“You don’t own enough windmills!”

It’s a comment that was made to us recently in a meeting with a prospective client. It’s also occasionally inferred in some commentary from other clients. So first, let’s set the record straight……. We like windmills!

But. It’s a tough business to be in right now (see recent profit warnings from Siemens Gamesa and negative commentary from GE). Vestas are the clear sector leader, and have better managed unit pricing and cost pressure, but even they struggle to consistently execute (especially offshore). Project risk is significant, delays can be costly and unit economics often dependant on variables outwith company control. As we have said previously, just being exposed to a theme is not enough. In renewables, long-term competitive advantage requires cost and technology leadership plus price discipline.

We won’t invest in anything just to appear virtuous! And we believe there are other ways of having a positive impact. The positive sustainable impact of technology might not be so obvious as a wind turbine, but we strongly believe it is no less important. Don’t get us wrong, technology alone can’t sort all our environmental ills, but we are more wizard than prophet. So called Fourth Wave Technologies, including artificial intelligence, automation, blockchain, data analytics and sensors are allowing businesses to lower resource consumption, decrease pollution, carbon emissions and waste AND boost their bottom line. Boom! They are functionally better and virtuous!

 


Nearly every CEO and VP we surveyed agrees that emerging technologies have at least some potential to improve their organization’s environmental impact, and 92% of all leaders agree that these technologies can help businesses improve their bottom line as well as their sustainability.’
Source – Business and the 4th wave of environmentalism, Findings from Environmental Defense Fund’s 2019 Fourth Wave Adoption Benchmark Survey.
Source – Making things better: Advanced Analytics and Manufacturing, Oct 2019, Bloomberg New Energy Finance

Energy reduction from software analytics, by industry (case studies)

And whilst the rate of adoption varies, companies across every industry are employing technology to drive efficiencies. Business leaders ignore at their peril. With benefits to retailers (data analytics to predict online purchasing trends), suppliers (blockchain to better track products and transactions for improved efficiency) and manufacturers (artificial intelligence for safer, more precise output), uptake of Fourth Wave technologies is surging.  Previous industrial revolutions have radically improved our standard of living but they have also borrowed from the future. Today’s technological revolution might just help break this pattern.

About the author

Ryan Smith is Head of ESG Research at Kames Capital. He joined Kames Capital in October 2000 as an SRI analyst and was appointed to his current position in September 2002. He has 19 years’ industry experience. His role involves managing the team that conducts the ESG screening process for our Responsible Investing funds. Ryan’s team also provides corporate governance screening and research for all equity investments, and conducts research into environmental and social issues. Before joining us, he worked as an environmental chemist for Severn Trent Water. Ryan has an MSc in Environmental Chemistry from Nottingham Trent University.  *As at 30 November 2019.

Sign up to receive our fortnightly Soapbox email

Transport connectivity

Back in the 80’s, when Chris Rea crooned about driving home for Christmas, he probably wasn’t aware of the environmental impact of his travel advice.


Source IEA 2019

Energy intensity of different transport modes in 2017. The left-hand chart shows energy intensity of passenger transport, in tonnes of oil equivalent (toe) per million passenger km travelled. The right-hand chart shows energy intensity of freight transport, in toe per million tonne km transported.

Transport accounts for one quarter of the EU’s total greenhouse gas emissions of which road transport is 82%. Seamless connectivity between different modes of transport is key to enabling travellers to make more sustainable transport choices.

And connectivity between different modes of transport is what Trainline (held across Kames ethical, sustainable and UK equity portfolios) does. In fact the company explicitly states that, ‘Trainline’s ambition is to bring together rail, coach and other travel services into one simple mobile experience so that travellers can easily find the best prices for their journey and access smart, real-time information on the go. By making rail and coach travel easier, our aim is to encourage people all over the world to make more environmentally sustainable travel choices.’ Trainline covers approximately 80% of the supply of rail in the European Union and 60% of coach services. And people love their app (e.g. 4.9 out of 5 stars iOS rating) which Trainline invests significantly in.

