ESG: Growth of Alternative Energy – Investment Opportunities and Returns

On August 8th CFA Society Chicago hosted an ESG event focusing on alternative energy. This event was structured with a featured keynote speaker, followed by a moderated Q&A with a panel of four alternative energy asset investors.

The keynote speaker was journalist Amy Harder of Axios. Based out of Washington, D.C., Harder covers national energy and climate change issues in her regular column, “Harder Line,” as well as reporting on trends and scoops. She is adept at discussing complex energy and climate issues in ways that everyone can understand. She is the inaugural journalism fellow for the University of Chicago’s Energy Policy Institute. Before joining Axios, she covered energy and climate change at the Wall Street Journal, and before that, the National Journal.

Amy Harder with Axios delivers opening remarks at CFA Society Chicago’s ESG: Alternative Energy event on August 8, 2019.

The panel consisted of moderator Martha Goodell and panelists Susan Nickey, Clive Christison, and Ammad Faisal, CFA.

  • Goodell is a co-founder and managing partner at Enigami Partners, LLC in Chicago, which supports institutional clients with all aspects of the investment process supporting private structured finance. Enigami’s clients are investing in energy technologies, projects and infrastructure.
  • Nickey is a managing director at Hannon Armstrong, a leading capital provider for sustainable infrastructure markets that address climate change. She was previously the founder and CEO of Threshold Power.
  • Christison is the senior vice president of pipelines, supply, optimization and specialties for Fuels North America; he is responsible for BP’s commercial, supply and optimization activities in the Americas. He is based in Chicago.
  • Faisal is managing director and co-head of the Chicago office at Marathon Capital. His firm as an investment bank in the energy and power sectors, and he focuses on mergers and acquisitions, debt, equity and tax equity capital raise transactions.

Harder led off the event with some remarks about the state of the energy industry, energy infrastructure and how it relates to regulation on national and international levels. She opened with a note about how the phrase “alternative energy,” as a reference to energy sources that aren’t fossil fuels, marginalizes what are already very viable sources of energy.

In 1987, fossil fuels made up of 81% of energy sources. In 2017, it was still 81%. There was relatively little fluctuation over that 30-year span. In addition, Harder made the point that hydroelectric technology is 150 years old and is the primary clean energy source in the world currently. However, hydro is in decline, while wind and solar are in ascendency. Wind has recently passed hydro as the main source of clean energy in the United States.

Harder explained that it is unlikely that all our power will come from wind or solar by 2050 – or ever. The main reason is the lack of suitable storage technology. Battery technology is not up to the task of storing energy in the amounts that can accommodate consistent and steady power supplies at this point. Wind and solar costs have dropped considerably, but that drop has been matched by a drop in prices for wind and solar power. This has made investment returns on wind and solar developments worse, which has slowed down investment in clean energy projects.

Additionally, batteries themselves are more difficult to develop because investing in battery technology is tricky. The availability and costs of the metals involved in producing the batteries could make them cost prohibitive. As a result, natural gas will likely be a part of our energy source mix for the foreseeable future.  

In Australia, which has a highly developed clean energy infrastructure, one answer to the storage issue is the use of pumped hydroelectricity. Water is pumped to create electricity on demand, which effectively stores the electricity. There are some issues with pumped hydro, though, including having to dam any river used to create the electricity.

Harder then began to discuss carbon capture. Carbon capture is the process of retrieving greenhouse gases from the atmosphere. This is a technology that is starting to gain real traction in the investment community and has great promise to help slow down global warming.

In response to some of the challenges we face, many large-scale investors, such as the Government Pension Fund of Norway (their sovereign wealth fund) has divested its investments in companies that specialize in oil exploration and production. The belief among many in the energy community is that over time, the oil exploration industry will consolidate like a game of musical chairs. There will be fewer and fewer “chairs” over time as governments begin to enforce higher levels of regulation. This move by the Norway sovereign wealth fund is indicative that this process may have begun. Europe has been the leader in this process so far.

 As for the United States, President Trump’s policies are not as opposed to clean energy as his rhetoric has been. While he has publicly shown strong support for conventional energy sources, there have not been as many policy changes as his rhetoric might indicate. Still, the Green New Deal is extremely unlikely without a Democrat president, Democrat majority Senate and Democrat majority House, and on top of that, some cooperation from Republicans in Congress. Climate change is starting to be more of a political liability for Republicans, according to Harder.

A question from an audience member was for Harder’s opinion on carbon credits as an effective policy. Her answer was that there are really three options for ways to manage carbon emissions – innovation to new technologies, carbon tax, or a cap and trade regime. Cap and trade is politically unpopular because of the “energy tax” label slapped on it during previous debates, but would probably be very effective. Renewable energy mandates would probably not be as useful for businesses, but they are politically popular.

Harder signed off, and the panel was introduced.

L to R: Martha Goodell, Susan Nickey, Clive Christison and Ammad Faisal, CFA

Goodell began by asking each panelist about what specifically they do in the energy field. Nickey’s firm, Hannon Armstrong, invests in different types of projects that either make the energy grid more efficient, such has highly efficient light bulbs, or in projects that actually generate energy. Christison works for BP and actually manages energy projects for BP, including identifying potential projects. Faisal is in the business of finding capital for clean energy projects with Marathon Capital.

