Sustainable Investing weekly blog: 22nd October 2021 (Issue 12)

This blog does not constitute Investment Research as defined in COBS 12.2.17 of the FCA’s Handbook of Rules and Guidance (“FCA Rules”). See the end of this blog for links to important information and disclaimers.

Our weekly summary of the key news stories, developments, and reports that are impacting investing in the wider transition to net zero carbon .


In case you were not aware – COP26 is coming. While it’s likely it will dominate press coverage of the sustainability debate for the next few weeks, it’s a topic we are staying away from in our blog. Its not that we don’t think what gets decided isn’t important. The transition to net zero and a greener/fairer economy will not happen unless governments set targets and act on them. And from a big picture perspective, some problems can only be fixed by society as a whole pushing for new laws. The public pressure from such events is critical, it can build consensus and momentum. Its just our focus is slightly different.

We think of this as a three part parallel process. You have government commitments. Its really important, but there are many steps between policy and action, and lets be honest, many governments (& companies) may be well intentioned, but they can be poor at the follow through. And you have socially motivated impact investing, where owners of capital look to fix many of our societies inequalities. Less of a focus on financial return and more on the impact delivered. Also really important. In between this is our world, the problems and challenges around the transition that the private sector can help fix – while at the same time earning a fair financial return. Sometimes its new products and services, disrupting existing business models. Sometimes its  fine tuning an existing business model, and other times, it needs the hard grind of engagement to make change happen. For all of these to succeed we need better educated clients, the owners of the capital. The more they understand the complexity, the trade-offs and compromises needed, and the actions they can take that will make a real difference, the faster progress we will make. To be clear, we don’t think the private sector can fix all of the challenges, but they have to be part of the toolkit. The scale of the funding needed is just too massive to leave them out. I didn’t mean this introduction to be so long, its just its something we feel passionately about. I will now get off my soapbox and go back to the weekly.

This week our top story examines the (good news warning ) explosive growth in battery storage demand in the US, and the slower uptake in Europe; then we look at plans by Germany to cut the green electricity levy, we examine the launch of the latest precision spraying Ag technology, before finishing with our BST-Impact partners on the legal aspects of  the recent legal filing on behalf of 500 Kenyan tea planation workers.

The format 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 dan@sustainableinvesting.co.uk. 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 : We need to talk about battery storage




Global energy storage capacity to grow at 31% CAGR (Wood Mackenzie)

Main points of the story as published

  • Wood McKenzie’s latest report shows that global energy storage capacity could grow at a compound rate (CAGR) of 31%, ending up with 741 GWh of cumulative capacity by 2030. This is a slowing on the growth from 2013 to 2020 (66%) but still a rapid increase. They forecast that front of meter will dominate deployments, accounting for 70% of capacity additions. This follows a decline in deployments in 2020, with a “wavering ” growth pattern expected in the early 2020’s followed by an acceleration in the late 2020’s.
  • The US maintains top spot, with their analysts forecasting that it will make up 49% of cumulative capacity (c. 365GWh) by 2030. China comes in second, on their estimates accounting for 21% or c. 153GWH of capacity.  By contrast European growth is expected to be slower. They see the UK and Germany dominating, at least out to 2025, with France and Italy opening up and Spain and the rest of Europe expected to follow.
  • LFP technology (cf NMC which has dominated to date) is expected to become more prevalent, growing from 10% market share in 2015 to more than 30% by 2030.

Our take on this

  • While governmental targets and aspirations get a lot of focus, especially in the press, the reality is that its the “boring” application of these targets via regulation that often provides the real opportunity for the private sector to contribute. Battery storage is a good example of this.
  • Starting from the basics, battery storage is going to be one of the technologies that enables us to add materially more renewable electricity generation to the mix. Its particular role will be time shifting, storing (cheap) surplus electricity at times of high generation and releasing it back when renewable supply is lower. It will be complementary to interconnectors, software based grid enhancement and demand management. The current focus is on the up to four hour storage market, but we expect this to expand over time to longer durations  (although still hours or maybe days rather than weeks or months).
  • This is where regulation comes into play. The main US Federal regulatory agency (the Federal Energy Regulatory Commission or FERC) starting looking at this nearly a decade ago. In November 2016 they released draft order 841, which aimed to open up wholesale markets for battery storage & aggregation. The final version of the order was confirmed in February 2018 and it was upheld in a recent US Court of Appeals decision (which declared that FERC has jurisdiction over how energy storage interacts with the interstate transmission markets it regulates, even if those systems are interconnected to the grid under regulations set by the states). Appeal court upholds FERC rule 841
  • As battery storage became more economically attractive, this regulation opened the opportunity for the technology to be more widely used. The result is the dominance of the US in the global market that Wood Mackenzie reported above. We can contrast this with Europe. The UK and Germany have both moved on the regulatory front to encourage battery storage uptake. By comparison, domestic regulators in other markets have moved more slowly, although we are starting to see progress in other major European countries as well.
  • Why is this important ? Its not just a question of domestic markets. The provision of battery storage technology can become a major export industry, as demand grows globally. European governments have talked a lot about the job creation and export opportunities for green hydrogen – maybe they need to look at the less “glamorous” technologies as well. The long term future is electric. 

