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.

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#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.

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Stewardship Enquiry

Questions are being asked regarding the role of corporations in society. Similarly, expectations regarding the role of shareholders are changing and proposed changes to the UK Stewardship Code reflect this.

The Code sets the framework for how fund managers should think about the companies they invest in and hold them to account. The first of its kind was established after the global financial crisis and has now been replicated in a number of other markets. The most recent iteration being the EU Shareholder Rights Directive.

In fact, on the face of it, the rest of the world has now caught up with the UK on stewardship. In response (and also in response to the critical Kingman review), the FRC has come out all-guns-blazing in an attempt to regain the UK’s mantle of being a stewardship ‘leader’. Proposed changes to the Code include: a broader rationale for engagement (other than short-term corporate governance), a wider range of asset classes, and better reporting of engagement outcomes. It also seeks to get other players in the investment value chain, not just the asset managers (e.g. the asset owners), to pay more attention to stewardship activity. The climate crisis is also specifically carved out as a stewardship issue.

Fine. Like many other sectors, the asset management industry needs to do more and explain the role that it plays in society. But ‘society’ and the readers of ‘engagement reports’ also need to recognise that as fund providers, our fiduciary (legal) responsibility remains to our clients. The mug on my desk says, ‘capitalists with a conscience’; there is a role for us to engage with companies on ESG when we believe our investors capital is at risk or where there are opportunities for investee companies to benefit from environmental/societal drivers. As we have previously said, ‘who cares wins’ , so we are more than willing to challenge companies and their executive management teams on a range of ESG issues, including on long-term strategic issues like climate. For instance, we were one of the few institutional investors to support the Follow This shareholder resolution at BP’s AGM; which sought the company to set emission intensity targets for the fuels that it sells. Finally, as active investors, if we need to, we have the ultimate sanction available to us, an ability to sell the shares of any company when we feel the ESG risks are too great.

Not shying away from voting against management:

Source: ShareAction. Proxy Voting Policy & Practice: Charity Asset Managers in Focus Investor Report December 2018

But we also need to be honest and pragmatic about what and how much we can achieve in our engagement efforts. The rationale for any stewardship activity must always be investment performance. Bear in mind that a lack of engagement reporting by a fund provider could mean they are (mostly) investing in the ‘right’ companies! Asset management has an important role to play in society, but it can’t fix all its ills or fill the void left where governments fail to prepare for the future.

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.

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Nothing new under the sun

Every single second, the sun furnishes the earth with more than six thousand times the energy produced by all our power plants, engines, factories, furnaces and fires combined!

And as far back as 2000 years ago, Chinese architects were aligning windows and doors with the southern sky to let sunlight flood into rooms during winter, heating cold interiors. The Greeks and Romans expounded similar architectural principles. Then coal came along and these design principles fell out of favour…unlucky for us.

But, there’s nothing new under the sun (as they say). Fast-forward to 2019, and take a look at the world. Homeowners in many markets are increasingly warming to the idea of solar panels on their roofs- particularly in California, Germany, and Australia.

  • In Australia more than one in five homes now use solar panels.
  • California was the first state in the US to require that from 2020, every new home is built with a solar system (and California builds about 100,000 housing units each year).

Plus, a recent survey* by CITE research suggests that, regardless of politics, built-in rooftop solar in every new home is an idea that appeals to 70% of Americans.

Solaredge Technologies Inc. has been a beneficiary of this demand. By making each solar panel ‘intelligent’, the company’s technology optimises the power generation of a rooftop solar system. In the residential space, Solaredge provides an array of features: its own smart inverters, cloud-based monitoring systems, solar-based water heating and third-party battery storage systems.



Source: Solaredge

And as the economics of batteries fall and the proportion of electricity generated by renewables rises, home energy storage technologies (solar + battery) become increasingly compelling/necessary. Wall mounted batteries are already relatively low cost ($2500-$10,000), often with short pay-back periods in certain markets and if you’re in California, one can imagine why it might be attractive to have backup power in the event of a brownout or blackout, (the frequency of which are expected to increase as utility PG&E implements cautionary measures to reduce the risks of wildfires).

