Our weekly summary of the key news stories, developments, and reports that are impacting investing in the wider transition to net zero carbon and a greener/fairer society.
This weeks top story highlights our recently published thematic research on the wider Agtech space, highlighting the long term opportunities in salmon, in precision ag/robotics and in ag biotech, plus the long term risks to the Agchem sector. In Electrification, we follow up with a piece on (another) report setting out the case for 100% renewable electricity generation, plus in Demographics, we examine the importance of population trends and role played by the politics during our formative years on our beliefs and attitudes to risk . We finish with a guest story from our human rights expert on why we need to watch the increasing human rights concerns regarding cobalt mining. Our last thought highlights some fairly brutal feedback in a Bloomberg article on how some ESG scores are created.
The format of the blog is simple, first our summary of the key points of the story (click on the green link to read the original) and then what we think it means for investors. The focus is on news flow that we think should change the markets perception of the investment case of individual stocks and sub sectors. So not the place to come to for news that has already been well covered in say the FT. Our approach is unashamedly long term, so we ignore short term noise.
If you would like to subscribe, please contact Dan at firstname.lastname@example.org. For the next few weeks, we will focus on just four key stories, and then we will ramp up coverage. For now, the blog will be freely available but at some point we will shift to a public blog and a more detailed client ie subscription version.
This week’s top story : Agtech – massive potential unconnected to commodity prices
New Research – Agricultural technology: field of dreams
- In research published earlier in the week, Nick Anderson (a partner at Sustainable Investing LLP), published a thematic piece on the agtech sector, a large US$300bn+ market, growing at 7% CAGR. Nick pulls out three key drivers. First, Agtech investing is not a call on commodity prices. Agriculture is a tech savvy industry where, despite volatility in farm incomes, farmers have consistently adopted technology that works and have done so quickly. Agtech companies can and do offer attractive returns in excess of the cost of capital, outperforming across the cycle. For instance Deere has outperformed the S&P500 by 2.8% p.a. over 50 and c. 100 years.
- Second, the drive to Net Zero, associated regulation, plus the rise of litigation, will accelerate agtech adoption. Agriculture’s role in delivering Net Zero 2050 is underestimated by the market, and seemingly by governments as its low profile at COP-26 suggested. At 31% of global greenhouse gases, the agri-food system is a big part of the problem but also part of the solution. Government intervention will likely increase with policies (including immigration), regulations and subsidies accelerating agtech adoption; litigation and consumer pressure are also important.
- Third, the importance of routes to market is underestimated by the market. The role of distribution is often overlooked in high growth markets. Incumbents in precision ag, robotics and alternative proteins (ag retailers, OEMs, FMCGs/supermarkets respectively) dominate routes to market, making it difficult for many new entrants to commercialise their technology and earn a satisfactory return.
- Nick’s report highlights the long term opportunities in salmon/aquaculture, in precision ag/robotics, and in ag biotech, plus the opportunities in waste & biofuels. On the potentially negative side, he sees long term risks to the ag chem sector, driven by a potent combination of regulation, litigation, political and consumer pressure, and adoption of Net Zero targets, combined with emerging agtech and use of more soil-friendly farming practices.
- If you would like a copy of the report, please contact Dan. In terms of being able to receive our research, this message from our compliance team might help. By making samples of previous analysis publicly and freely available (on our website) to professional clients as defined in COBS 3.5 of the FCA Handbook, we believe this analysis is capable of qualifying as an acceptable minor non-monetary benefit in accordance with COBS 2.3A.19 of the FCA Handbook. However, as the recipient firm, you must be satisfied that you can accept this an acceptable minor non-monetary benefit and, by requesting access to this analysis, you should be satisfied that this analysis does not amount to unsolicited free research. Additionally, please note that, as Sustainable Investing LLP (“SI”) does not provide execution services, the requirements set out in COBS 2.3C of the FCA Handbook do not apply to us. Consequently, the requirements in relation to separately identifiable charges for execution and research services are not applicable.
Electrification: can we get to a 100% renewable grid and as investors should we care
Avoiding blackouts with a 100% renewable electricity grid (Stanford Woods Institute for the Environment)
Main points of the story as published
- For some, visions of a future powered by clean, renewable energy are clouded by fears of blackouts driven by intermittent electricity supplies. Those fears are misplaced, according to a new Stanford University study (link here) that analyses grid stability under multiple scenarios in which wind, water and solar energy resources power 100% of U.S. energy needs for all purposes. The paper, just published in Renewable Energy, finds that an energy system running on wind, water and solar coupled with storage, avoids blackouts, lowers energy requirements and consumer costs, while creating millions of jobs, improving people’s health, and reducing land requirements.
