union’s entire electricity consumption at present.”

That’s right, almost 13% of global electricity will be used by AC units by 2050.

So, it’s crucial that the world breaks this loop and the additional demand is met with renewable energy.

Peak time energy demand will shift to mid-afternoon when the sun is at its hottest and AC units are turned up to the max. This is almost perfectly aligned with the power generation of solar panels and they might provide the best chance of breaking this destructive loop.


Source: https://www.iea.org/futureofcooling/

As Ryan mentioned last week, the tipping points (declining costs of renewables + government policy) are here and green shoots are emerging. In China, developers of solar projects are guaranteed the same price as coal plants for their energy for at least 20 years. In India, solar is now the cheapest source of new power generation throughout the daytime. BNEF predicts solar will account for 30% of their energy mix by 2050.

The tipping points are here but we have to hope they tip fast enough to keep up with new energy demands.

About the author

Euan Ker is a Sustainable Investment Analyst. He is responsible for analysing and monitoring environmental, social and governance factors within the Global Sustainable Equity Strategy. Euan joined us in 2014 as an investment implementation analyst with responsibility for implementing macro investment decisions across a number of fund-of-fund mandates, totaling some £13 billion under management. Prior to moving to the ESG Research team in 2018 his responsibilities also included asset class, regional and currency hedging overlays through derivatives. Euan has a 1st Class Honours degree in Management with Economics from Robert Gordon University. He has the IMC professional qualification and has 5 years’ industry experience (as at 30 April 2019).

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When will Green be the New Black?

Plastic bag charges, vegan diets, electric cars and re-usable cups. Environmental issues are certainly en vogue. Eco-movements have sprung up to challenge the environmental impact of certain industries and whether they want to or not, companies are now competing to show consumers exactly how sustainable their operations are.

So why then is one industry that prides itself on staying ahead of the curve, still lagging behind? Environmental awareness is not ‘the new black’ for the fashion industry just yet. Generally, consumers still want the latest fashions as quickly as possible and as cheaply as possible… regardless of the impact on the environment.  

Seasonal collections are a thing of the past and designers now work on ‘micro runs’, constantly churning out new fashion lines. What Meghan Markle wore yesterday, is a bestselling purchase today, and in the bargain bin tomorrow (or later tonight!). But the furious pace at which the industry works is not sustainable.

The manufacturing of textiles relies on an extremely water-intensive process. From the dyeing, printing and finishing stages, it accounts for roughly 20% of global wastewater (5 trillion litres / 2 million Olympic sized swimming pools / 2 Mediterranean Oceans). And the problem extends beyond the manufacturing process where water waste is often not treated to remove pollutants before it’s disposed of.

We believe that a company’s impact mainly stems from the sustainability of the products and services it provides. We also favour new technologies that provide solutions to pressing environmental or social problems. Kornit design and manufacture digital printing machines for textile industries. They also produce the ink used in the colouring process.

So what is it about Kornit that we like?

  1. Waterless – Kornit machines utilise a 100% waterless process. No pre-treatments, steaming or washing is required during the printing process.  
  2. No toxins – Their NeoPigment inks are non-hazardous, non-toxic and biodegradable. Kornit have a great understanding of the regulatory environment they work in and their inks currently fulfil the Oeko-Tex Standard 100 (approval for children’s apparel). They also have the Global Organic Textiles approval that ensures the inks are eco-friendly in their production and usage.
  3. Microruns – Kornit’s machines are excellent at dealing with smaller design runs. The traditional model takes too long and produces too much, leading to unwanted garments that are wasted. Digital printing can meet the demand in a more efficient and environmentally friendly way.

On top of all that? Their whole process has no problem with printing directly onto organic cotton, hemp, and bamboo fabrics that can create a truly environmentally friendly product.

Consumer demand looks less willing to change in this instance, which enables industries to keep the status quo. But when technologies like Kornit’s offers a more efficient process AND is better for the environment, it can really begin to shift the dial.

About the author

Euan Ker is a Sustainable Investment Analyst. He is responsible for analysing and monitoring environmental, social and governance factors within the Global Sustainable Equity Strategy. Euan joined us in 2014 as an investment implementation analyst with responsibility for implementing macro investment decisions across a number of fund-of-fund mandates, totaling some £13 billion under management. Prior to moving to the ESG Research team in 2018 his responsibilities also included asset class, regional and currency hedging overlays through derivatives. Euan has a 1st Class Honours degree in Management with Economics from Robert Gordon University. He has the IMC professional qualification and has 5 years’ industry experience.*  *As at 30 November 2018.

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The Perfect Storm

The UK began to give names to storms back in 2014. The Met Office hoped this would “aid the communication of approaching severe weather” so the public be “better placed to keep themselves, their property and businesses safe”. [1]

If raising awareness was their aim, then it’s worked in my opinion. It certainly feels like we have a Brian, Deirdre or Ali more often than before.

