Monday, January 31, 2022

Wall Street’s green push exposes new conflicts of interest

The booming business of green finance is being led by an unlikely group of companies that sits at the heart of the financial system.

The giant firms that audit the books, rate the bonds, advise on proxy voting and categorise the world’s companies are spending billions to boost their climate-related operations. That could accelerate the shift away from fossil fuels but could also create a new set of conflicts of interest for industries that struggled to manage them in the past.

In the past two years, US firms in the financial-services sector have spent more than $US3.5bn buying green-ratings companies and data providers, a review by The Wall Street Journal found. The big four audit firms are also moving into the environmental, social and governance, or ESG, arena. PricewaterhouseCoopers last year said ESG was a focus of its $US12bn investment plan.

When the United Nations last year asked the finance industry to back its plans to cut carbon emissions, many banks had to be cajoled into signing up. Financial-services firms eagerly jumped in, according to people involved in the effort.

These firms are betting on big profits as companies, responding to demands by regulators and investors, seek to reduce their carbon emissions and better disclose their ESG practices. The firms have bought up smaller companies to bolster their offerings.

The market for helping companies with corporate ESG reporting alone is worth an estimated $US1.6bn globally, and forecast to increase by 21% a year over the next six years, according to UK-based research firm Verdantix. “The growth rate across several areas of ESG professional services is very strong,” said Kim Knickle, a research director at Verdantix.

In many cases, firms that rate or evaluate companies on things like climate risk also sell services to help companies address these issues. Many of the firms providing these ratings, such as credit raters and auditors, are already managing deep conflicts of interest because they are paid by the companies they judge. Conflicts of interest in the credit-ratings industry were one cause of the financial crisis, according to politicians.

One new set of potential conflicts springs from the widespread practice of selling ESG ratings alongside consulting and other services.

Institutional Shareholder Services, the nation’s biggest shareholder advisory firm, sells to investors its climate-risk ratings for thousands of companies. It also sells to those companies advice on how to increase those scores.

“Improve ESG Ratings,” the Rockville-based firm says in its pitch to the roughly 5,000 businesses it covers. “Stand out among companies that you compete with for capital.”

The financial-services firms’ multiple ESG services create clear potential conflicts of interest, according to Anant Sundaram, a finance professor at Dartmouth College’s Tuck School of Business. “They earn cash flows by selling their services … to the very firms they’re supposed to be unbiasedly scoring and ranking,” he said.

ISS’s general counsel, Steven Friedman, said the firm, owned by German stock exchange operator Deutsche Börse, has taken steps to address potential conflicts of interest in its ESG work, including a firewall separating its ratings and corporate-advisory units. “ISS does not and will not give preferential treatment to any corporate issuer,” Mr. Friedman added.

ESG raters typically get most of their income from investment firms, which package together topscoring companies to create green-branded products that are sold to investors. That creates an incentive to hand out high ESG scores, said Hans Taparia, a business professor at New York University.

“If the raters were to be tough on companies, there wouldn’t be any products to create for investors,” Mr. Taparia said.

Fund-ratings firm Morningstar gives out performance awards that are available only to companies that pay it for an ESG assessment.

Morningstar’s Sustainalytics unit sells companies an “ESG Risk Rating License” for an undisclosed amount. “Showcase that you are rated by a world’s leading ESG Rating agency,” its website states. Only companies that buy the license are eligible to potentially get a “Top-Rated ESG Badge.”

Badge winners include Freehold Royalties, a Canadian firm with a portfolio of oil-and-gas properties. The company isn’t top rated by everyone. It is classified as a “poor” ESG performer, with a score of 23 out of 100, by ratings-firm Refinitiv, owned by London Stock Exchange Group. A Freehold Royalties spokesman declined to comment.


Hedge fund short sellers take aim at green energy stocks

The Greenie dreams are dying

Hedge funds have been cranking up their bets against sustainable energy stocks, wagering that as interest rates rise, investors will be less forgiving of companies with strong environmental credentials but weak earnings.

Shares in sustainable stocks have drawn in billions of dollars of inflows from ethically minded investors in recent years, lifting the valuations of some stocks to eye-watering levels.

Already, some of those stocks have begun to fall back as the Federal Reserve prepares to start withdrawing its pandemic-era support — a process that is pulling down many high-growth assets, especially in the tech sector. But doubters say green stocks have much further to fall.

