Sustainable Investing weekly blog: 8th October 2021 (Issue 10)

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


This week we cover more big picture news and reports, maybe its the upcoming COP26 that is bringing them to the fore, or maybe its the approach of winter ? Our top story is directly stock and investing related, examining the plans by Thyssen to expand its green hydrogen  production capacity; then we look at part of the complex question of social licence, which we argue is an essential element in successfully driving the transition to net zero and a greener economy, we examine the importance of water – which seems to have dropped down the green agenda, before finishing with our BST-Impact partners on the technical issues around how States (countries to you & me) can have an obligation to act against companies, even if the claimed human rights or environmental violation takes place in another country. 

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. While our new team member, Nick, gets up to speed, we will continue to 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 : Green hydrogen – a coming supply surge ?




Thyssenkrupp “to boost green electrolyser production line to 5GW” (Recharge News)

Main points of the story as published

  • Germany’s Thyssenkrupp plans to boost its annual electrolyser production capacity to a massive 5GW from a current 1GW. The industrial conglomerate also said it is involved in all three hydrogen lead projects that gained support by Germany’s education and research ministry (BMBF), and is testing the industrial-scale production, use and system integration of green hydrogen (produced from renewable power via electrolysis).
  • The German government will support the first of the three flagship hydrogen projects, H2Giga, with €8.5m ($9.8m) in subsidies for the research and development of large-scale production of alkaline water electrolysis (AWE). Thyssenkrupp through the project aims to take advantage of scaling effects and thereby reducing manufacturing costs, as well as expanding its existing supply chain of 1GW of electrolysis cells to enable larger project volumes of several gigawatt per year.
  • The industrial conglomerate currently offers standardised 20MW electrolyser modules, which it said enables selective maintenance work on individual cells instead of having to replace the entire stack. In order to develop the next technology generation of alkaline electrolysis, Thyssenkrupp said it is carrying out completely new stack and cell development work. Essential for the ramp-up to series production is its joint venture with electrochemistry and cell manufacturer De Nora and other partners like metal processing firm Hoedtke.
  • Thyssenkrupp will also receive €780,000 in funding for its contribution to the H2Mare flagship project aimed at developing the production of hydrogen and downstream products such as synthetic fuels, methanol, ammonia and synthetic methane directly at sea. Siemens Energy, which coordinates the project, in August had already said H2Mare will be supported by €100m from Germany’s government. The third flagship project the company is involved in is the TransHyDE project that looks into the potential of the ammonia cracking process.

Our take on this

  • The important points to make are that these are first, relatively small projects (for now) and second, the talk about scaling up to 5GW has no time scale or concrete dates against it. But we think its a real indicator of the type of interest in the theme being shown by large industrial conglomerates. In our analysis of the green hydrogen industry published earlier in the year, we identified two key themes. The moves by Thyssenkrupp are consistent with both.
  • First, as the article makes clear, the industry is still at the pilot project stage. There is much work to be done before green hydrogen can become both viable at scale and cost competitive with traditional hydrogen, even when the costs for carbon capture and storage are included. So our projections of the main demand growth occurring in the later part of this decade or more likely post 2030 still look well founded.
  • Second, the plans by Thyssen to expand production up to 5GW are consistent with our view that we will see a range of new entrants into this market. And that these new entrants will materially expand supply, potentially at a rate faster than demand growth. The Thyssenkrupp plan follows that from Cummins (Cummins hydrogen day link) and Siemens Energy (link to Siemens Energy hydrogen day – 19 March 2021). On top of this we expect Chinese companies to be material contributors to both production capacity, noting that BNEF estimates that they are currently producing electrolysers at a cost well below that of their western peers. ABB is among the companies that have recently signed Memorandums of Understanding with possible Chinese partners (ABB signs MoU with PERIC Hydrogen Technologies Ltd)
  • Something to also bear in mind when we consider the potential market for green hydrogen. Recharge News, in their coverage of the recent IEA Green Hydrogen report, asked a good question (has the IEA lost the plot – set high targets then blame countries for not meeting them).  We firmly believe that green hydrogen can be an important part of the transition to net zero, largely through replacing existing “dirty” hydrogen production. But we agree with the Recharge analysis, there is a lot of hype that could lead investors to follow some financial dead ends. Not all promoted uses will make commercial sense. 
  • Finally, while this project (Repsol plans E1.5bn green hydrogen complex by 2025) is also still at an early stage, one thing about it struck us as really interesting, its in Spain. The location makes sense, potentially abundant solar and some of the cheapest generation prices in Europe. Will we see a long term trend for industrial production to shift to where green energy is most plentiful and cheapest ?

