The shades of grey in sustainable investment

A documentary film called ‘Planet of the Humans’ was recently released online to much controversy. For those of you who haven’t seen it, it describes itself as a “full-frontal assault on our sacred cows’, arguing that renewable energy and green movements have been hijacked by the traditional form of capitalism, and that these technologies are not as good for the environment or society as we’re led to believe.

In terms of false facts and narratives, there are many. The film seems unaware of the many evaluations of the life-cycle emissions of renewable energy sources which demonstrate that even with the carbon emissions resulting from the manufacture of wind turbines or solar panels, the emissions-intensity from these energy sources are far lower than those from fossil-fuel generated power. According to research published in the Nature publication two years ago, solar, wind and nuclear provided energy at less than 1/6th of the energy intensity of fossil fuels (and considerably less for projects with high efficiency). Where the film is onto something is that bioenergy was found to be only fractionally less energy-intensive than fossil fuel alternatives.

Viewers are also encouraged to be shocked by the fact that electric vehicles (EVs) are often partly powered by fossil-fuels. This is not an unimportant issue, as the location of battery charging will have a significant impact on the lifecycle footprint of the car. But there is a need to step back and review the global efforts underway to reduce the carbon intensity of the grid, and with that EVs are becoming increasingly green. For a reference point an EV charging from the grid in France or Norway, where nuclear and renewables make up a high proportion of the total energy supply, has half the lifecycle emissions as the most efficient conventional car over 150,000km. For Germany the relative emission economics are not so obvious for EVs using the current power mix on the grid; this will obviously change with the closure of coal power plants planned over the coming years. This analysis was done assuming the upper end of estimates on the footprint of the manufacture of an EV battery; with ongoing innovation, this footprint too will change.

Source: ‘Effects of battery manufacturing on electric vehicle life-cycle greenhouse gas emissions’
Feb 2018, The International Council on Clean Transportation


Another interesting feature in the news recently, covered by both the FT and Bloomberg, was a study showing that while ESG ETFs are enjoying continued inflows of capital amid strong performance, the ESG might be missing the S. Many of the companies in these ETFs are tech or biotech companies which by nature employ very few people. By investing in companies that are innovating people out of jobs, perhaps these indexes aren’t very ESG at all?

Together these two stories demonstrate the great challenge in sustainability. There are few, if any, companies and supply chains that don’t have some negative impact either on society or the environment. Fingers can easily be pointed to the sourcing of lithium for EV batteries or the jobs lost in the shift to technology. Sustainable investors must manage this complexity and evaluate how these issues are managed, how the company is progressing, and what are the intentions of the strategy and management team.

For ESG ETFs however, this complexity is drilled down to a single ESG figure from a rating agency. On this I couldn’t agree more with the comments this week from Jay Clayton, Chairman of the Securities and Exchange Commission, who is concerned that aggregating ESG analysis into one score is ‘imprecise’ and will fail to deliver on the values that they communicate.

Whether an investment is sustainable is rarely black or white; few companies are either entirely ‘good’ or ‘bad’. Sustainable investment is instead about considering the many shades of grey.

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