The insurance industry will likely agree.

2018 saw the insurance industry pay-out $79bn in relation to natural disasters worldwide, making it the fourth most expensive year on record. In 2017, where the likes of hurricane Irma and Harvey hit built up coastal areas of the US, the figure stood at $150bn. [2]

Global Catastrophic Insurance loses, 1970-2018;


Source: SwissRe.com

Disaster for insurance companies then? Well, no, not necessarily. Insurers are pricing this risk into their models and then into the premiums they charge. Such things as hurricane deductibles have even been introduced, where up to 10% of the value of your home may not be covered by storm damage.

Whilst the risk for insurance companies appears high, it pales into insignificance when you begin to count the economic costs of catastrophic weather events. Take, for example, hurricane Harvey where it’s estimated that the total economic cost was $80bn – much higher than the estimated $30bn of insurance losses. [3]

This is what’s known as the “insurance protection gap”. It’s the difference between what is insured and what needs to be insured. The US is considered to have a high insurance penetration rate but total losses that were covered by insurance stood at only 40% in 2017. The figure drops dramatically for emerging market economies. [4]

In the end, the protection gap becomes society’s burden.

US utilities firm PG&E illustrates this perfectly. The wild fires that devastated California last year left the company with potential liabilities of over $30bn after initial investigations suggested faulty power lines may have caused some of the blazes. The company was only insured for $1.4bn and subsequently filed for bankruptcy in January. [5]

Businesses with operations that are highly exposed to catastrophic weather events might need to adapt and it’s something investors will need to take into consideration for the future.

With changes in global climate conditions expected to increase the frequency of extreme weather events, and with densely populated areas thanks to increased urbanisation and a higher concentration of assets in exposed coastal areas – it looks like the perfect storm.

 

[1] www.metoffice.gov.uk

[2] www.SwissRe.com

[3] RMS “2017 North Atlantic Hurricane Season Review”

[4] AON “Reinsurance Market Outlook 2018”

[5] www.bloomberg.com

About the author

Euan Ker is a Sustainable Investment Analyst. He is responsible for analysing and monitoring environmental, social and governance factors within the Global Sustainable Equity Strategy. Euan joined us in 2014 as an investment implementation analyst with responsibility for implementing macro investment decisions across a number of fund-of-fund mandates, totaling some £13 billion under management. Prior to moving to the ESG Research team in 2018 his responsibilities also included asset class, regional and currency hedging overlays through derivatives. Euan has a 1st Class Honours degree in Management with Economics from Robert Gordon University. He has the IMC professional qualification and has 5 years’ industry experience (as at 30 November 2018).

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No bank? No problem!

Bank Clerk: How can I help you, young man?

Stan Marsh: I got a hundred-dollar check from my grandma and my dad said I need to put it in the bank so it can grow over the years.

Bank Clerk: Well that’s fantastic. A really smart decision, young man. We can put that check in a money market mutual fund, then we’ll re-invest the earnings into foreign currency accounts with compounding interest aaaand it’s gone.

[Blank stares and silence as it goes from the Bank Clerk, to Stan, to the Bank Clerk, to Stan]

Stan Marsh: Uh… what?

Bank Clerk: It’s gone, it’s all gone.

South Park geeks will remember the episode ‘Margaritaville’ where the US economy goes into freefall due to bankers behaving badly. All trust in the financial system erodes and chaos ensues. Ah yes, that’s right; this actually happened!

In the episode, Stan Marsh goes to bank a cheque and has his savings almost immediately wiped out by the bank. The bank clerk then dismissively asks him to move along. In the real world, many people, like Stan, don’t trust the US banking system.

The Federal Deposit Insurance Corporation (FDIC) has conducted a yearly survey since 2009 to assess the inclusiveness of the US banking system. It’s astonishing to us that 6.5% of US households (that’s over 20 million people) have no bank account whatsoever. They are dubbed the “unbanked”.

Reasons for Not Having a Bank Account, % of Times Citied 

Source: 2017 FDIC National Survey of Unbanked and Underbanked Households

Imagine life without a bank account and all manner of simple tasks become complicated.

It’s the norm to get paid and pay others through a bank account. We can purchase things at shops and online with a single piece of plastic. If you do want the physical stuff, just take it out of a hole in the wall. We can set up direct debits to pay bills and forget how much we are paying for the sports channels. Using a bank account protects our money from fire, theft and accidently throwing out the cash-stuffed mattress. It can also help us access credit for larger purchases, like a house. Heck, they even pay us interest for all of this goodness!

So who can the unbanked trust? One place to turn could be Green Dot, which has been providing an alternative solution since 2001.

Green Dot began life as a tech company before buying a bank and we believe this gives them an edge over the industry’s incumbents. Possessing the ability to build and distribute their own financial services products directly to the consumer has proven successful; they found their niche in pre-paid debit cards and largely helped develop the market into what it is today.

The idea is simple – it works much like a credit or debit card, except 1) you pre-load the card and 2) you do so at your local grocers. This has proven massively popular with the unbanked for the following key reasons:

  • Pre-paid cards are not linked to a bank account and there are no credit checks as no credit is on offer;
  • They can be used to receive wages and government payments such as social security and unemployment benefits for people without traditional bank accounts;
  • Transactions are made on a pay-as-you-go basis;
  • No overdraft allowance and no overdraft fees. Only use what you load onto the card;
  • Access the card at convenient places and convenient times, rather than queueing forever at your local branch

They aren’t perfect and certain fees still apply. But they can provide a great solution for the many millions who are currently excluded from the traditional banking system in the US. This hasn’t gone unnoticed; Green Dot won the Economics Inclusion Award 2017 at American Bankers Association.

If only Stan Marsh had known!

The South Park scene – there’s nothing rude don’t worry!

About the author

Euan Ker is a sustainable investment analyst. He is responsible for analysing and monitoring environmental, social and governance factors within the Global Sustainable Equity Strategy. Euan joined us in 2014 as an investment implementation analyst with responsibility for implementing macro investment decisions across a number of fund-of-fund mandates, totaling some £13 billion under management. Prior to moving to the ESG Research team in 2018 his responsibilities also included asset class, regional and currency hedging overlays through derivatives. Euan has a 1st Class Honours degree in Management with Economics from Robert Gordon University. He has the IMC professional qualification and has 5 years’ industry experience (as at 30 November 2018).

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Meat the Agricultural Disruptors

Plant based burgers that bleed?! Could companies like Beyond Meat and Impossible Foods be the future of our food needs?

Tech giants, venture capitalists and famous names such as Bill Gates and Leonardo DiCaprio are backing a burgeoning industry that hopes to disrupt traditional agriculture. Beyond Meat recently filed for an IPO and it’s the first public listing from a slew of companies offering vegetarian meat products that taste, smell and cook like the real thing. Yes really.

The ethical debate and health concerns of factory food production have done nothing to quell our hunger for meat. But more recently, the effects of global warming have shone a light on the industry- will this be the start of meat’s ‘Tesla moment’?

Agriculture has a huge environmental impact, generating around 24% of global greenhouse gas emissions (according to the US Environmental Protection Agency[1]). To add context around that, the global transportation industry accounts for just 14%.

And with meat consumption predicted to rise, forecasts from climate change scientists warn that “unabated, the livestock sector could take between 37% and 49% of the GHG budget allowable under the 2°C and 1.5°C (Paris agreement GHG) targets, respectively, by 2030.”[2]

It is also a drain on resources. It is estimated that livestock occupy 30% of the planet’s land surface and account for 78% of all agricultural land use. 1,799 gallons of water are needed to produce a single pound of beef[3].

Animal meat is just a molecular structure of water, protein, fat and carbohydrates and we are very quickly discovering they can be replicated – but by using entirely plant based ingredients. As Jessica Appelgren of Impossible Foods describes it; “We are at the molecular level figuring out what makes meat meat and reconstituting that from the animal kingdom.”[4]

And they are just a bit more sustainable…

Source: Beyond Meat

It’s proved challenging but we are beginning to move beyond fossil fuels. So, who’s to say we can’t transition to less meat in our diets? The reason Tesla has been such a successful disruptor of the auto industry is because they offer a similar product, but without the nasty side effects of a traditional combustion engine.

Cars and burgers. Modern society loves them both. But if disruption of the latter is possible, it needs a viable alternative….and maybe another eccentric CEO!! Companies like Beyond Meat and Impossible Foods could provide the solution.

1 https://www.epa.gov/ghgemissions/global-greenhouse-gas-emissions-data
2 Harwatt, H. (2018): Including animal to plant protein shifts in climate change mitigation policy: a proposed three-step strategy, Climate Policy
3 Livestock’s Long Shadow: Environmental Issues and Options, FAO (2006)
4 National Geographic, November 2018, p86.

About the author

Euan Ker is a sustainable investment analyst. He is responsible for analysing and monitoring environmental, social and governance factors within the Global Sustainable Equity Strategy. Euan joined us in 2014 as an investment implementation analyst with responsibility for implementing macro investment decisions across a number of fund-of-fund mandates, totaling some £13 billion under management. Prior to moving to the ESG Research team in 2018 his responsibilities also included asset class, regional and currency hedging overlays through derivatives. Euan has a 1st Class Honours degree in Management with Economics from Robert Gordon University. He has the IMC professional qualification and has 5 years’ industry experience.*

*As at 30 November 2018.

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