Electrification – social licence, without it many decarbonisation efforts will fail



Convincing people to pay is hard – could treating it like a pension help (The Conversation)

Main points of the story as published

  • Energy prices across the world have soared in recent weeks, hitting households and businesses hard. Combined with the costs of dealing with the pandemic, this may make political leaders think twice about making the case for expensive environmental policies that could further raise taxes or bills at next month’s COP26 global climate summit.
  • But one way or another, climate change will eventually have to be paid for. Put simply, we can pay now by replacing our cars and gas boilers with greener alternatives; or we can pay later, by funding the replacement of flooded infrastructure and dealing with natural disasters.
  • It’s a bit like saving for retirement. An employee knows that sooner or later they will have to pay to support themselves when they are no longer working. They can choose to pay that price sooner, by putting aside money for a pension or they can pay later, with a reduction in living standards when they stop working. With climate change, there may be a similar lack of motivation. Though the costs of climate change mitigation are experienced here and now, the benefits can seem distant and uncertain.

Our take on this

  • We are sceptical about the pension comparator, in most countries we are massively under saving if peoples lifestyles are to be supported in retirement, so incentives haven’t really worked. But we agree on the importance of the question.  This is an issue that the recent spike in energy costs across Europe has really brought to the fore (with some, unsurprisingly,  trying to blame renewables). Lets take some examples – starting with electric vehicles. Norway is held out, quite rightly, as a success story in “driving” the general population to use EV’s, without coercion. But the cost to the government has been high and not all countries can use their massive oil revenues to subsidise this process (Norway an EV role model ? ). Don’t misunderstand us, the outcome is positive, and there is a valid argument that the more EV’s we build, the cheaper they will get, but its not really a model that can be widely applied. The more EV’s we sell, the bigger the bill for subsidies becomes, and even China found it unaffordable.
  • Another example is home heating in the UK, a debate that has become more “heated” as gas prices rise. The UK government proposes to ban gas boilers in new homes from 2025, but as early as the middle of this year some reports were already suggesting that this date would be allowed to slide (UK PM considers pushing ban back to 2040) . Why, its the cost or more importantly, who pays. For new homes the debate should be simple, with research suggesting that the extra cost is small and its recouped quite quickly (including in higher property values). But its a tougher debate around refurbs, especially when much of the housing stock is poorly insulated. While heat pumps are being promoted (again quite rightly) as the solution (or at least part of it), the cost difference between installing a heat pump and replacing an existing gas boiler, at least currently, is material. Again, its the right thing to do (should you get a heat pump ?) but getting people to pay the upfront capital cost, especially those on lower incomes, is seen as being very tough (if not impossible).
  • We could go on (extending carbon pricing is another area of debate), but you get the drift. To be positive, there are solutions being worked on. Organisations such as Bankers without Boundaries are working with partners such as EIT Climate-KIC, co-funded by the European Union –  (climate – KIC website), to develop innovative funding solutions. These look encouraging as a way of both spreading the cost and introducing different layers of financial contribution.  Maybe green bonds can help, raising capital from both institutional and retail investors to fund the necessary capital spend, offering a lower return, but for many this might be a price they are prepared to pay. Companies such as Abundance Capital are doing this in the retail market (Abundance Capital) … to be clear, this is not an endorsement, you need to do your own due diligence.
  • Our worry is that many of the easy wins have been achieved. From here on most decisions will be politically and socially tough and they will involve some material trade-offs and compromises. We think its important that the debate happens, how do we pay for this (obviously including the cost of doing nothing in the debate) ? The absence of this debate, no mind finding solutions, is one reason why, just to take one example, we don’t do research on green home heating (in some markets) … without a clear social licence we struggle to see how its financially viable.  
  • We don’t know the answer to this. In some cases the debate is being used to stifle change, but in most examples its a problem that needs to be solved – who pays. We would like to think COP26 will bring forward solutions – but we are not holding our breathe. 