- Imagine all cars and trucks were powered with electric motors or hydrogen fuel cells, electric heat pumps replaced gas furnaces and water heaters, and wind turbines and solar panels replaced coal and natural gas power plants. The study envisions those and many more transitions in place across the electricity, transportation, buildings and industrial sectors in the years 2050. The scenario is not as far-fetched as it may seem, according to Jacobson and his co-authors. Wind, water and solar already account for almost 20% of US electricity, and 15 states and territories and more than 180 U.S. cities have enacted policies requiring a virtually all-renewable electricity sector, among other signs of a larger shift to clean, renewable energy.
- Critics of such a shift have pointed to grid blackouts amid extreme weather events in California during August 2020 and Texas during February 2021 as evidence that renewable electricity can’t be trusted for consistent power. Although in both instances renewable energy was not found to be more vulnerable than other sources, the fear of increased blackouts has remained substantial, according to the researchers, who aimed to evaluate the contention on a larger scale.
Our take on this
- This report is the latest in a string that have examined the question of “can we get to a 100% renewable electricity grid”. Pretty much all of these reports have focused on the US, but the conclusions they have drawn are equally application to other large developed markets such as Europe.
- The consensus conclusion seems to be that most countries could get to c. 70% renewables “fairly easily”, meaning its both technically and financially possible. For some countries (those blessed with a range of renewable resources) a higher level, maybe as much as 90%, looks achievable. Delivering the last 10-30% (depending on your country) could be technically possible but the costs could be prohibitive, at least based on current technologies and expected cost reductions.
- We don’t think its useful to get to tied up in the how big can renewables be debate. As investors, we believe the question needs to be asked in a slightly different way. The question should not be “can we achieve XX% renewables by 2050 (or even 2030)”, it should be “does this analysis change my view as to which activities and technologies offers the best route to delivering the transition we need, while at the same time offering a fair financial return on my capital”. Putting it another way, if the analysis indicates that c. 70% renewables in the electricity generation mix is possible or even probable, what activities, other than building wind & solar, look to be investible.
- Pretty much all of the studies we have read support the view that more renewables in the generation mix is going to require materially more battery storage (probably Li Ion – but this is open to debate), a lot more renewable grid connections and interconnectors, and a really material increase in spending on making the electricity grid smarter and more responsive. Plus, we need to put a lot more effort into demand management and energy efficiency.
- It’s these areas we think investors should be most focused on, not the debate around is the grid going to be 50%, 70%, 90% or 100% renewables. While investment opportunities in stationary storage batteries, electricity cables, smart grids and demand management/energy efficiency are harder to find than those focused on building more renewables, our analysis suggest it’s here that investors should be looking. It’s these less analysed themes that offer the opportunity to find stocks that the market is mispricing.
Demographics – does it matter what generation you were born into ?
Main points of the story as published
- Three stories caught our eye on demographics this week touching on two core issues: the outlook for the size and structure of the population, and differences in behaviour between generations. The former maybe predictable, the latter is hotly debated but both have major implications for future patterns of consumption, economic growth, inflation and interest rates.
- The first story focuses on a decline in the number of weddings in China to the lowest level in 13 years with implications for future birth rates and population growth. The number of births in China is already at the lowest since 1961 while population growth is at its slowest in seven decades. The decline in weddings has been attributed to the high cost of engagement gifts (to more than six times average income), the gender imbalance that resulted from the one-child policy, and women choosing to prioritise their careers.
- In the second story, Gillian Tett debates the differences between hard and soft economic data in the US, wondered if there was a psychological issue involved. Inflation is creating so much angst today because it has been almost unknown for decades. “A generation of consumers does not know how to parse the current outlook.” A similar behavioural change took place in attitudes towards debt in the run up to 2008.
- Finally, in an opinion piece reflecting on the death of US politician Bob Dole at 98, Janan Ganesh noted that “few voters in the west have ever seen their domestic politics go catastrophically, life-endangeringly wrong… Their appetite for political risk is therefore only natural”. Societies thus become “rasher and more reckless as their memories of past crises fade”.
Our take on this
- Demographics has significant implications for the long-term outlook and sustainability of many companies but slow rates of change means that it has little impact on near term earnings and therefore investors’ attention. This is a mistake. In our view, it is every bit as important as Net Zero 2050 in shaping the economic and investment landscape through the rest of this decade. As we have argued in other blog posts here and here, declining fertility rates and ageing then declining populations will likely keep interest rates and inflation lower for longer. Japan is indeed the play book.