“In a bear market, a company doesn’t trade at 60 times earnings just because it does something morally good,” said Barry Norris, chief investment officer at Argonaut Capital. “People will be a bit more hard-nosed about it.”

Norris is shorting a number of wind power stocks and has recently increased his bet against Danish wind turbine maker Vestas Wind Systems.

On Wednesday, the company reported a lower-than-forecast profit margin and said supply chain issues would continue for the rest of the year, having warned in November of an “increasingly challenging global business environment for renewables”.

The shares soared from DKr130 at the start of 2020 to peak briefly above DKr300 a year ago. They have since fallen back, although on Wednesday they were 5 per cent higher at about DKr175. Norris believes Vestas, with contracting margins, is now “the most expensive it has ever been”.

Shares in green companies are not the only ones trading with elevated valuations. Tesla, the electric carmaker, is priced at a forward price to earnings rate of 92 times, while Nvidia, another popular stock in recent years, is priced at 43 times.

Germany’s Nordex has also been targeted by short sellers, with bets against the wind turbine manufacturer soaring from 0.79 per cent of the company’s shares a year ago to more than 7 per cent, according to data group Breakout Point. That makes it one of Europe’s most shorted stocks based on disclosed short positions.

Among hedge funds betting against it are $52bn-in-assets Millennium Management, AKO Capital and Gladstone Capital Management.

It is a risky strategy. Government-supported efforts to shift the global energy reliance away from fossil fuels point to heavy demand for companies in the sector. One executive told the Financial Times their fund “won’t touch” bets against such stocks because of the increasingly favourable regulations and weight of money pouring into the sector.

But hedge funds in the US and UK have been buying the lowly valued shares of oil and gas companies discarded by investors focused on environmental, social and governance (ESG) factors.

Betting against companies whose stories of helping the environment are stronger than their earnings, or against those that have exaggerated their ethical credentials, has also become increasingly attractive.

The prospect of four rises in US interest rates this year is also now providing a challenge for lossmaking green stocks. Higher interest rates mean higher borrowing costs for companies and a lower value ascribed to future cash flows.

Funds have targeted hydrogen stocks, with disclosed bets against Norwegian hydrogen technology group Nel, which reported a loss of NKr1.4bn ($156m) in the first nine months of last year, jumping from 1.8 per cent a year ago to 7.8 per cent, according to Breakout Point. Helikon Investments, Crispin Odey’s Odey Asset Management and WorldQuant have short positions against Nel, whose shares have risen from NKr5 three years ago to more than NKr35 a year ago but have since dropped to about NKr11.

“There is no obvious valuation support with Nel,” said James Hanbury, a partner who manages about $1.3bn in assets at Odey, in a note to investors seen by the FT.

The company is “lossmaking, cash consumptive, they continue to fail to win material contracts or partnerships, their medium-term capex needs are not fully funded and, on top of this, the [Odey] team perceive the business to be a commoditised technology offering”, he said.

He added that while hydrogen would play “a big role” in the transition to cleaner energy, there will “inevitably be many companies in the space that will not succeed economically”. Odey declined to comment.

A spokesman for Nel said the company is “the technology and market share leader in an industry that is at the beginning of significant growth and industrialisation”, adding that its investment was “backed by a robust financial position”.


How About A Pilot Project To Demonstrate The Feasibility Of Fully Wind/Solar/Battery Electricity Generation?

At this current crazy moment, most of the “Western” world (Europe, the U.S., Canada, Australia) is hell bent on achieving a “net zero” energy system. As I understand this concept, it means that, within two or three decades, all electricity production will be converted from the current mostly-fossil-fuel generation mix to almost entirely wind, solar and storage.

On top of that, all or nearly all energy consumption that is not currently electricity (e.g., transportation, industry, heat, agriculture) must be converted to electricity, so that the energy for these things can also be supplied solely by the wind, sun, and batteries. Since electricity is currently only about a quarter of final energy consumption, that means that we are soon to have an all-electric energy generation and consumption system producing around four times the output of our current electricity system, all from wind and solar, backed up as necessary only by batteries or other storage.

A reasonable question is, has anybody thought to construct a small-to-moderate scale pilot project to demonstrate that this is feasible? Before embarking on “net zero” for a billion people, how about trying it out in a place with, say, 10,000, or 50,000, or 100,000 people. See if it can actually work, and how much it will cost. Then, if it works at reasonable cost, start expanding it.