Agriculture & Natural Capital – we need to be more worried about water



Wake up to the looming water crisis  (WMO)

Main points of the story as published

  • Water-related hazards like floods and droughts are increasing because of climate change. According to figures cited in the report, 3.6 billion people had inadequate access to water at least one month per year in 2018. By 2050, this is expected to rise to more than five billion. In the past 20 years, terrestrial water storage – the summation of all water on the land surface and in the subsurface, including soil moisture, snow and ice – has dropped at a rate of 1cm per year.
  • The number of people suffering water stress is expected to soar, exacerbated by population increase and dwindling availability. But management, monitoring, forecasting and early warnings are fragmented and inadequate, whilst global climate finance efforts are insufficient according to a new multi-agency report. “Increasing temperatures are resulting in global and regional precipitation changes, leading to shifts in rainfall patterns and agricultural seasons, with a major impact on food security and human health and well-being,” says World Meteorological Organization Secretary-General Prof. Petteri Taalas.
  • “This past year has seen a continuation of extreme, water-related events. Across Asia, extreme rainfall caused massive flooding in Japan, China, Indonesia, Nepal, Pakistan and India. Millions of people were displaced, and hundreds were killed. But it is not just in the developing world that flooding has led to major disruption. Catastrophic flooding in Europe led to hundreds of deaths and widespread damage,” he said. “Lack of water continues to be a major cause of concern for many nations, especially in Africa. More than two billion people live in water-stressed countries and suffer lack of access to safe drinking water and sanitation,” he told the official high-level launch event.

Our take on this

  • Our take on this is short. When we started in this industry, water was one of the big long term investable themes for investors. If anything the need has got greater. As our world warms, the atmosphere will hold more water, so more floods. Ironically at the same time we will get more droughts, as this report so eloquently reports. Its well worth a read, especially as at least parts of the problem can be solved through private capital.

Social and Legal factors – BST Impact


Photo by Mahosadha Ong on Unsplash

 Calls for re-evaluation of human rights impact of sanctions (Office of UN High Commissioner)

  • This week our BST-Impact colleagues are continuing their examination of how national courts are using human rights to hold companies accountable, but this time going into the technical issues around why States can be “forced” to act, even if the violation takes place in another country. To us this is both important, and often poorly understood by investors. So, while its complex, its worth understanding just how it works and how it might change in the future. The analysis and discussion over the last few weeks is leading up to next weeks blog, where they we will be discussing how human rights norms and standards are being used to hold companies accountable for environmental damage. Over to our colleagues at BST-Impact

Over to the BST-Impact team for the legal definitions, which gives a solid foundation to investors to help make sense of the growing wave of legal cases.

  • Building on what we discussed last week (who is responsible for rights violations), plus the various legal cases we have reviewed e.g the case against Dutch Royal Shell, this weekly takes a look at the legal theory behind what is known as “extraterritoriality” – something we are examining more in depth in our upcoming monthly. The cases we looked at over the past weeks all show that operating outside your territory of domiciliation does NOT absolve a company from responsibility of what happens “overseas”. Recent developments in case law clearly show that a private enterprise can be held accountable for actions in a country in which it is not domiciled.
  • Importantly, for States to live up to THEIR responsibilities they need to hold private actors accountable. 
  • The substantive obligations of States to regulate and control the activities of corporations operating in more than one jurisdiction consist of the duties to prevent abuses. In case of human rights violations both national, regional and international monitoring bodies (courts and committees) have examined the important question of whether the State could reasonably be expected to act so as to prevent the infringement of the individual’s rights. This means that there is an expectation on what the state could or should know when performing adequate due diligence. This includes situations where there is wide-spread knowledge that actions of a certain group is violating people’s human rights, or where the state had been directly alerted to problematic actions.
  • This means that if a State is or reasonably should be aware of violations abroad the obligation to protect may well become relevant. Similarly, an obligation to act can exist when a company operates in a setting where the local State is failing in its obligations (perhaps even doing so to avoid accountability for practices that would be punishable elsewhere). In many national legislations there are clear extraterritorial implications; for example, requiring corporate parents to report on the company’s overall human rights policy and impacts, including those of its overseas subsidiaries. This is exactly the focus of a number of targeted draft regulations in e.g. the EU, but existing law is and has been used already to hold companies such as Royal Dutch Shell accountable.
  • 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

Drought is causing hydro in the US to have a rough year – a sign for the future ? (inside climate news)

The US Energy Information Administration is projecting a 13.9 percent decrease in hydroelectric generation this year compared to 2020, part of a larger picture in which renewable energy—which includes hydropower—is not growing as fast as scientists say is necessary to avoid the worst effects of climate change. This could be a cause for concern, or it could just be natural cycles. While the decrease in hydropower this year may be alarming, it is within the bounds of what’s happened in the recent past. If the EIA forecast pans out, the 13.9 percent decrease in hydro generation this year would be less than the 14.4 percent decrease in 2007, and close to the 13.5 percent decrease in 2012. What isn’t clear though is is this a warning flag for the future, when some regions will get more rainfall than they want, and others will get less. Something to watch.

 

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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