Low-Carbon Wares

Not a day goes by where companies, countries and trading blocs do not have something to announce regarding low-carbon ambitions or green policies. As one who has been writing about and analyzing the energy-climate-resources nexus for well over a decade, it’s a glorious time to be an analyst, communicator or commentator. It can also be overwhelming too. Laggard companies and industries are getting into high gear. Most firms need an ESG strategy, and more. There is the compliance and reporting side but also the communications side — to investor, employee and other stakeholder audiences. It’s an era for thought leadership and strategic communications to complement the risk mitigation efforts. But careful analysis to cut through the noise and identify effective and meaningful actions is required. 

I fear a lot of money will be wasted on firm’s quests to be and portray themselves as green and good ESG plays. That concerns me greatly. Sustainability includes not just the activities and initiatives we harness to reduce greenhouse gases, re-think materials and processes, and reduce/reuse/recycle but the money we spend along the way to accomplish goals. That it has the highest uses—sustainable finance or capital.

The European Union’s latest announcement about their sweeping proposal to accelerate GHG emissions reductions originate from:

• Upping the renewables portion of the energy mix to 40% by 2030 from 20%

• Imposing a carbon border tax on imports, the carbon border adjustment mechanism, initially on steel, fertilizer, cement and unfinished aluminum and then extend to other products

One Russian aluminum manufacturer is already restructuring companies to have a low-carbon profile for its exports to the EU and a separate company for its dirtier assets. Who will be the customers for the high-carbon aluminum? Markets with less strict environmental rules? This “regulatory arbitrage” simply shifts the carbon emissions elsewhere. They would still be part of the global carbon budget. Yes, a kind of pressure will exist to make the product greener over time. 

The world’s largest emitter, China, has also announced plans to speed up its climate change mitigation efforts. Their goal is to reach peak emissions before 2030 and be carbon neutral or net zero emissions by 2060. It will launch an emissions trading system that covers the power sector first; then cement, aluminum and steel sectors next year; and petrochemicals, chemicals, building materials, iron and steel, nonferrous metals, paper and domestic aviation in the next 3-5 years. 

Of Europe’s policy maneuvers, Russia, Turkey, China and the U.K. are expected to be the hardest hit trading partners, according to Centre for Europe Reform of the UK. The U.S. not so much. Debates and disagreements will begin to arise from the various EU countries, many of which have differing carbon emission’s profiles. In China, affected businesses will be publicly silent on the matter. 

It’s going to get interesting. Changing weather patterns are increasingly destructive. If a key message from the global pandemic was a resounding ‘we’re all in this together,’ that shared fate permeates the climate change situation. The challenge is that countries are afflicted differently with their own unique coping capacities. The same goes for organizations, with varying degrees of knowledge, financial capacities and competencies. 

There’s nowhere to hide anymore with climate change, not if you’re a publicly-traded company. To firms’ credit, many thoughtful approaches have been and are emerging. Like the Paris Agreement on climate, ESG reporting and disclosure is following. A vaccine doesn’t exist for the life-supporting system of the planet that we collectively use. The supply side of the global economy is being called to action, now comes an equally hard part — the demand of consumers.

Financing Crypto Firm Projects More Sustainably

Novel research sheds light on the optimal design of “uncapped” initial coin offerings (ICOs), meaning that an unlimited quantity of tokens is offered on launch day. Read more here about the research I profiled.

Sustainability Advances from Energy Transition Events

The news of Exxon’s shareholder vote resulting in two new board members owing to activist Engine No. 1 and Shell’s ruling to cut its greenhouse gas emissions by 45% by 2030 serves as a milestone for the beginning leg of sustainability’s marathon. Numerous countries, firms and other entities have pledged to be net zero by 2050. Over 60% of countries and 20% of Forbes-listed firms with sales near $14 trillion have committed to net zero goals; however, only about 20% meet robustness criteria set forth by the U.N.’s campaign standards. Still, in the realm of momentum and sentiment, the signs are more promising. 

Further changes are afoot in investment activity in response to managing portfolio risk related to climate change. Bond investors in Europe are positioning themselves ahead of anticipated changes to monetary policy, according to the Wall Street Journal. Credit analysts and strategists suspect the European Central Bank, Bank of England and other central banks may tilt their bond-buying programs toward sustainable companies. They attribute the widening spreads to these potential policy changes. Though oil prices have increased, which typically tightens spreads of the past, they are widening, even among the Majors like BP, Total and Shell with the more advanced pledges of carbon emissions reductions.