Goodell asked Christison how BP and other corporations make decisions about investing in clean energy projects. Christison said it depends on the technology. BP, for example, has a group that evaluates projects that deal in emerging technologies. Most corporations have investment return hurdle rates that must be met; conventional energy projects are certainly subject to these hurdles, but these emerging technology projects don’t usually pass those internal hurdles. This requires a different type of analysis to make an investment decision.

Goodell followed that question with a question about if different renewable technologies might cannibalize each other, making those investment decisions more difficult. Christison replied that it was not as concerning because the focus for BP is on increasing its exposure to technologies and emphasizing a less conventional energy mix. In the transport field, it is likely that the energy mix will still be at 80% conventional by the year 2040, but renewables will increase in other sectors. The number of vehicles in the world is likely to increase rapidly between now and 2040, so there are some time frame challenges that make it a better solution to build out the various technologies rather than trying to pick a winner. All four panelists affirmed that wind and solar technologies are the unquestioned leaders in the clean energy space.

Goodell asked Nickey about the green bond market and its place in her firm’s investment strategy. Nickey replied that the market for green bonds is still very small, at roughly $100M in annual issues versus the global bond market of around $12T. It’s a part of their overall investment purview and a space where there is room to grow.

Goodell asked about the global leaders in renewable technologies. Christison answered that China was the clear leader in electric vehicles. The US is progressive on renewable gas, which is supported by credits. Europe is strongest in social and political awareness of climate change and backs it up with policy. Spain, for example, last year wanted 100% of its electricity from renewable sources but had to default to gas power during times where the wind wasn’t blowing sufficiently. Southeast Asia is the leader in the development of biofuels. Christison gave the example that algae-based biodiesel is an emphasis in Southeast Asia.

Goodell asked Faisal about the level of deal flow now as opposed to previous years. Faisal answered that deal flow is quite a bit stronger, especially in the wind and solar spaces. He also mentioned that European companies have been quick to step into deals outside of Europe, taking advantage of slower movement from other global players. An example was the growing area of leases on existing offshore windfarms, which are quickly being acquired by European companies and investors.

Distinguished Speaker Series: Sheila Penrose, Jones Lang LaSalle

On April 9th, CFA Society Chicago’s Distinguished Speaker Series Advisory Group welcomed Sheila Penrose at The Metropolitan. Penrose is Non-Executive Lead Independent Chairman of the Board at Jones Lang LaSalle, a global real estate services company, and also serves on the Board of Directors for McDonald’s. Penrose retired from Northern Trust in 2000. In her 23 years at Northern Trust, she served as President of Corporate and Institutional Services and as a member of the Management Committee, where she was the first woman to serve. Subsequently, she served as an Executive Advisor to The Boston Consulting Group from 2001 to 2007. She has been on the boards of Entrust Datacard Group, eFunds Corporation, and Nalco Chemical Corp. She has also served on the advisory board of the Gender Parity initiative of the World Economic Forum, the board of the Chicago Council on Global Affairs, and as a founding member of the US 30% Club, a group whose initiative is to achieve female representation of at least 30% on corporate boards.

After detailing some of her credentials and experience, Penrose highlighted three topics she wanted to explore:

  1. What issues are boards of directors discussing the most?
  2. How are boards of directors handling the evolution of the business environment?
  3. How do a group of highly ambitious, competitive and capable people, all of whom are used to leading others, form a functioning team that can effectively oversee a company?

She emphasized that in each topic, boards are fiduciaries for both shareholders and stakeholders, and need to understand how to balance the needs of both groups. She also emphasized that individual board members should be listening and learning all the time, while contributing and remaining objective.

Penrose expounded upon the recent transformation of the business environment as it relates to the board of directors.  Recently, boards have become less dominated by the executive. The CEO/Chairman dual role that was so common in previous years is now no longer as accepted as it once was. This was spurred by Sarbanes-Oxley, but also investors and employees who now have more of a voice shareholder activism has increased. Digital disruption has also been a major category for boards to tackle, and relatedly, managing corporate reputation in an age of social media, where all voices have access to the public. Diversity on boards, and not just different kinds of people, but different viewpoints, has also been an important topic. Boards have been seeking to find people who have different types of experience and different types of expertise, as opposed to finding a group of CEOs for the board. Boards need to develop consensus, not groupthink. She brought up the dilemma of cybersecurity. Boards must wrestle with the questions of how much cybersecurity is enough and how quickly the company can react in the event of a breach. Boards must also consider the impact of global events, as almost all large corporations are now global in reach. Lastly, and importantly, she discussed the issue of talent and corporate culture. Boards must grapple with the future of work and the changes in expectations of their employees. Companies assume they will be able to find the skills they need in the labor market, but they are not doing much to develop those skills in employees and not moving quickly enough to develop people whose jobs might be redundant in the future.

Boards also have to understand how best to find directors. With the changing business environment, new skills are often necessary, and boards have begun looking for people who have those skills, such as digital experience, to help them stay current.

The composition of the board, its dynamic, and its leadership are all critically important. The board should be “collegial but not clubby”, and board decisions should be made in the room, not in private meetings.  Board members should maintain a healthy balance of both listening and contributing.

Individual board members should have what Penrose called “The Four Cs.”

  • Curiosity
  • Conviction
  • Courage
  • Compassion

During the Q&A portion of the event, Penrose described how she believes someone can become a member of a board of directors. She said the individual must have a good reason for why they want to join a board, should be strongly curious and constantly learning, should have experience trying to manage a business on some level, and should be wary of joining a board too quickly. Joining a board too quickly usually means that board is likely of lower quality, and the first board you join dictates one’s future opportunities.