The Clean Energy Transition is not ESG

The Clean Energy Transition is not ESG

December 21 2021

Environmental, Social and Governance (ESG) investing is at an all-time high, with $30 trillion in total global investment assets, which compares impressively with the market cap of the S&P 500 of $40 trillion. Many end investors have put their investment dollars to work to do good AND generate financial returns. ESG rating firms score whether a company behaves well toward the environment, its employees and other stakeholders and whether its Board of Directors and C-suite officers are aligned in how to achieve these goals. Investment managers buy these high scoring ESG stocks.

ESG has significant value because companies that score well on the environment are probably working hard to cut emissions and other types of pollution, but ESG is in a different zip code than investing in the Clean Energy Transition (CET). CET means massive investments in the companies and projects that will cut fossil fuels from the four big emission sectors: electricity generation that powers the grid, vehicles (transportation), homes/buildings and general industry. CET investing needs to ramp up much faster than ESG, to the tune of $3 to $5 trillion each year (or about 5% of global annual GDP) to get anywhere close to the 1.5 Centigrade goal. Good ESG companies (across all sectors of the economy) are working to cut emissions by utilizing CET technologies and services.

The most important CET investment options don’t score well on ESG or aren’t scored at all. Tesla is the most important CET company on the planet but has a poor ESG score because of Social and Governance issues. Many wind, solar and storage/battery companies are in China where ESG performance is problematic. Claims that some solar panel makers use forced labor are credible. Today’s oil/gas and utility companies have the capital and talent to shift from supplying dirty energy to clean energy. Shareholders need to vote in new board members at their annual meetings to put them on the right path. Commodity companies that supply copper, bauxite/aluminum, nickel, lithium, cobalt and rare earths don’t index well on ESG but are essential. The largest CET investments are into start-ups and private companies and projects, but they are not scored on ESG because they are private companies.

Further, ESG has attracted investors because high performing tech and healthcare companies dominate ESG indexes and drive outsized ESG index performance. Investors have gotten to do good AND make more money. Socially progressive companies like Google, Netflix, Apple, Microsoft and Facebook score well on ESG because their businesses don’t generate a lot of pollution except from the electrical power that runs their server farms and the internet, or about 5% of global electricity demand. Big tech companies are the largest owners of solar and wind farms, so they can say they will quickly get to net zero — and do so more easily than other sectors of the economy.

The international business community stepped up its rhetoric and pledges at the Glasgow convention, even if the participating countries did not. Good ESG corporations are setting net zero pledges for their own operations and across their supply chains and end customers. Banks and other finance firms pledged to limit lending to oil and gas companies and projects. These pledges will drive huge investments and returns in the CET companies that do the hard work of building renewable energy generation: building electric vehicle fleets; building and converting to all electric, high efficiency buildings; and the R&D to figure out how to make all the stuff we use with far less fossil fuels.

Most institutions and individuals invest in public equities and ESG is a superior choice to the general stock market. However, CET public equity solutions are on their way. We have previously provided a table of CET sectors, ETFs and publicly traded companies across the globe, and we include it here.

July 24 2023

Surprisingly, in the state that provides the bulk of US fossil fuel production, it’s not fossil fuels keeping the grid going this summer.

April 6 2021

This week we feature 4 companies developing technologies that will help with the clean energy transition, brought to market through SPAC mergers.

September 26 2020

Batteries will play a crucial role in our ability to achieve a net zero emissions global economy, so any innovation in battery technology is big news. And, as we explain in MEMO 26, Tesla’s Battery Day announcements were very, very big indeed.