This is very interesting for the future of asset prices related to risk management. We know that ESG investing is a matter of screening firms for environmental, social and governance factors. There is also variance in its application by firms and authoritative bodies globally. Convergence on standards may allow for better comparisons over time, but expect asymmetries to exist for some years. In a recent ESG conference, experts in policy, academia and institutional investing echoed the observation of divergent standards in Europe and the U.S., even within large swathes of participants by industry. Thus, top-level policy changes and firm-level responses to trends offer a confluence of events that will increasingly shape and hopefully ground asset prices. 

The whipsaw of financial markets between sustainable-oriented or green firms and “the rest” has not been grounded in today’s reality on a macro level. The spaces in-between and the divergences in practices offer new opportunity for thoughtful investors—and new strategies for firms carving out their positions—in the evolution of sustainability investment and its many manifestations. 

Technological-Induced Creative Destruction on Tap

After attending the annual technology-enabled disruption event produced by the Dallas Federal Reserve Bank, several key ideas emerged about macro- and micro-level trends. As the U.S. currently sits at the beginning of the end of the pandemic (hopefully) from vaccinating its way through it, some businesses have advanced their own digital economic footprint faster than they might have otherwise. It has implications for monetary policy.

Pepsi Co’s Stephen Williams mentioned that his firm is as much a technology firm as a consumer goods firm, increasingly leveraging artificial intelligence (AI) in operations. He suggested that they are five years ahead of where they thought they would be in their digital and technological progress. We know the pandemic has unleashed a torrent of online shopping and business activity since March of 2020. He further mentioned that AI is here to stay, improving blue-collar jobs but also impacting white-collar ones as well from their on-the-ground perspective.

‘Data is the new oil,’ noted academic Diane Coyle of Cambridge University. I’ve also heard it said as ‘information is the new oil.’ Her observation —information needs tacit knowledge to be used —conveyed a most important truth that is often overlooked. We still need human intelligence to apply the mountains of information being gathered by our computerized extensions of ourselves. Big data needs a visible hand in its laissez faire endeavors of gathering insights and applying them.

Of course, it would not be a Fed conference without a question being asked about the Fed’s inflation outlook and their thinking about interest rates and securities purchases. The current economic climate as it relates to monetary policy can be characterized as uncertain. Dallas Fed President Robert Kaplan says that a key watchword for him is risk management. An example given was to consider the benefits of Fed stimulus (interest rates and securities purchases) versus the unintended consequences. One such sign noted by Kaplan was that investors were competing with home buyers in the red-hot housing market. Witness the home price appreciation in markets throughout the U.S., with an increased demand (and availability of low-interest rate capital) pressuring a limited supply from pandemic economics and work-life behavioral shifts.

Richmond, Virginia’s Fed President Barkin observed that the pursuit of productivity was everywhere. He expects more businesses to automate operations to replace labor versus businesses raising wages to attract workers. My inference is that there will be more dislocation of certain types of jobs. On the flip side, the technologies that replace these types of positions will usher in new upskilled roles for replaced workers.

In general, technological advances have pushed inflation down over the last decade or more, a cyclical force which has been proven by research and cited in the earlier conferences. The labor issues at hand with technology are structural in nature. The pandemic’s effects on unemployment have therefore collided with changes already in motion in the labor market. This may mean that the current unemployment scenario (mentioned at 8 million) will take longer to rebalance. The states rolling back unemployment federal benefits may be giving up demand support at the expense of the anecdotes and voicings by businesses to find low-wage workers. TBD.

Atlanta Fed President Bostic expects a turbulent transition, with markets currently experiencing volatility. Inflationary pressures, those which are transitory versus permanent, are challenging to disentangle at present. The inference, and supporting statements, is that the decision to raise interest rates or reduce securities purchases cannot be decided based on one quarter’s data set.

The macro forces of technological advances might be considered an abstraction in some ways. However, as this touches every consumer, business, and institution, displayed in very concrete terms during the pandemic, it shakes the investment case and rationale in virtually every industry. We observe this in the gyrations of the stock markets as investors sort through what type of creative destruction is really happening.

(My next post will attempt to overlay some of these observations onto the energy transition and sustainability space.)

Energy in the Time of COVID

After my listening tour from various expert presentations, I attempt to parse the state of demand, the energy transition and what it means for future investment on Seeking Alpha. (Here.)

ESG in Energy and Virus Hits China's Oil Demand

ESG in Energy

As large firms like Blackrock add more sustainable-oriented offerings to their product lines, an energy transition continues. Summary points follow.

• Behemoth investor Blackrock announced a tougher stance on climate risk disclosure.

• Increasingly, the large- and medium-cap energy firms will solidify and mature their positions with respect to ESG principles.

• The timing of the energy transition is challenging to identify but the fundamentals still apply.