In London, transport connectivity is critical for economic success. Readers will perhaps be unsurprised to know that more than 1 million people travel into central London by rail or Tube every morning. Insufficient rail and tube services for central London will constrain future economic growth, but also compromise economic fairness by limiting access to jobs, education and training leading to less social integration.

Transport for London, TfL (held in the Kames Ethical Corporate Bond Fund) is the enabler of the Mayor’s Transport Strategy, a vision of high quality public transport services that connect seamlessly to other forms of active, efficient and sustainable travel across the city. Whilst also making London’s transport network net zero emission by 2050.

Source – London Mayor’s Transport Strategy, 2018

We have previously written about the #Flightshame phenomenon. High-speed rail offers one solution and the IEA suggest that high-speed rail lines can reduce aviation transport on the same routes by as much as 80%. As the chart below shows, the opening of the Brussels-London Eurostar reduced the number of km travelled by plan on that route by 55%. Getlink (held in the Kames Ethical Corporate Bond Fund) is the operator of the Channel Tunnel and estimates that journeys that are shorter than four hours tend to be dominated by rail… assuming connections between the cities exist.  Market share drops significantly with additional journey time.

Average change in passenger activity on selected air routes after high-speed rail implementation. Source – IEA, 2019

Unlike Chris, many people are beginning to reconsider their short-haul travel choices. But more sustainable alternatives also have to be convenient and cost-effective. Transport connectivity is critical to enable travellers to make more sustainable choices.

About the author

Ryan Smith is Head of ESG Research at Kames Capital. He joined Kames Capital in October 2000 as an SRI analyst and was appointed to his current position in September 2002. He has 19 years’ industry experience*. His role involves managing the team that conducts the ESG screening process for our Responsible Investing funds. Ryan’s team also provides corporate governance screening and research for all equity investments, and conducts research into environmental and social issues. Before joining us, he worked as an environmental chemist for Severn Trent Water. Ryan has an MSc in Environmental Chemistry from Nottingham Trent University.  *As at 30 November 2019.

Sign up to receive our fortnightly Soapbox email

Is there an ESG bubble?

Are too many investors chasing the same names? It’s a question we’ve had from a couple of clients and prospects in recent meetings. We’ve previously written that we believe that the Kames Global Sustainable Fund investment philosophy is different which means we invest in different things to the majority of our peers…………but of course we would say that!!! Are we actually just investing in the same stuff?

These questions make a recent research note from Goldman Sachs timely. Goldman’s have completed a couple of exercises now looking at the most widely owned stocks in ESG orientated funds globally. The table below is taken from the most recent piece and shows those names which appear most frequently- specifically in two ways, firstly based on the stock’s weight relative to their market capitalisation and secondly the absolute percentage point overweight, relative to their share of a global benchmark (MSCI ACWI)).

Source:Revisiting the ‘ESG Nifty Fifty’: The Rise of Impact, Goldman Sachs Equity Research, 2 Dec 2019

Some well-known and loved ESG favourites. And on reading this, naturally our next question was, ‘How many of these companies does the Kames Global Sustainable Equity Fund hold?’ (The answer is two btw – Kingspan and Relx). Albeit, we have held some of the others in the past, but sold them, often because of their valuation. That’s right, just being sustainable doesn’t necessarily make something a good investment! (Although we do believe it can help). We are passionate advocates for ethical and sustainable investing, but we mustn’t ignore the risk of an ‘ESG bubble’ developing in any asset class.

