A World in Energy Transition: Part 2

Impact Reflection | April 22, 2022

The recent report from the Intergovernmental Panel on Climate Change (IPCC) touted areas of progress to slow down global warming, from radical reductions in cost for solar and wind power to the promise of battery technology and digitalization. Still, the need for acceleration in the energy transition remains urgent: the IPCC estimates that spending needs to be at least triple the current level to accomplish the 45% emissions reduction by 2030 intended by the Paris Accords. Today, technology, know-how, and wealth are “insufficiently deployed” to achieve that goal, and acceleration of investment in the next two years is essential to support a livable climate in the future.¹

Our ability to begin the sprint needed to finance radical emissions reduction depends on the early miles of a decades-long marathon in the development of renewable energy. Early financial support for technical development, the creation of infrastructure for transforming small scale to large scale, and bridging the gap to consumer acceptance have historically been provided by the government. It has the financial scale to support the investments that individuals and private companies cannot make on their own as well as to create a foundational scaffolding on which private industry can later build profitability, scale, and additional innovation.

Every major area of renewable energy innovation – nuclear, solar, wind – has begun with foundational spending from the government. Nuclear energy was built on the foundational research done for the atomic bomb during World War II (nuclear currently provides approximately 20% of domestic electricity). Commercial solar photovoltaic technology was developed on the government dime in the 1950s at Bell Labs.² In the 1980s, the government funded efforts to develop commercially viable wind turbines, including passing new policies that mandated utilities to purchase some power from small renewable energy generators.³

Global financial resources recently committed to be spent specifically on clean energy projects over 2021-2023 total $480B globally. About $45B of that is committed in the US, and will be directed to transportation infrastructure and energy efficiency, with smaller portions allocated to build out “low carbon power” via solar and wind power, and to the continued development of clean fuels, such as green hydrogen.

That government allocation, through both direct spending and tax incentives, is the seed for substantial investment from private investors, both institutional and individual. High fossil fuel prices due to the war in Ukraine may also accelerate spending to increase the scale for both solar and wind generation. While pandemic shutdowns and labor shortages make it hard to predict how rapidly new investment can be put to work, sufficient funding will help move us down the track more quickly.

Investments into climate and green-related investment strategies have increased dramatically in recent years, with assets doubling in 2021 alone.⁴ For North Berkeley portfolios, mutual fund managers play a primary role in directing investment to energy efficiency and energy transition, as well as the development of clean water infrastructure, pollution control, plastics elimination, and sustainable agriculture. Investment opportunities include both debt and equity ranging from municipal bonds to fund the construction of mass transit, cycling, and walkability infrastructure to direct financing of commercial scale solar and wind power.

Investment managers also work directly with portfolio companies to change conventional corporate behavior to meaningfully reduce emissions. They press companies to collect data that can be comparable to peers, identify best practices, and build the business case for action. With regard to greenhouse gas (GHG) emissions, they pressure companies both to track existing emissions and set policies to reduce them. After five years of promises to create policies with no action at natural food provider Hain Celestial, a shareholder resolution brought leverage from investors and was successful in prompting the company to finally create a meaningful GHG reduction goal.

Fund managers work on more indirect efforts as well. Electronic waste has become an issue in a world of disposable goods; the challenge of reducing that waste is exacerbated by consumers’ inability to repair their own devices. Historically a vocal opponent of the “right to repair,” Apple finally changed course last year following the filing of a shareholder resolution and announced a new do-it-yourself repair program. Fossil fuels also provide the raw material for virgin plastics production. Coca-Cola is the largest plastic polluter in the world. In response to recent investor efforts, they have committed both to reduce their use of virgin plastic by the equivalent of about 4% of global production, and to have 25% of their bottles be re-usable or recyclable by 2030.

Investors continue to direct capital to companies that are developing positive alternatives and pushing for radical improvements in energy efficiency. Schneider Electric of France is a leading energy efficiency company using digitalization to advise multinational corporations on saving energy and money. Schneider works with industrial automation, smart grids, smart homes, commercial building management, and data centers, helping customers reduce carbon footprints by up to 50%, while also generating dramatic cost savings. Beyond cost savings, companies that embrace adaptation – in energy use as well as other areas – are usually those best positioned for long-term financial success.

To complement mutual fund efforts and enhance opportunities for impact, we offer interested clients access to private, less-liquid investments that are focused on areas of clean energy generation and building a healthy and regenerative environment. This has included investments in the expansion of commercial scale solar and wind power, battery storage, run-of-the-river hydropower generation, and organic agriculture investments. Some efforts focus additionally on providing financial and environmental benefits to lower-income consumers or communities of color that have experienced an inequitable balance of costs and benefits in the push toward more renewable energy generation.

Globally, emissions are correlated with wealth, and in the US, we have a “carbon heavy” lifestyle. In our first part of this series, we commented that changing energy usage begins with directional choices. Small choices add up, both in our day-to-day energy use, as well as in an investment portfolio. We work with clients to develop their own path to have their personal energy consumption come more fully from renewable sources, commonly via analyzing the relative cost benefit of an electric car or of solar panel installation. These individual efforts have an impact on helping build out the national grid of renewable energy generation and consumption. Making the directional choice to include renewable energy investment in a portfolio also adds momentum to the larger effort of funding the energy transition, and collaboratively creates the livable world we want.

Resources

¹ Eric Roston, “Planet’s Breakneck Warming Likely to Pass 1.5°C, UN Scientists Warn,” Bloomberg, Green/Energy & Science, April 4, 2022.

³ The early solar cells in 1954 achieved 4% efficiency; now panels can typically reach 25% efficiency.

³ “Energy Subsidies in the United States,” Wikipedia, April 13, 2022.

¹ John Sullivan, “Assets in Climate-Related Mutual Funds and ETFs Double in 2021,” 401k Specialist, April 14, 2022.