See the editor’s pick full article on Seeking Alpha.

Coronavirus and Oil Demand

In other economic news, the coronavirus has trickled through to oil demand in China and elsewhere. Select summary points follow.

• China's influence in the global economy has grown since the SARS outbreak, highlighting a bigger hit to the more highly-interconnected global outlook.

• OPEC is debating further production cuts to shore up oil prices and budgets.

Read the article.

Oil Co Eyes Lower Carbon Future

In a brief radio interview with Boston’s Financial Exchange program, I offer a glimpse of the energy transition underway relative to one Permian player that is also globally diversified, Occidental Petroleum.

Fed Chairman Powell in Dallas

Last night at the Dallas Federal Reserve Bank, Chairman Jerome Powell answered questions posed by Dallas’ President Robert Kaplan. I found Chairman Powell exactly the kind of leader one would want in that position—a studied approach, open to multiple viewpoints, a listener, but also clearheaded in his role to serve the public given his mandate by Congress. He visits Capitol Hill frequently but also engages with the 12 districts to hear on-the-ground news of business practitioners. His apolitical stance is refreshing and encouraging. His job is to hold watch over the American financial system, deeply connected to the globe’s, with an objective, transparent, steady approach. He is a man for the times. Some key paraphrased comments follow:

 In the future, a press conference will be held after every FOMC meeting rather than the four currently. This means that interest rates could be adjusted at any meeting. He mentioned that over eight years, there was no change in the federal funds rate, and now we are around 2-2.25%, in an attempt to normalize monetary policy. Inflation is on target, he mentioned, and he was positive about the economy. He understands the delicate balancing act between raising rates too fast or slow, each with their own unique challenges to monitor in terms of markets and economy. Ie., the pacing and amount of rate change are the factors.

 Chairman Powell said his primary goal with respect to the economy is to extend the economic expansion we have witnessed over the last many years. The Fed will continue to reduce its balance sheet as well. Referring to his recent Jackson Hole, Wyoming speech, he said his message was simply to bring the idea of risk management to the fore. When presented with uncertainty, you take a slower thoughtful approach. A Marketplace reporting noted, “The slowing housing industry — which Powell pointed out is not simply about rates but also a scarcity of lots and labor — was also mentioned. Powell noted that many Americans have never lived in an environment of high mortgage rates.” However, housing has become less of an [economic] driver than in the past. It’s still a forward indicator.

 On the trade front, Powell said that the new tariff policies have not shown up in the data yet. But he has heard from business leaders about the higher costs associated with the policies. He also noted that often businesses observe trends in costs and inflation before the data reveals the trend. Monetary policy is guided by both the anecdotal and the evidence in the data from the economic activity across the entire country and Fed banking system. It remains to be seen how the trade policies play out—whether it’s the case of fairer and freer trade or greater protectionism that means less growth and higher inflation. 

 The global economy is showing signs of a slow down. Half of economic activity involves emerging and developing markets, he mentioned, and a large part of their activity comprises global GDP growth. 

 A main observation made by Powell about the recession and financial crisis was the lack of imagination. People and policymakers did not see the vulnerabilities in the financial system. In a warning, he noted that the U.S. is on an unsustainable path fiscally, with high debt-to-GDP levels. The health care system and spending on entitlements need to be addressed. 

 His presentation of fact and inferences was sober and credible. Powell is a credit to the American economy and to global financial leadership.  

Energy Investing and Economy

Recent work features a blend of economic and business trends. In energy, the direction of oil prices continues to weigh on investors, while new policies clash with market forces. • Read a Q&A interview with Seeking Alpha, the crowd-sourced investor platform, about the outlook for 2018: "Remaining a Realistic Optimist in Energy."

• New research about shale oil highlights that U.S. shale oil is plentiful and competitive.

In other work, Dallas Committee on Foreign Relations hosted a speaker event about complexity science and its contribution to solving problems arising from a faster-paced, distributed and connected world. Can complexity science's approach help policymakers develop better ideas? Read "Can Complexity Science Save the Day?"

Two brief articles were written for D CEO magazine in the second half of 2017:

• Is manufacturing alive and well in North Texas? Activity in this sector is more diverse and innovative than one imagines. Read "Manufacturing is Thriving in North Texas," July-Aug 2017.

• Indications suggest that the flatbed and specialty trucking business has a foothold in Dallas via Daseke Inc., a publicly-traded consolidator in the segment.

