So you’ve made the decision to divest from fossil fuels. But what now? In conversation with Blue & Green Tomorrow, John David (JD) and Chris Bullock (CB) from Rathbone Greenbank Investments provide the lowdown on investing in alternative energy as a means of combatting climate change.
This piece originally featured in Blue & Green Tomorrow’s Guide to Climate Change 2013.
JD: Climate change science shows that we shouldn’t be burning fossil fuels. Some environmental investors argue that a major incentive to the traditional energy industry to change and to invest in alternative technologies is to cut off investment to them.
We do, however, have to be realistic as to how quickly that can happen. A pathway to a low-carbon society is not something that’s going to happen overnight. That’s not a realistic approach.
We may have to promote natural gas, which is less polluting than oil or coal, as well as renewable energy technologies and energy efficiency.
If you pull out of traditional energy stocks, you’ve naturally got quite a big hole in your portfolio because the oil and gas industry is a large component of most global indices, particularly in the UK.
Everything one says about investing in renewables, energy efficiency and energy infrastructure has to be seen in the context of sensible risk management within a portfolio. These aren’t necessarily an alternative to traditional energy stocks as a whole because they can’t really be looked at on the same page.
If you look at their performance, they certainly aren’t correlated, and most of the stocks represent a greater risk – certainly in the short-term – than traditional energy stocks. Many are overseas companies, too, so apart from anything else, you’re adding potential currency risk into the equation.
Having said that, we’re very keen on these stocks as alternatives over the longer term.
How to approach fossil fuels
JD: In terms of our clients, it’s fair to say the majority would support a best-in-sector approach when it comes to oil and gas, supporting those companies operating more towards the natural gas end of the spectrum and the ones with very strong environmental, social and governance (ESG) records.
But equally, we do have a significant number of clients who would favour a complete divestment approach.
The nature of bespoke investment management is that you cater to your clients’ needs and wishes. Our role as investment managers is to make the client aware of the potential financial impact of his or her ethical or environmental criteria, and to manage any additional risks represented by these choices.
Domestic alternative energy investment
CB: A good place to start is at more generalist funds such as WHEB Sustainability and Impax Environmental Markets plc, which have well-resourced teams in London. The thing we like about these funds is that they have the flexibility to invest in a variety of themes. So, although they have exposure to renewable energy, admittedly wind and solar developers rather than the actual manufacturers, they also have exposure to energy efficiency, water and waste, and recycling.
It’s not a direct switch from oil and gas to funds like these, but it does mean that the risks and volatility apparent in the renewable energy companies is mitigated by the water and some energy efficiency holdings. It gives investors the flexibility to have some exposure without risking too much.
We also invest in some more focused funds. European fund managers are quite strong in this area and the likes of Pictet, RobecoSAM and KBI are some of our favourites.
CB: We’re also seeing quite a lot of developments in the renewable infrastructure space, especially this year with the listing of the Greencoat UK Wind Fund, which was the vehicle that brought wind farms from Scottish and Southern Energy (SSE) and RWE.
This is quite an interesting fund for us. It provides a pretty sustainable dividend yield and, while not a direct replacement for oil and gas, it gives clients a stable income stream with a good asset backing.
CB: In terms of direct investment, some of our clients have direct holdings in renewables stocks, but again a word of caution: these can be quite volatile, especially towards the smaller end of the market capitalisation range.
Renewable Energy Generation is an interesting company that has been around for a while. It is a developer, owner and operator of renewable projects in the UK. Its main focus is wind farms but also has a small used cooking oil facility, which it uses for short-term energy requirements for the grid.
We’ve met the management numerous times: it always seemed slightly undervalued, a small company that perhaps not many people are following. But a few months ago, Blackrock bought some of its wind farms, and as a result, there was a surge in the price of its other wind farms and development sites. That led to a marked increase in the value of the company, and it seems to be trading at those levels quite sustainably.
Renewables becoming more cost-competitive
JD: Going back five or six years, the opportunities in renewable energy were very much at the technology end of the spectrum. They did well for a while, but plummeted during the financial crisis as a result of oversupply, a pullback in government policy, and falling oil prices.
But over the past couple of years the technology has fallen substantially in price, so it’s made it much easier to invest in renewable energy as a utility.
Overcoming the investment risk
JD: Financial markets tend to be quite short-term, which is a challenge when considering a long-term issue like climate change.
Even the hardest-hearted of traditional investors sees that renewable energy is going to become increasingly important. But they might argue that it may take five or ten years before it really begins to compete with traditional energy forms.
Markets don’t really work on a five or 10-year basis; they are much shorter term. That’s been a challenge for renewable energy.
Having said that, particularly if you look at the developing world and emerging markets, where there is huge investment in energy infrastructure, they are to some extent leapfrogging some of these more traditional energies – not least because they may have an abundance of natural resource, in the form of sunshine, geothermal or wind, whereas they may not have access to oil or coal.
