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Hermes Challenge ESG Investing Assumptions

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Solar panel by Marufish via Flickr

Geir Lode, Head of Global Equities at Hermes Investment Management, challenges the preconceptions of what many investors believe make an ESG stock.

There is a perception amongst some investors that to invest in a company with strong environmental credentials you need to compromise; that you’ll be confined to the small cap investment universe, excluded from multi-national businesses that generally offer stability and consistency of dividends.

Dong Energy is a Danish utility company that over the next decade is refocusing its business away from traditional fossils fuels to renewable energy. Its market capitalisation of over US$15bn allows large investors to take a meaningful participation in the transition to a low carbon economy. 

The company was founded in 2006 when Dong, a traditional oil and gas company, merged with five smaller Danish power utilities. Today the most carbon-intensive fossils fuels are seen as a non-core business segment with legacy assets being managed to maximise cash returns.

The main focus of the company is the fast-growing offshore wind farm business which includes the world’s biggest offshore wind farm that Dong is building off the coast of North-East England. Dong has a slightly different approach to its competitors in that it typically sells fifty percent of the interest in a wind farm prior to completion to crystallise the value of the project. This strategy is proving successful as it reduces the risk for equity investors whilst simultaneously increasing the visibility of the project to infrastructure investors looking for stable yields.

Dong is the largest global developer of offshore wind farms and having already doubled their installed capacity from 2012 to 2016 they aim to double capacity again by 2020. The company is committed to reducing carbon emissions by converting existing coal and gas power plants to use sustainable biomass. By 2020, the company’s target is that at least 60% of the power and heat produced at their power stations should be from sustainable biomass. The contribution from coal, oil and gas is expected to shrink significantly.

In Hermes Global Equities we rank potential and current investments by assessing the company’s financial attractiveness and ESG risk factors. For Dong, we expect the future return on capital to be higher than that of the legacy business. The company’s financial visibility is very clear through to 2020 and we see a 15 to 20 percent upside in the share price. The company has indicated that they expect to pay a dividend this year and given the high visibility of earnings we anticipate steady dividend growth thereafter. The company is also committed to maintaining their credit rating.

Investors may be surprised to consider Dong as a viable ESG name given its historical use of coal in energy production, however, we see ESG as not just investing in the green companies of today, but also those of tomorrow. Dong Energy is investing heavily in biomass and wind production and the carbon intensity of its production is expected to decline from 638g CO2/KWh to 260g CO2/KWh by 2020. Excluding companies with hydro exposure, Dong has the highest percentage of renewables in the energy mix of any European integrated utility company. The company’s corporate governance is also strong with excellent compensation transparency, a separate CEO and chairman, high board independence, and almost forty percent female representation on the board.

To achieve their ambitious targets the company must continue to demonstrate the excellent project management skills that have propelled them into their current position. There will also be risks outside of the company’s control, for example renewable energy has long relied upon government subsidies and a favourable regulatory environment. The Paris COP21 agreement last year suggests that the world is committed to the green economy, but in the face of a global slowdown or a Brexit-induced recession this resolve may be tested.

Geir Lode is Head of Global Equities at Hermes Investment Management. Lode has been on the board of 17 companies across 4 countries and, amongst other roles, was previously Chairman of Bergen Yards.

Economy

Will Self-Driving Cars Be Better for the Environment?

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self-driving cars for green environment
Shutterstock Licensed Photo - By Zapp2Photo | https://www.shutterstock.com/g/zapp2photo

Technologists, engineers, lawmakers, and the general public have been excitedly debating about the merits of self-driving cars for the past several years, as companies like Waymo and Uber race to get the first fully autonomous vehicles on the market. Largely, the concerns have been about safety and ethics; is a self-driving car really capable of eliminating the human errors responsible for the majority of vehicular accidents? And if so, who’s responsible for programming life-or-death decisions, and who’s held liable in the event of an accident?

But while these questions continue being debated, protecting people on an individual level, it’s worth posing a different question: how will self-driving cars impact the environment?

The Big Picture

The Department of Energy attempted to answer this question in clear terms, using scientific research and existing data sets to project the short-term and long-term environmental impact that self-driving vehicles could have. Its findings? The emergence of self-driving vehicles could essentially go either way; it could reduce energy consumption in transportation by as much as 90 percent, or increase it by more than 200 percent.

That’s a margin of error so wide it might as well be a total guess, but there are too many unknown variables to form a solid conclusion. There are many ways autonomous vehicles could influence our energy consumption and environmental impact, and they could go well or poorly, depending on how they’re adopted.

Driver Reduction?

One of the big selling points of autonomous vehicles is their capacity to reduce the total number of vehicles—and human drivers—on the road. If you’re able to carpool to work in a self-driving vehicle, or rely on autonomous public transportation, you’ll spend far less time, money, and energy on your own car. The convenience and efficiency of autonomous vehicles would therefore reduce the total miles driven, and significantly reduce carbon emissions.