Electricity applications – cheaper renewable electricity in Germany ?



German renewables surcharge to be reduced (Euractiv)

Main points of the story as published

  • Germany will lower its infamous renewable electricity surcharge to the lowest point ever in 2022 amid signs that the next government may be preparing to abolish the tax entirely. The renewable electricity surcharge, introduced under the German Renewable Energy Sources Act (EEG), “will go from 6.5 to 3.7 cents per kWh starting 1 January,” said Peter Altmaier, the country’s caretaker minister of economy and energy.
  • Germany is one of the EU countries with the highest electricity prices, something that critics have attributed to the EEG. Because of the levy, industrial electricity prices in June were 30% higher than wholesale market prices, according to energy industry association BDEW. “The reduction of the EEG levy will help stabilise electricity prices for private households and the vast majority of companies in Germany in 2022,” said Thorsten Lenck, senior associate at think-tank Agora Energiewende.
  • The EEG surcharge is one of the pillars of Germany’s transition to renewables. The money is fed into a fund that secures renewable electricity suppliers a guaranteed price for 20 years, giving investors the confidence to spend on wind or solar power projects.
  • After the reduction, the EEG will bring €3.25 billion of revenues in 2022, far less than the €10.8 billion had initially expected. But the reduction of the EEG levy will not put a stop to government backing for the continued expansion of renewable energies, Altmaier said. Instead it means financing will come “from the general budget and the emissions trading scheme income,” he explained.

Our take on this

  • This will likely be seen as an important move, as the German government looks to make electricity more affordable (in the face of rising gas and coal prices), which should in turn further encourage German consumers and SME’s to transition toward a more electrified future – so more EV’s & heat pumps.
  • It also a clear signal that the new government (or should I say likely new government) will focus more on the net zero transition, with the statement on the levy coming the same day as the German social democrats (SPD), the liberal FDP and the Greens published a paper summarising their exploration talks as they seek to govern the country in a so-called “traffic light” coalition. How much of this is the direct influence of the Greens, and how much is a general shift to stronger environmental policies by all parties is tough to know.
  • The bottom line is that at least in some countries, a greater focus on a green agenda is gathering momentum. 

Agriculture & Natural Capital



Greeneye launches AI precision spraying technology (Croplife )

Main points of the story as published

  • Israel-based Greeneye Technology has announced the commercial launch of its precision spraying technology following the first commercial sale of its technology. It plans to launch in North America in early 2022 where it already has a waiting list of companies. The technology uses cameras mounted directly on the spraying machine combined with AI and deep machine learning to identify and spray individual weeds in amongst a crop, reducing herbicide use by 78% and cutting herbicide costs by more than 50%.
  • The company believes that most precision spraying technologies have failed to move beyond field trials because either the technology doesn’t deliver the required accuracy, or farmers need to invest in new spraying equipment. Greeneye claims it has overcome both of these. It sprays individual weeds with a 96% accuracy and has designed a system that integrates the technology seamlessly with existing commercial sprayers. The next generation of Greeneye’s technology will target precision spraying of fungicides and fertiliser.

Our take on this

  • There has been considerable excitement around precision spraying technology since John Deere’s acquisition of Blue River Technology in 2017 for US$305m. However it has taken until this year for the first products to reach the market with Deere announcing the commercial launch of its See-and-Spray technology only in March this year.
  • Both Greeneye and Deere use the same combination of cameras and AI and both claim identical reductions in herbicide use (78% and 77% respectively). Where they differ is in the incorporation of the technology in the sprayer: Greeneye adapt existing sprayers while Deere only provide it factory-fitted to their own equipment.
  • Precision spraying is one of the most exciting agricultural technologies. It offers the potential to improve farm economics (pesticides and fertilisers account for 13% of the cost base of the average US farm), health outcomes for farmers and their neighbours, reduce the environmental impact of farming (soil and water), and slow the development of pesticide resistance.
  • Economics remains the main barrier to widespread adoption but will likely be overcome either by incorporating the technology into existing equipment (as Greeneye do) or offering through a product-as-a-service model. History is clear. Farmers will adopt technology that works, in other words delivers meaningful and measurable cost or yield benefits. In the case of precision spraying, once farmers are comfortable with the economics, adoption rates could reach 80% within 15 years.