Unquoted or unregulated investment
CB: Unquoted investment is a really interesting area that has been growing rapidly over the last 10 years or so, from some of the original wind farm co-operatives to the more recent examples like Westmill Solar, a 5 megawatt (MW) wind farm in Oxfordshire that some of our clients have invested in.
It seems that communities are taking the lead here and trying to stabilise their own energy sources. That’s definitely a developing theme.
There seems to be a lot more support for these co-operatives, both in terms of enlightened investors and organisations facilitating the process by sharing information.
There are some larger-scale projects as well. One that we’re familiar with is the Tidal Lagoon Swansea Bay project, which has been in the news. It could be the start of a major change to our energy policy and, if it goes ahead, it can be used as a blueprint for others.
We expect other interesting opportunities in this area but, while we’re always supportive, people need to be aware of the risks that go with an unquoted investment. They’re very much long-term projects that support social and environmental returns, as well as financial ones.
The elephant in the room: nuclear
JD: If you look at the UK, nuclear remains a pivotal part of the energy policy for the next 10 to 20 years. It will be very interesting to see how this issue develops.
Nuclear is something that our clients have very mixed views on. Many are anti; others are reluctantly supportive because they don’t see any alternative in the short term. But the nuclear industry appears to be under a certain amount of pressure.
Germany has stepped away from nuclear. So has Japan, on the back of Fukushima. And it’s becoming increasingly difficult to see how the nuclear industry will develop in the way it is expected to. If nuclear energy runs into further problems, this could be a boost for the renewable energy sector.
Investing in energy efficiency
CB: The combined results of people using energy-efficient technologies can be huge. This is an area where the UK is quite strong. There are a lot of small and medium-sized companies listed on our markets that are enabling businesses and individuals to operate more efficiently.
For companies that have cash to spend, but aren’t willing to make huge investments in major capital expenditure, adopting a relatively low-cost energy-efficient solution can often reap dividends. There are real opportunities with efficiency companies that make products that perhaps aren’t visible to us, but whose combined impacts are certainly quite considerable.
JD: Ultimately, investors have to go with their heart as well as their head. Their strength of feeling, their attitude to risk and their investment objectives will potentially determine which fossil fuels strategy they choose.
In the short-term, many investors see the benefits of investing in a best-of-sector basis – not least because it gives them an engagement opportunity with some very large, global companies that have the financial strength to change our energy market over the next few decades. The opportunities in renewable energy and energy efficiency are making those sectors very attractive for all investors if used appropriately in a portfolio.
CB: The renewable energy sector as a whole has real opportunities in the coming decades. We’re now at a stage where, in highly-irradiated regions of the world like California, solar is reaching grid parity. There are reports about Saudi Arabia considering the build out of massive solar farms because it’s more economic for them to produce their own electricity from solar than from oil, in spite of their plentiful supplies.
Consumers and investors can support this trend, either through home generation, buying energy-efficient products and appliances, investing in leading companies and supporting more local community-owned renewable projects. The opportunities are huge, and growing.
John David is investment director and Chris Bullock is investment manager at Rathbone Greenbank Investments.
How Going Green Can Save A Company Money
What is going green?
Going green means to live life in a way that is environmentally friendly for an entire population. It is the conservation of energy, water, and air. Going green means using products and resources that will not contaminate or pollute the air. It means being educated and well informed about the surroundings, and how to best protect them. It means recycling products that may not be biodegradable. Companies, as well as people, that adhere to going green can help to ensure a safer life for humanity.
The first step in going green
There are actually no step by step instructions for going green. The only requirement needed is making the decision to become environmentally conscious. It takes a caring attitude, and a willingness to make the change. It has been found that companies have improved their profit margins by going green. They have saved money on many of the frivolous things they they thought were a necessity. Besides saving money, companies are operating more efficiently than before going green. Companies have become aware of their ecological responsibility by pursuing the knowledge needed to make decisions that would change lifestyles and help sustain the earth’s natural resources for present and future generations.
Making needed changes within the company
After making the decision to go green, there are several things that can be changed in the workplace. A good place to start would be conserving energy used by electrical appliances. First, turning off the computer will save over the long run. Just letting it sleep still uses energy overnight. Turn off all other appliances like coffee maker, or anything that plugs in. Pull the socket from the outlet to stop unnecessary energy loss. Appliances continue to use electricity although they are switched off, and not unplugged. Get in the habit of turning off the lights whenever you leave a room. Change to fluorescent light bulbs, and lighting throughout the building. Have any leaks sealed on the premises to avoid the escape of heat or air.
Reducing the common paper waste
Modern technologies and state of the art equipment, and tools have almost eliminated the use of paper in the office. Instead of sending out newsletters, brochures, written memos and reminders, you can now do all of these and more by technology while saving on the use of paper. Send out digital documents and emails to communicate with staff and other employees. By using this virtual bookkeeping technique, you will save a bundle on paper. When it is necessary to use paper for printing purposes or other services, choose the already recycled paper. It is smartly labeled and easy to find in any office supply store. It is called the Post Consumer Waste paper, or PCW paper. This will show that your company is dedicated to the preservation of natural resources. By using PCW paper, everyone helps to save the trees which provides and emits many important nutrients into the atmosphere.