As far as I can determine, that has never been done anywhere. However, there is something somewhat close. An island called El Hierro, which is one of the Canary Islands and is part of Spain, embarked more than a decade ago on constructing an electricity system consisting only of wind turbines and a pumped-storage water reservoir. El Hierro has a population of about 11,000. It is a very mountainous volcanic island, so it provided a fortuitous location for construction of a large pumped-storage hydro project, with an upper reservoir in an old volcanic crater right up a near-cliff from a lower reservoir just above sea level. The difference in elevation of the two reservoirs is about 660 meters, or more than 2000 feet. Here is a picture of the upper reservoir, looking down to the ocean, to give you an idea of just how favorable a location for pumped-storage hydro this is:

The El Hierro wind/storage system began operations in 2015. How has it done? I would say that it is at best a huge disappointment, really bordering on disaster. It has never come close to realizing the dream of 100% wind/storage electricity for El Hierro, instead averaging 50% or less when averaged over a full year (although it has had some substantial periods over 50%). Moreover, since only about one-quarter of El HIerro’s final energy consumption is electricity, the project has replaced barely 10% of El Hierro’s fossil fuel consumption.

Here is the website of the company that runs the wind/hydro system, Gorona del Viento. Get ready for some excited happy talk:

A wind farm produces energy which is directed into the Island’s electricity grid to satisfy the population’s demand for electricity. The surplus energy that is not consumed directly by the Island’s inhabitants is used to pump water between two reservoirs set at different altitudes. During times of wind shortage, the water stored in the Upper Reservoir is discharged into the Lower Reservoir, where the Wind-Pumped Hydro Power Station is, to generate electricity from its turbines. . . . The diesel-engine-powered Power Station only comes into operation in exceptional circumstances when there is neither sufficient wind or water to produce the energy to meet demand.

Over at the page for production statistics, it’s still more excitement about tons of carbon emissions avoided (15,484 in 2020!) and hours of 100% renewable generation (1293 in 2020!). I think that they’re hoping you don’t know that there are 8784 hours in a 366 day year like 2020.

But how about some real information on how much of the island’s electricity, and of its final energy consumption, this system is able to generate? Follow links on that page for production statistics, and you will find that the system produced some 56% of the electricity for El Hierro in 2018, 54% in 2019, and 42% for 2020. No figures are yet provided for 2021. At least for the last three years of reported data, things seem to be going quite rapidly in the wrong direction. I suspect that that’s not what you had in mind when you read that the diesel generators only come into operation in “exceptional circumstances” when wind generation is low. And with electricity constituting only about 25% of El Hierro’s final energy consumption, the reported generation statistics would mean that the percent of final energy consumption from the wind/storage facility ran about 14% in 2018, 13.5% in 2019, and barely 10% in 2020.

So why don’t they just build the system a little bigger? After all, if this system can provide around 50% +/- of El Hierro’s electricity, can’t you just double it in size to get to 100%? The answer is, absolutely not. The 50% can be achieved only with those diesel generators always present to provide full backup when needed. Without that, you need massively more storage to get you through what could be weeks of wind drought, let alone through wind seasonality that means that you likely need 30 days’ or more full storage. Get out your spreadsheet to figure out how much.

Roger Andrews did the calculation for El Hierro in a January 2018 post on the Energy Matters website. His conclusion: El Hierro would need a pumped-storage reservoir some 40 times the size of the one it had built in order to get rid of the diesel backup. Andrews provides plenty of information as to the basis of his calculations and his assumptions, so feel free to take another crack at his calculations with better assumptions. But unfortunately, his main assumption is that the pattern of wind intermittency for any given year will be just as sporadic as it was for 2017.

Then take a look at the picture and see if you can figure out where or how El Hierro is going to build that 40 times bigger reservoir. Time to look into a few billions of dollars worth of lithium ion batteries — for 11,000 people.

And of course, for those of us here in the rest of the world, we don’t have massive volcanic craters sitting 2000 feet right up a cliff from the sea. For us, it’s batteries or nothing. Or maybe just stick with the fossil fuels for now.

So the closest thing we have to a “demonstration project” of the fully wind/storage electricity has come up woefully short, and really has only proved that the whole concept will necessarily fail on the necessity of far more storage than is remotely practical or affordable. The idea that our political betters plow forward toward “net zero” without any demonstration of feasibility I find completely incomprehensible.