- Behavioural differences between generations is a complex debate but every bit as relevant to the impact of demographics. The much maligned millennials are, in our view, little different from their grandparents in terms of consumption and work choices. They want to get a well-paid job, buy a property, have a family and save for retirement. They may eat smashed avocado on toast but their aspirations are the same.
- Where generations do differ is in the societal, political and economic climate they grew up in and their resulting risk appetite and relationship with society, issues touched on by Ganesh and Tett in their opinion pieces. There is evidence that each generation is not unique, rather it repeats on an 80-100 year cycle. This was the argument put forward by Neil Howe and William Strauss in ‘The Fourth Turning’ (reviewed here). At a personal level, it also fits with discussions with our grandparents generation about work, debt and investing in the 1930s and post war.
- Finally, this topic also resonates in debates around how best to push forward with the transition to a greener, cleaner & fairer society. Its almost impossible to gain consensus on the actions we need to take without taking account of the social framework within which people operate. This is a topic that Katherine Hayhoe ( an atmospheric scientist and evangelical Christian) has written on extensively. Regular readers of the blog we know we think highly of her work, even when we don’t always agree (how to talk climate across the political divide).
Social and Legal factors
- This week our good friend Kristina Touzenis, who has many years experience in the human rights field (LinkedIn profile here), has again kindly guest written the social & legal section of the weekly. Thank you Kristina. Just a reminder, this section is not written and prepared by Sustainable Investing LLP. Quite frankly, we are not experts in this field, so we leave the topic to those that are. This week she starts to look at how human rights law, and the rise in legal challenges in western jurisdictions, could impact the purchasers of cobalt. It’s no secret that many investors are concerned about the working conditions of miners in the DRC, the home of nearly half of the world’s reserves of cobalt. This material is an important input to some Li Ion batteries and hence to EV’s. Recent press coverage includes this article in the Guardian (DRC miners toil for 30p an hour) and this one in ACI Africa (Catholic sisters work to end child labour). Recent political and legal moves in Europe, including a push for a new human rights laws (EU justice chief promises new human rights laws in 2021), and the new law, passed in June in Germany (Germany’s new Supply Chain Due Diligence Act) that requires require large companies to conduct supply chain due diligence, mean that possible human rights abuses in supply chains should get more attention from investors.
- Growth in the sales of electric vehicles means we have seen an increasing demand for minerals such as Cobalt. With this growth comes an increased focus on its extraction and how companies, such as car manufacturers, source their minerals from countries in which they are not domiciled. In a recent article in the Guardian (source above) it was pointed out that “many EV brands have made public commitments to “responsible sourcing” of minerals, and some – notably Tesla – are using innovative ways to achieve this. Nevertheless, the Guardian report highlights how far the sector still has to go to ensure “the shift to clean energy is not tainted by claims of workers’ rights abuses.”
- Regular readers of these weekly blogs will know that some courts are increasingly willing to look into cases where the alleged offence takes place in a different country from the companies domicile. In one of our early blogs (back in August 2021), we wrote about how the US District Court for Puerto Rico approved a $25 million settlement in Puerto Rico’s favour as part of a lawsuit the Commonwealth filed more than a decade ago against ExxonMobil Corp. and Esso Standard Oil Co. claiming the companies contaminated the island’s groundwater. We also discussed (in July 2021) how London’s Court of Appeal agreed to reopen a $7 billion lawsuit by 200,000 claimants against Anglo-Australian mining giant BHP – a case regarding dam rupture behind Brazil’s worst environmental disaster in 2015.
- Both the UNGP +10 measures we highlighted last week, and the specific Human Rights Due Diligence legislation planned in the EU, put a large part of the responsibility for ensuring human rights are respected on the company engaging the supplier of its materials. This raises the prospect of German automotive OEM’s having to explain just what they are doing to make sure they are sourcing cobalt and other minerals responsibly. 2022 could be an interesting year.
One last thought
To quote the article ….”No single company is more critical to Wall Street’s new ESG profit engine than MSCI, which dominates a foundational yet unregulated piece of the business: producing ratings on corporate “environmental, social, and governance” practices. BlackRock and other investment salesmen use these ESG ratings, as they’re called, to justify a “sustainable” label on stock and bond funds. For a significant number of investors, it’s a powerful attraction. Yet there’s virtually no connection between MSCI’s “better world” marketing and its methodology. That’s because the ratings don’t measure a company’s impact on the Earth and society. In fact, they gauge the opposite: the potential impact of the world on the company and its shareholders. MSCI doesn’t dispute this characterization. It defends its methodology as the most financially relevant for the companies it rates.” Regular readers know our view … we think the primary focus should be on what difference the company actually makes to delivering the transition, and how it does this.