Make money by spreading the word
Companies realize that consumers like to buy, or invest in whatever the latest trend may be. They also cater to companies that are doing great things for the quality of life of all people. People want to know that the companies that they cater to are doing their part for the environment and ecology. By going green, you can tell consumers of your experiences with helping them and communities be eco-friendly. This is a sound public relations technique to bring revenue to your brand. Boost the impact that your company makes on the environment. Go green, save and make money while essentially preserving what is normally taken for granted. The benefits of having a green company are enormous for consumers as well as the companies that engage in the process.
5 Easy Things You Can Do to Make Your Home More Sustainable
Increasing your home’s energy efficiency is one of the smartest moves you can make as a homeowner. It will lower your bills, increase the resale value of your property, and help minimize our planet’s fast-approaching climate crisis. While major home retrofits can seem daunting, there are plenty of quick and cost-effective ways to start reducing your carbon footprint today. Here are five easy projects to make your home more sustainable.
1. Weather stripping
If you’re looking to make your home more energy efficient, an energy audit is a highly recommended first step. This will reveal where your home is lacking in regards to sustainability suggests the best plan of attack.
Some form of weather stripping is nearly always advised because it is so easy and inexpensive yet can yield such transformative results. The audit will provide information about air leaks which you can couple with your own knowledge of your home’s ventilation needs to develop a strategic plan.
Make sure you choose the appropriate type of weather stripping for each location in your home. Areas that receive a lot of wear and tear, like popular doorways, are best served by slightly more expensive vinyl or metal options. Immobile cracks or infrequently opened windows can be treated with inexpensive foams or caulking. Depending on the age and quality of your home, the resulting energy savings can be as much as 20 percent.
2. Programmable thermostats
Programmable thermostats have tremendous potential to save money and minimize unnecessary energy usage. About 45 percent of a home’s energy is earmarked for heating and cooling needs with a large fraction of that wasted on unoccupied spaces. Programmable thermostats can automatically lower the heat overnight or shut off the air conditioning when you go to work.
Every degree Fahrenheit you lower the thermostat equates to 1 percent less energy use, which amounts to considerable savings over the course of a year. When used correctly, programmable thermostats reduce heating and cooling bills by 10 to 30 percent. Of course, the same result can be achieved by manually adjusting your thermostats to coincide with your activities, just make sure you remember to do it!
3. Low-flow water hardware
With the current focus on carbon emissions and climate change, we typically equate environmental stability to lower energy use, but fresh water shortage is an equal threat. Installing low-flow hardware for toilets and showers, particularly in drought prone areas, is an inexpensive and easy way to cut water consumption by 50 percent and save as much as $145 per year.
Older toilets use up to 6 gallons of water per flush, the equivalent of an astounding 20.1 gallons per person each day. This makes them the biggest consumer of indoor water. New low-flow toilets are standardized at 1.6 gallons per flush and can save more than 20,000 gallons a year in a 4-member household.
Similarly, low-flow shower heads can decrease water consumption by 40 percent or more while also lowering water heating bills and reducing CO2 emissions. Unlike early versions, new low-flow models are equipped with excellent pressure technology so your shower will be no less satisfying.
4. Energy efficient light bulbs
An average household dedicates about 5 percent of its energy use to lighting, but this value is dropping thanks to new lighting technology. Incandescent bulbs are quickly becoming a thing of the past. These inefficient light sources give off 90 percent of their energy as heat which is not only impractical from a lighting standpoint, but also raises energy bills even further during hot weather.
New LED and compact fluorescent options are far more efficient and longer lasting. Though the upfront costs are higher, the long term environmental and financial benefits are well worth it. Energy efficient light bulbs use as much as 80 percent less energy than traditional incandescent and last 3 to 25 times longer producing savings of about $6 per year per bulb.
5. Installing solar panels
Adding solar panels may not be the easiest, or least expensive, sustainability upgrade for your home, but it will certainly have the greatest impact on both your energy bills and your environmental footprint. Installing solar panels can run about $15,000 – $20,000 upfront, though a number of government incentives are bringing these numbers down. Alternatively, panels can also be leased for a much lower initial investment.
Once operational, a solar system saves about $600 per year over the course of its 25 to 30-year lifespan, and this figure will grow as energy prices rise. Solar installations require little to no maintenance and increase the value of your home.
From an environmental standpoint, the average five-kilowatt residential system can reduce household CO2 emissions by 15,000 pounds every year. Using your solar system to power an electric vehicle is the ultimate sustainable solution serving to reduce total CO2 emissions by as much as 70%!
These days, being environmentally responsible is the hallmark of a good global citizen and it need not require major sacrifices in regards to your lifestyle or your wallet. In fact, increasing your home’s sustainability is apt to make your residence more livable and save you money in the long run. The five projects listed here are just a few of the easy ways to reduce both your environmental footprint and your energy bills. So, give one or more of them a try; with a small budget and a little know-how, there is no reason you can’t start today.