Social and Legal factors – BST Impact


Photo by Mahosadha Ong on Unsplash

 The crippling cost of your cuppa (The Times – paywall)

  • This week our BST-Impact colleagues are using the recent legal filing on behalf of 500 former tea workers in Kenya to explain some of the legal framework under which the case has been brought.  And, as they have done in a number of their weekly contributions, they reinforce the point that violations of human rights abroad are “no longer out of reach of those jurisdictions that take a tougher line on human rights and the rule of law”. Plus they link this case back to Goal 8 of the 2030 Agenda for Sustainable Development

Over to the BST-Impact team

First – what has happened: 

  • Over 500 former employees of James Finlay company in Kericho County Kenya, have filed a case in Scotland seeking damages for musculoskeletal injuries while on duty. The case was filed in Scotland on September 29. 2021, following an initial lawsuit filed in December 2017 against the company in relation to seven different workers. Since then, the company has been fighting the case while simultaneously mechanising its tea harvesting. James Finlay Kenya is based in central London, but its registered offices are in Aberdeen, which is why the lawsuit was brought in Scotland.
  • The victims’ lawyers claimed that all of the cases in the group proceedings raise similar issues of fact and law. It is also claimed that the claimants have all been injured and should be compensated for any pain and suffering. This includes any physical or mental injuries sustained by them as well as other financial losses. It is alleged their loss and injuries were caused by the company’s negligence.
  • In particular, it is claimed that the company as an employer, was bound to take reasonable care for the safety of their employees, while at work, and to respond to the high incidence of injury by assessing the method of work to reduce or eliminate the risk of injury of their employees.
  • This included providing the employees with reasonable training on how to carry out their duties without risk of injury, paying them reasonable wages, so that they would not be obliged to continue to work unreasonable hours or carry unreasonable weights over unreasonable distances and uneven terrain.

BST -Impact take on this case

  • Decent standards of work (decent work) have always been at the heart and core of issues of social justice as well as protection of workers, workers’ rights and economic and social rights. Decent work directly influences one’s capacity to have decent standard of living as well as civil and political rights around participation and ability to make choices. It is also closely linked to avoiding exploitation (or as it is commonly called these days “modern day slavery”).
  • Decent work has become a universal objective and has been included in major human rights treaties, UN Resolutions and outcome documents from major conferences including Article 23 of the Universal Declaration of Human Rights (1948), the World Summit for Social Development (1995), World Summit Outcome Document (2005), the high level segment of ECOSOC (2006), the Second United Nations Decade for the Eradication of Poverty (2008-2017), Conference on Sustainable Development (2011) and in the UN’s 2030 Agenda for Sustainable Development (2015) as well as the Covenant on Social, Economic and Cultural Rights and numerous International Labour Organization Instruments.
  • During the UN General Assembly in September 2015, decent work and the four pillars of the Decent Work Agenda – employment creation, social protection, rights at work, and social dialogue – became integral elements  of the new 2030 Agenda for Sustainable Development. Goal 8 of the 2030 Agenda calls for the promotion of sustained, inclusive and sustainable economic growth, full and productive employment and decent work. Key aspects of decent work are widely embedded in the targets of many of the other 16 goals.
  • The continuum of exploitation captures not only the complex combination of situations that exist between decent work and forced labour (an environment that permits the existence of sub-standard working conditions), but also an individual work situation, as it evolves over time. The continuum of exploitation aids understanding of the persistent problem of the changing reality of work, captures various forms of exploitation up to forced labour and assists in identifying ways of addressing it. Sub-standard working conditions are not forced labour per se; neither is the lack of viable economic alternatives that makes people stay in such situations. However, that does not mean that people working in substandard work situations cannot claim that their human and labour rights have been violated.
  • This case clearly shows what we have been speaking about in the weeklies before: that violations of rights overseas are no longer out of reach of jurisdictions with a tradition of respect for the Rule of Law and human rights. And that there is an obligation on private entities operating in jurisdictions other than the one where they are domiciled to operate according to human rights and labour standards or they risk paying the price.
  • Just a reminder. The team at Sustainable Investing is unqualified to discuss the legal implications of cases such as these. Fortunately, the BST-Impact team has many years’ experience with international human rights legislation. The importance of international human rights law to investors is becoming material, both from a risk perspective but also with regard to informed engagement.  For follow up, consultancy and training etc, BST-Impact can be found here.

One last thought

Is the UK really focused on delivering net zero

We don’t deliberately focus on the UK for these “one last thoughts”, its just a combination of being the host of COP26 and the gap between promises and follow though, makes them an easy target.  Carbon Brief has done a good (detailed summary) of the 21 documents that make up the UK governments net zero plan. They apparently total 1,868 pages (& no – we haven’t read them all) link here.

What caught our eye was the BBC reporting that the business secretary has denied that individuals will bear the cost of changing to greener ways of living. link here. Kwasi Kwarteng said it was “not true” to say that the move to more environmentally friendly transport and energy production would “cost us”. This came as another government department, this time the Treasury said that “future governments “may need to consider changes to existing taxes and new sources of revenue” rather than relying on higher borrowing“. 

We get the point. Net net its likely that consumers will be financially better off once the transition has happened (or at least no worse) and governments will need to find a way to replace some taxes. But, we also think its important to recognise that the actual transition could be messy and that unless we find a way of making sure that the wins are widely spread, especially among the poorer sections of our societies, we could find voters becoming very unhappy.

 

Sustainable Investing LLP is an appointed representative of Varramore Partners Limited which is authorised and regulated by the Financial Conduct Authority (“FCA”) in the United Kingdom (“UK”). Sustainable Investing’s FCA Firm Reference Number is 946165.

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