In Germany, one out of every two orders for rooftop solar is already sold with a battery storage system.



Source: Bank of America Merrill Lynch

4 reasons why energy storage will win

We have previously written about the disruption of the traditional centralised power generation model of utilities. But it’s not just technology disruptors like Solaredge** that are interested in this new market. Ikea have offered solar + storage products (which one assumes doesn’t come flat-packed) and Shell*** recently purchased Sonnen, Germany’s leading maker of home batteries. The future is 4D , Decarbonised, Decentralised, Digitised and Democratised. It’s not yet clear who will provide it, but it probably won’t be long until having rooftop solar, a battery and an EV car will be a genuine reality for many.


*CITE Research (www.citeresearch.com), on behalf of Vivint Solar, conducted a nationally representative online survey of 2000 US adults age 25+ from June 13-16 2019.
**Solaredge is held in the Kames Global Sustainable Equity Fund, as well as other Fund portfolios.
***Royal Dutch Shell is held by sever Kames portfolios, but is not held in our Sustainable or Ethical funds.

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.

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Tipping points

As we mentioned in last week’s Soapbox, the direction of travel of greenhouse gas emissions is far from good – even BP agree! Which means that the longer governments delay, the more forceful and urgent the policy response needs to be.

In her last hurrah as PM, Theresa May’s committed the UK to a zero carbon target by 2050. The cost? Huge, obviously! Our energy infrastructure is vast and complex and has take more than 150 years to build. But the cost of doing nothing is even greater and the longer we do nothing the more expensive it gets! And anyway, as the advisory group on the costs and benefits of net zero sets out in its report, it’s pretty much pointless trying to estimate what the cost might be; economists struggle to estimate GDP more than a year or two out.

However, all is not lost. What we do know is the remarkable speed with which renewable energy costs have fallen, rendering those earlier forecasts of the costs of decarbonisation extremely pessimistic. How quickly? Since 2010, solar PV prices have fallen 83%, wind turbines 25%. LED lighting has gone from 5% of the global lighting market to 40% in six years and renewable investment now outpaces fossil fuels. In the UK,

It’s the first time since the Industrial Revolution that more electricity has been produced from zero and low-carbon sources rather than fossil fuels. It’s tremendously exciting because it’s such a tipping point.”  John Pettigrew, CEO of National Grid, recently.

It’s not unreasonable to expect similar cost reductions in other key technologies, such as batteries, fuel cells and electric vehicles:

“Once a technology becomes sufficiently competitive, it starts to change the entire environment in which it operates and interacts. New supply lines are formed, behaviours change, and new business lobbies push for more supportive policies. New institutions are created, and old ones repurposed. As costs fall and expectations of market size increase, additional investment is induced and the political and commercial barriers to a transition begin to drop away. A tipping point is eventually reached where incumbent technologies, products and networks become redundant.”    -Source – Report to the Committee on Climate Change of the Advisory Group on Costs and Benefits of Net Zero

The economics of clean energy are increasingly compelling and the scales are tipping in its favour as the diagram from Carbon Tracker shows below.

And once the economic tipping point is reached, the opportunity for politicians to act is enhanced. The energy incumbents’ ability to obfuscate and lobby is increasingly overwhelmed by financial reality. A political tipping point becomes a possibility. In enacting more sustainable energy policies, politicians are, after all, simply aligning themselves and policy with the economics of a rapidly changing energy landscape.

We would therefore argue that it feels like we are at, or are approaching multiple tipping points. New energy technologies are cheaper than fossil fuels for electricity and will soon be cheaper for transport. For the reasons set out above, anchoring views around concrete climate change policy commitments is not appropriate as the process of decarbonisation will not be linear. Companies that sell unsustainable products will face strategic dilemmas. But the biggest problem we face also creates enormous investment opportunities… and those companies providing solutions that address climate change should benefit from secular tailwinds.

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.

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