Which also makes Christine Lagarde’s first speech as the incoming European Central Bank’s President worth flagging here. In it, she hinted she may want to harness the institution’s asset purchase program to fight climate change. What does this mean in practice? Assuming the EU can agree more standard definitions of ‘green assets’, it likely means buying green bonds, albeit the green bond universe is still small. It’s a radical proposal and departure from traditional monetary policy (specifically the principle of market neutrality to avoid bubbles)… albeit consistent with the narrative of other central bankers. But the climate crisis requires radical solutions and the ECB’s balance sheet could play a significant role in speeding up the green transition. Investors just need to be mindful of the potential unintended consequences of a desire to do the right thing.

 

 

Kingspan Group Plc and Relx Plc are held in the Kames Global Sustainable Equity Fund as well as other Kames Fund portfolios. Other company names listed in the table above whilst not held in the Kames Global Sustainable Fund, may be held in other Kames Fund portfolios.

About the author

Ryan Smith is Head of ESG Research at Kames Capital. He joined Kames Capital in October 2000 as an SRI analyst and was appointed to his current position in September 2002. He has 19 years’ industry experience*. His role involves managing the team that conducts the ESG screening process for our Responsible Investing funds. Ryan’s team also provides corporate governance screening and research for all equity investments, and conducts research into environmental and social issues. Before joining us, he worked as an environmental chemist for Severn Trent Water. Ryan has an MSc in Environmental Chemistry from Nottingham Trent University. 

*As at 30 November 2019

Sign up to receive our fortnightly Soapbox email

Powerful dark forces….whahahahahahaha

It’s that time of the year. In Scotland we call it ‘guising’. In other places it’s called ‘trick or treating’. Collins dictionary describes it as, ‘the practice or custom of disguising oneself in fancy dress, often with a mask, and visiting people’s houses, especially at Halloween.’ At a stretch, you could also call it doorstep lobbying…..

But when it comes to the murky world of corporate lobbying, there’s a bit more at stake than a few Haribo or spending a night in with the curtains drawn and the lights off. Although US lobbying spend is actually down this year versus last, it’s not something we should ignore since it spans a multitude of sectors and its impacts are multi-faceted.

For instance, most readers will be familiar with the idea of a company’s direct (operational) and indirect (supply chain, product use) greenhouse gas emissions. But what about the impact of a corporates direct or indirect lobbying on climate? Not-for-profit InfluenceMap argue that at some companies, the dark forces of climate lobbying are in fact the largest component of their carbon footprint.

Source – InfluenceMap

And to an extent we would agree. We expect the highest ESG standards and we also want a level playing field for all the companies that we invest in. Which is why (in contrast to some of the world’s largest investment managers), we have consistently supported shareholder resolutions relating to climate lobbying. The most recent of which was at BHP Plc’s1 AGM.

BHP isn’t a bogey man. It is a reputable mining company with well-managed operations in relatively low political risk geographies. But alongside 20% of other shareholders, Kames recently voted for a resolution at the company’s AGM seeking the company take further steps to address the lobbying activities of the industry bodies it is a member of. TBH, given that 2.5% of BHP’s EBITDA is from thermal coal (one thermal coal mine in Australia), its associations with certain organisations and defending their anti-climate narrative (which is inconsistent with its own) struck us as an unnecessary distraction for management. But anyway, post the AGM, its pleasing to see that BHP appears keen to engage with investors further on the issue.

At the same time, we recently co-signed a letter to a number of other Australian-listed corporates on the issue of climate lobbying by industry associations. And elsewhere, Kames voted for similar resolutions at the AGM’s of ExxonMobil Corp1  and  NextEra Energy, Inc.1 and a review of lobbying activity influenced our thinking when voting BP Plc’s1 AGM earlier this year.

In a previous soapbox, we described ourselves as ‘Capitalists with a conscience’. We have multiple investments on behalf of our clients across multiple industries. Climate change presents a risk for many companies and an opportunity for some that we need to understand and shady behaviours, industry obfuscation and lobbying prevents investors, customers and voters from making better informed decisions. Ghosts and ghouls need to be bought into the light; so does inconsistent corporate messaging and lobbying about climate change.