'A spectacular failure of climate leadership': Climate activists hit out at the Biden administration

Biden issued 3,557 permits for oil and gas drilling in his first year in office, 900 more than Trump in his first year
Biden's runaway drilling approvals are a spectacular failure of climate leadership,' said the Center for Biological Diversity's Taylor McKinnon

Legal challenges have 'made it impossible for us to stop many of these leases,' White House press secretary Jen Psaki claimed Thursday

Despite lofty promises on environmental goals, President Biden has outpaced even President Trump in issuing new drilling permits on public land.

Biden in his first week in office had issued an executive order halting new leases for oil and gas drilling. But that order was struck down by U.S. District Judge Terry Doughty in Louisiana, and the administration has said its hands were tied and it had to continue issuing the leases.

Biden issued 3,557 permits for oil and gas drilling in his first year in office, 900 more than Trump in his first year, according to federal data compiled by the Center for Biological Diversity.

'Biden's runaway drilling approvals are a spectacular failure of climate leadership,' said the Center for Biological Diversity's Taylor McKinnon in a statement. 'Avoiding catastrophic climate change requires ending new fossil fuel extraction, but Biden is racing in the opposite direction.'

Legal challenges have 'made it impossible for us to stop many of these leases,' White House press secretary Jen Psaki said during a daily briefing on Thursday.

Permits are typically issued for leases that have already been sold, mostly under previous administrations.

'We have an entirely different policy from the Trump administration on addressing ... the climate crisis,' Psaki added.

But climate activists have said that the Biden administration could have found a way to slow drilling, either through litigation or through reopening the environmental review that normally takes place during the leasing process.

'Their hands are not tied,' McKinnon told in response to Psaki's remarks.

'We've gone to great lengths to research how the government can do this under existing laws without Congress. It's disappointing to hear an administration that purports to be leading on climate dismiss that possibility rather than researching how they can do it.'

Nearly 2,000 of the permits were administered by New Mexico's Bureau of Land Management Office. Meanwhile 843 were given to Wyoming, 285 to Montana and 171 to Utah. The Biden administration approved 187 permits for California, more than double the 71 Trump approved in the state in his first year.

Asked about the permits, Department of Interior spokesperson Tyler Cherry told 'Permit reviews are required by law.'

'Interior is conducting a more comprehensive analysis of greenhouse gas impacts from potential oil and gas lease sales than ever before,' he said. Cherry added that the department is working on a number of reforms in fossil fuel leasing, including eliminating the preferential financial treatment given to fossil fuel companies by the Trump administration and tightening oil and gas safety standards.

Rising gas prices, inflation and tensions with Russia, meanwhile, clash with Biden's rhetoric on climate change. In November at the COP26 Summit, Biden called climate change an 'existential threat to human existence.'

He has often used climate change to push for his Build Back Better plan, which passed the House and stalled in the Senate, and contains $550 billion for clean energy and climate initiatives. The bill included $320 billion in tax incentives for producers and purchasers of wind, solar and nuclear power, intended to speed up the transition away from fossil fuels.

Since 2018, the U.S. has been the top crude oil producer in the world. But with prices rising at the pump, Biden has not only increased production at home but called on OPEC+ nations to produce more fuel. And as Russia threatens to invade Ukraine and cuts back on its gas exports to Europe, the U.S. has become the number one exporter of natural gas in the world.

The Center for Biological Diversity, together with climate, indigenous and community groups wrote a petition to the Biden administration last week urging them to use executive authority to delay these permits.

Their petition cited a number of different laws that could be used to assert Biden's authority to reassess the permits. The Federal Land Policy and Management Act requires the Department of Interior to 'take[] into account the long-term needs of future generations' in drilling permits.

They also cite the Mineral Leasing Act (MLA) and the Outer Continental Shelf Lands Act (OCSLA) specify that the president and secretary of Interior must take into account public good in issuing permits.

The MLA stipulates that leases must contain provisions 'for the protection of the interests of the United States . . . and for the safeguarding of the public welfare.'

The OCSLA charges the president with overseeing 'expeditious and orderly development [of offshore oil and gas resources], subject to environmental safeguards, in a manner which is consistent with the maintenance of competition and other national needs.'




No comments: