By: Hilary Wiek, CFA, CAIA, Society Volunteer

The ESG track at the Intellisight Conference on August 13 was a terrific guided tour through the issues and solutions currently in development and practice in the investment community. While it has become a massive topic in some industry circles, some may still be unaware that ESG stands for Environmental, Social, and Governance. It is somewhat related to the SRI (Socially Responsible Investing) methodology that grew to prominence in the 1990s, where individual investment programs applied values (faith-based or otherwise) to screen out certain investments.

ESG has gained more widespread acceptance globally than did SRI because of the risk-avoidance approach it entails for many. While certain “sin stocks” (for example, gambling, alcohol, tobacco) may offend some, there may be nothing inherently wrong with the investments. On the other hand, if a company is polluting, treating its workers poorly, and operating without appropriate board oversight, there are legal, competitive, and agency risks that prudent investors should seek to avoid.

The Intellisight ESG track started at breakfast with a talk by J. Drake Hamilton of Fresh Energy, a non-profit climate and energy think tank based in St. Paul. She is a Science Policy Director, so spoke to us of science-based evidence of damage being done to the planet and the policy work they are doing to combat very real problems. Fresh Energy seeks to shape and drive realistic, visionary energy policies that benefit all.

Some facts Hamilton presented, particularly the ones that hit close to home (I encourage you to go to fresh-energy.org for much more):

• Even with strong measures by the world’s largest polluters, consulting firm Wood Mackenzie said in its August 2019 Energy Transition Outlook that fossil fuels will still contribute about 85% of the world’s energy supply in 2040, down only 5% from today. Much investment is needed to transition our dependence on fossil fuels to sources of energy that will have a marked impact on global warming.
• Minnesota has warmed 3-4 degrees in the past 30 years. By 2050, the temperatures are expected to warm an additional 5 degrees Fahrenheit. A warming climate leads to amplified extreme weather. The “100-year events” are now happening much more often. More of the rain will come in intense downfalls, which cause extreme floods and damage agricultural productivity.
• Wildlife in Minnesota is being impacted. Expect a rapidly declining population of moose (replaced by deer), loons, and Canada lynx (replaced by bobcats). The state’s pines, firs, spruce, and tamaracks are facing issues, as well, as some are being harmed by an increase in pests and too early springs.
• For humans, Minnesota mosquito season has extended from 74 days a year to 108. Lyme disease is on the rise. Pollen production is increasing. Heat waves are coming with more frequency and more extremity. Children under 5, adults over 64, and people living in poverty are most at risk.
• Globally, July 2019 was the hottest month ever recorded.

Current policy issues:

• People will not stay and die where the environment won’t support them – they will migrate. This will lead to places that can support life being inundated with climate immigrants.
• Both China and India are outperforming their national commitments to the 2015 Paris Agreement. The U.S. is not performing on pace; where the federal government has not taken action, the states have been assuming leadership on the issue, though it is not enough to move the dial as much as is needed.
• Minnesota’s House of Representatives passed a bill in 2019 to establish a 100% clean energy target for electric utilities with a deadline for completion of 2050. This effort is supported by the largest Minnesota utility, Xcel, companies, citizens and city governments within the state. Nearly half of Minnesota’s electricity production is already free of carbon.
• All levels of government can help in fighting an increase in global temperature. Beyond mandates and incentives to businesses and homes to convert to electricity, cities and states are working to transition to electric vehicles for their fleet vehicles. In the Twin Cities, all new buses purchased for Metro Transit will be electric starting in 2022. By 2040, the entire fleet will be electric.

What sort of information should investors have?

• Investment is needed particularly in batteries – wind and solar are variable, not available every minute of every day, so finding solutions to the storage of power is essential. By moving passenger vehicles from today’s less than one half of one percent to one third of the global fleet in 2040, immense scale will be added to the battery manufacturing sector, which should lead to innovation and cost reduction.
• Wind and solar are often produced in more rural areas where renewable energy potential is much greater. But electricity does not currently travel long distances without significant losses. Transmission that moves the clean electrons from where they are sourced to population centers is needed. This improvement to our national infrastructure is being called the Power Superhighway.
• The clean energy transition – taking carbon out of the economy, be it in skyscrapers, transportation, or homes – is being fueled by lower cost technologies replacing fossil fuel uses; this will hurt some and help others from an investment perspective. Investors need to be aware of the risks that this transition may have on investments, be they opportunities or threats.
• Make the business case: companies, cities, industries, and citizens need to be shown how attractive it is to live in a world where temperatures only rise by 1.5 to 2 degrees C by 2030 rather than 3 degrees C, which is where we are currently trending.
• 60,000 jobs have been created in Minnesota in clean energy. 40% of those were in rural parts of the state. This field is growing 4-5% faster than other jobs. Energy efficiency is responsible for 46,191 of these jobs, while another 4,917 are in solar. Two Minnesota companies, Blattner and Mortenson, installed 70% of all solar and wind projects in North America in the last 10 years.
• Wind is our least cost clean energy resource, though solar will soon be in that category. Solar panels, per a VP of Mortenson, have dropped from 47 cents per watt to 35 cents in just 10 months, and the costs keep dropping.
• Many landowners receive higher profits from renewable energy lease payments than from some farm fields, so installing clean energy generation provides more income diversity for farmers. Improved economics on land increases land values and property taxes for local communities.
• Aveda was the first Minnesota company to go to 100% wind energy. It is building its own solar array in Blaine, MN. Aveda, General Mills, Target, Tennant, Cargill, Best Buy, and Uponor have all shared their clean energy goals – and economic rationale – with Minnesota legislators.
• Xcel Energy announced this year that in 2028 and 2030 its last two coal plants will be shuttered. And it will save its customers $200 million by doing it.
• Goldman Sachs this year formed the Sustainable Finance Group to deliver sustainable growth solutions to clients. They see this as a big growth initiative for its business, not a do-good venture.
• Shareholder actions and divestment: Typically, you have to own shares of bad actors to get them to listen, but if you find they are not listening and are actively operating in an irresponsible manner, investors may need to divest to get their attention.
• Increased options to invest: Morningstar says that $8.9 billion in net inflows went to funds with an ESG mandate in the first six months of 2019. Green bonds will have expanded to $250 billion by the end of 2019.

In the next blog, I will report on the highlights of the four ESG-related panels that followed Hamilton’s breakfast presentation.