1 At the date of writing, Kames held BHP Plc, BHP Limited, ExxonMobil Corp, NextEra Energy Inc. and BP Plc across a number of investment strategies except Kames Global Sustainable Equity and Kames Ethical Equity, Ethical Corporate Bond and Ethical Cautious Managed.

About the author

Ryan Smith is Head of ESG Research. He joined Kames Capital in October 2000 as an SRI analyst and was appointed to his current position in September 2002. He has 18 years’ industry experience*. His role involves managing the team that conducts the ESG screening process for our Responsible Investing funds. Ryan’s team also provides corporate governance screening and research for all equity investments, and conducts research into environmental and social issues. Before joining us, he worked as an environmental chemist for Severn Trent Water. Ryan has an MSc in Environmental Chemistry from Nottingham Trent University and is a CFA charterholder.  *As at 30 April 2019.

Sign up to receive our fortnightly Soapbox email

#Flightshame

The airline industry doesn’t really have a plan or immediate technological solution to address its climate impact. Currently, flying accounts for only 2.4% of global CO2 emissions. The problem is passenger numbers are projected to double to 8.2 billion by 2037, and at this rate it could consume a quarter of the carbon budgeted to limit the global temperature increase to 1.5C by 2050 (Carbon Brief).

Factors affecting the emissions intensity of an airline include fleet age, seat density/passenger load (well done Ryanair, but you were still Europe’s 10th largest polluter in 2018), and the mix of long-haul versus short-haul routes. Fuel typically comprises 25% of an airline’s operating expense, so there is a massive incentive to increase fuel efficiency. Airlines have managed to make considerable progress in reducing emissions by improving the efficiency of their aircraft, but this is dwarfed by increasing demand.

It’s convenient to dismiss ‘flygskam’ or #flightshame as virtue signalling. But consider how societal concerns regarding plastic have shifted radically and in short order. Air travel is on track to become the new coal within three decades if the predicted cuts in other sectors materialise. Flying accounts for 17% of an average household’s greenhouse gas emissions, but the real problem lies with the 10% of us who take four or more flights each year.

Short-term, the industry is pitching carbon offsets as a partial solution. From 2021, CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation) will require participants to offset their emissions. All airlines which operate between two volunteering states will be subject to offsetting requirements.  As of January 2019, 78 countries had volunteered to participate, including the US, UK, and Saudi Arabia (but not China, Brazil or India).  The carbon offsetting business is probably a good place to be right now, though the scientific merit of the approach is often questioned.

Material technological solutions are some way off. Alternative fuels may be part of the solution – fuel-electric hybrid technologies appear closest (late 2020’s) and UBS estimate that fuel costs could be reduced by as much as 40% versus a conventional aircraft, even allowing for higher battery costs and ground handling fees.

We have previously talked about climate tipping points. The industry risks being singled out more and more as other industries reduce their emissions. This probably means greater risk of taxation, a quick and easy solution beloved by governments. France recently imposed a new ‘eco-tax’ on all airline tickets for flights departing from French metropolitan airports by 2020. Aviation is critical in fostering economic growth, connecting businesses and travellers, providing important tourist income and supporting humanitarian missions. But as Richard Gustafson, CEO of Scandinavian Airlines (SAS) recently stated, climate change undoubtedly presents, “an existential question”.

About the author

Ryan Smith is Head of ESG Research. He joined Kames Capital in October 2000 as an SRI analyst and was appointed to his current position in September 2002. He has 18 years’ industry experience*. His role involves managing the team that conducts the ESG screening process for our Responsible Investing funds. Ryan’s team also provides corporate governance screening and research for all equity investments, and conducts research into environmental and social issues. Before joining us, he worked as an environmental chemist for Severn Trent Water. Ryan has an MSc in Environmental Chemistry from Nottingham Trent University and is a CFA charterholder.  *As at 30 April 2019.

Sign up to receive our fortnightly Soapbox email