Energy Policy in the U.S.: The Play of Conventional and Alternative Sources

Re-published from Dialogues, United States Association for Energy Economics  By Jennifer Warren

With less than 100 days into a new administration, the Trump administration has indicated new directions in energy policy. A comprehensive vision of U.S. energy policy has not been articulated however. America's energy landscape is dynamic and markets have considerable sway. The fundamentals of supply, demand, price and technological advances continue to push and pull the energy mix, shaping the amalgam that is U.S. energy. Notably, several key areas were emphasized on the campaign trail and contours of policy are echoing those pledges.

Conventional sources

The oil and gas industry was an obvious constituent that Trump wanted to support. The opening up of federal lands for more drilling was a campaign item. As an indication of support for the oil and gas industry, on January 24th, Trump signed a presidential memorandum that indicated movement on construction of the Keystone XL and Dakota Access pipelines. The $4.2 billion Rover pipeline, stretching from Pennsylvania to Ontario, was also advanced by the Federal Energy Regulatory Commission, where bottlenecks and economic impacts were stymieing the flow of natural gas.

As for policy directions and drilling on public lands, according to Amy Jaffe, executive director of Energy and Sustainability, University of California-Davis, "Trump has been direct in saying that he wants the oil and gas industry to be healthy and expand because it is important for the country." She continues, "Drilling on public lands is a bit of red herring. Companies know where the resources are and where there is infrastructure in place, for example in the Permian or Marcellus." The question she poses: "Do they want to drill on federal lands in other locations that lack infrastructure when you have this existing lower-48 resource base on private lands [via shale] all ready for the market."

As mentioned in a recent natural gas article, the idea of a trade spat with Mexico isn't a favorable development for U.S. natural gas producers, refiners or midstream firms. In the last several years, Mexico has increased its consumption of U.S. natural gas. A number of U.S. firms have added Mexico's market to their business plans, a new opportunity that formerly did not exist. In an era with the potential for excess supply and ample capacity, export markets like Mexico have served as a relief valve, helping buoy various oil and gas industry players during a downturn that is turning upward. The U.S. oil and gas industry has evolved with technological change under the pressures of a competitive global market and holds a position of strength.

Relief to the coal industry is the other major pledge with policy implications. The Clean Power Plan (CPP) was a major policy measure that was expected to shape and refine energy consumption and power generation. The Energy Information Administration projects a 26% decline between 2015 and 2040 in coal production with CPP implementation. Without the CPP, they expect production to remain at 2015 levels.

Alternative energy

In conversation with Jaffe, she mentions that the majority of states are implementing the clean power plan because these clean energy initiatives were already in motion. She does not expect these states to reverse course. "Some utilities are moving away from coal because natural gas is cheaper, or because shareholders will not invest in coal generation," she notes.

Additionally, more Fortune 500 companies are committed to using clean energy. The Googles and Walmarts are announcing to stakeholders that they intend to be 100% renewable by certain dates. "Therefore, as a firm, you have to be in a state that supports renewables," she says.

There is a flip side, Jaffe refers to as a fault line, "But to have the renewables, there can be a problem if higher costs get kicked over to fixed income folks. The perception is that flush Google-type firms are benefiting from federal tax credits when they buy renewables, while some of the costs are borne in the overall rate base by regular, working people." This is an example of the rise of the contention between the 'elites versus the rest' that has changed the political landscape of late. Jaffe suggests, "There maybe some temporary reprieve from electricity reform [under Trump], but that may wind up being more about the pace of change than the fact that change is coming."

The climate change agenda is a broad and diffuse issue that has many arteries. In these initial days, and given the weight of other issues such as trade, security and economy, this item may not be a high priority for the administration. However, executive orders to roll back the Clean Power Plan, the Climate Action Plan and the Paris Agreement are said to be on the horizon.

Jaffe offers, "At UC Davis, we talk about “the three transportation revolutions” — automation, shared mobility and electrification. These technologies will come forward but not because of climate change policy. In both developing and developed countries, traffic congestion is a real problem. Firms like UPS and FedEx are using big data to save on fuel and labor costs, offers Jaffe. At UPS, after implementing computer-based route planning, they saved 100 million vehicle-miles traveled in the U.S. with that program. "If we were to cede [our advances in technology] to China, that would be a disaster for American jobs," says Jaffe.

"It remains to be seen how automation and clean technology shakes out with respect to economic planning over this Administration," observes Jaffe. "Politicization exists but energy technology and clean tech are important as a source of competitiveness in the U.S.," says Jaffe. Advances in technology have implications for military applications, cyber security, electricity grid security, and the movement of goods inside the U.S. Further, notes Jaffe, the movements of goods in the U.S. has a major influence on the competitiveness of exports, and the competition of manufacturing versus importing foreign goods. Thus, policies that have knock-on effects need to be fully scored.