There’s a flip side to this argument, however. If autonomous vehicles are far more convenient and less expensive than previous means of travel, it could be an incentive for people to travel more frequently, or drive to more destinations they’d otherwise avoid. In this case, the total miles driven could actually increase with the rise of self-driving cars.

As an added consideration, the increase or decrease in drivers on the road could result in more or fewer vehicle collisions, respectively—especially in the early days of autonomous vehicle adoption, when so many human drivers are still on the road. Car accident injury cases, therefore, would become far more complicated, and the roads could be temporarily less safe.

Deadheading

Deadheading is a term used in trucking and ridesharing to refer to miles driven with an empty load. Assume for a moment that there’s a fleet of self-driving vehicles available to pick people up and carry them to their destinations. It’s a convenient service, but by necessity, these vehicles will spend at least some of their time driving without passengers, whether it’s spent waiting to pick someone up or en route to their location. The increase in miles from deadheading could nullify the potential benefits of people driving fewer total miles, or add to the damage done by their increased mileage.

Make and Model of Car

Much will also depend on the types of cars equipped to be self-driving. For example, Waymo recently launched a wave of self-driving hybrid minivans, capable of getting far better mileage than a gas-only vehicle. If the majority of self-driving cars are electric or hybrids, the environmental impact will be much lower than if they’re converted from existing vehicles. Good emissions ratings are also important here.

On the other hand, the increased demand for autonomous vehicles could put more pressure on factory production, and make older cars obsolete. In that case, the gas mileage savings could be counteracted by the increased environmental impact of factory production.

The Bottom Line

Right now, there are too many unanswered questions to make a confident determination whether self-driving vehicles will help or harm the environment. Will we start driving more, or less? How will they handle dead time? What kind of models are going to be on the road?

Engineers and the general public are in complete control of how this develops in the near future. Hopefully, we’ll be able to see all the safety benefits of having autonomous vehicles on the road, but without any of the extra environmental impact to deal with.

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Environment

Road Trip! How to Choose the Greenest Vehicle for Your Growing Family

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Greenest Vehicle
Licensed Image by Shutterstock - By Mascha Tace -- https://www.shutterstock.com/g/maschatace

When you have a growing family, it often feels like you’re in this weird bubble that exists outside of mainstream society. Whereas everyone else seemingly has stability, your family dynamic is continuously in flux. Having said that, is it even possible to buy an eco-friendly vehicle that’s also practical?

What to Look for in a Green, Family-Friendly Vehicle?

As a single person or young couple without kids, it’s pretty easy to buy a green vehicle. Almost every leading car brand has eco-friendly options these days and you can pick from any number of options. The only problem is that most of these models don’t work if you have kids.

Whether it’s a Prius or Smart car, most green vehicles are impractical for large families. You need to look for options that are spacious, reliable, and comfortable – both for passengers and the driver.

5 Good Options

As you do your research and look for different opportunities, it’s good to have an open mind. Here are some of the greenest options for growing families:

1. 2014 Chrysler Town and Country

Vans are not only popular for the room and comfort they offer growing families, but they’re also becoming known for their fuel efficiency. For example, the 2014 Chrysler Town and Country – which was one of CarMax’s most popular minivans of 2017 – has Flex Fuel compatibility and front wheel drive. With standard features like these, you can’t do much better at this price point.

2. 2017 Chrysler Pacifica

If you’re looking for a newer van and are willing to spend a bit more, you can go with Chrysler’s other model, the Pacifica. One of the coolest features of the 2017 model is the hybrid drivetrain. It allows you to go up to 30 miles on electric, before the vehicle automatically switches over to the V6 gasoline engine. For short trips and errands, there’s nothing more eco-friendly in the minivan category.

3. 2018 Volkswagen Atlas

Who says you have to buy a minivan when you have a family? Sure, the sliding doors are nice, but there are plenty of other options that are both green and spacious. The new Volkswagen Atlas is a great choice. It’s one of the most fuel-efficient third-row vehicles on the market. The four-cylinder model gets an estimated 26 mpg highway.

4. 2015 Hyundai Sonata Hybrid

While a minivan or SUV is ideal – and necessary if you have more than two kids – you can get away with a roomy sedan when you still have a small family. And while there are plenty of eco-friendly options in this category, the 2015 Hyundai Sonata Hybrid is arguably the biggest bang for your buck. It gets 38 mpg on the highway and is incredibly affordable.

5. 2017 Land Rover Range Rover Sport Diesel

If money isn’t an object and you’re able to spend any amount to get a good vehicle that’s both comfortable and eco-friendly, the 2017 Land Rover Range Rover Sport Diesel is your car. Not only does it get 28 mpg highway, but it can also be equipped with a third row of seats and a diesel engine. And did we mention that this car looks sleek?

Putting it All Together

You have a variety of options. Whether you want something new or used, would prefer an SUV or minivan, or want something cheap or luxurious, there are plenty of choices on the market. The key is to do your research, remain patient, and take your time. Don’t get too married to a particular transaction, or you’ll lose your leverage.

You’ll know when the right deal comes along, and you can make a smart choice that’s functional, cost-effective, and eco-friendly.

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