Tag: Sustainability

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Macro Minute: Is Deep-Sea Mining the Answer?

For many decades now, world leaders have slowly come to terms with the realities of climate change. More recently, we have seen the public and private sectors starting to translate promises into actions through various investments. As we move from theory to practice, agents are beginning to run against obstacles that were not clear before.

It has become increasingly clear that the world lacks the investment in natural resources necessary to make the green energy transition a reality. Setting aside the requirements for building solar and wind power on a global scale, the Geological Survey of Finland (GTK) recently released a study examining the volume of metals needed to build the first generation of electric vehicles (e.g., replacing every vehicle in the global fleet today with one EV) and the power stations (e.g., batteries) necessary to store intermittent electricity generated from renewable sources. They estimate that one generation of electric vehicles (1.39 billion) will require over 280 million tons of minerals and another 2.5 billion tons of metals for power storage projects to support such an increase in electricity consumption. In sum, current estimates for global reserves of nickel, cobalt, lithium and graphite are not sufficient to support such a massive undertaking.

To aggravate the problem, investments to transform reserves into actual ore are faltering. Existing mines for copper in places like Chile have under-produced expectations meaningfully this year. Reports from the recent 121 Mining Conference in Sydney highlighted the issues of getting new projects approved and on track for production, characterizing the challenges as “multiplying” for myriad reasons, including higher interest rates, low and volatile mineral prices, and ESG concerns.

On the geopolitical front, the ongoing realignment of world power will also have a material impact on access to materials and their ESG qualities. The world’s largest nickel producer is Indonesia, where mines are developed in the most biodiverse biome on the planet—rainforests; its biggest and cheapest nickel operation is Nornickel, located in Russia. The world’s largest cobalt producer by far is the Democratic Republic of the Congo (DRC), where not only does the climate range from tropical rainforest to savannahs, but also the exploitation of child labor is a major social concern. While China is responsible for 64% of graphite mining, it also has a controlling interest in much of the DRC’s cobalt production, and maintains an overwhelming majority of the refining capacity for lithium, nickel sulfate, manganese and graphite.

The unprecedented demand for green-transition minerals meets a supply picture that is very constrained and will generate prohibitive costs to the energy transition. That happens while billions of people lack cost-effective access to the energy they need to prosper.

Deep-sea mining offers a very interesting alternative to this problem. The USGS estimates that the Clarion-Clipperton Zone, “the largest in area and tonnage of the known global nodule fields,” contains 21.1 billion tons of dry nodules. Based on that estimate, tonnages of many critical metals in the CCZ nodules are greater than those found in global terrestrial reserves. Given the high ore grades found in nodules, and the simplicity of recovery, many companies in the space estimate that deep-sea nodule recovery will be one of the lowest cost producers of critical minerals in the world. The same USGS publication mentioned above notes, “if deep-ocean mining follows the evolution of offshore production of petroleum, we can expect that about 35–45 percent of the demand for critical metals will come from deep-ocean mines by 2065.”

Like any extractive activity, this kind of endeavor also carries costs along with its benefits. However, their costs are different from what one would think at first. The vanguard of deep-sea mining does not involve drilling and mining pits. Instead, it is focused on the harvesting of nodules. Nodules are fist-sized lumps of matter that collect on the ocean floor over thousands of years when currents deposit mineral sediments. Different parts of the ocean contain nodules rich in different elements. Those found in the Pacific Ocean have been shown to contain incredibly rich deposits of copper, nickel, cobalt, and manganese with ore grades superior to many, if not all, of today’s land-based reserves. Nodule collection occurs between 4,000-6,500 meters in the aphotic zone where sunlight does not penetrate and biodiversity is faint. Its process is minimally invasive and entails the scraping of about 6 inches of the ocean floor to separate nodules from sediment, depositing most of what is not used back to its original place. MIT researchers recently published results of a study demonstrating that 92% to 98% of the sediment either settled back down or remained within 2 meters of the seafloor as a low-lying cloud. The plume generated in the wake of the collector vehicle stayed roughly in the same area rather than drifting and disrupting life above.

The benefits are potentially many. From an environmental point of view, this process has enormous advantages when it comes to the impact on deforestation, destruction of carbon sinks, and water usage. From a social aspect, deep-sea mining also appears to be superior to other extractive activities on land, with limited exposure to the negative social dynamics of social displacement, corruption and child labor. If proven to be cost-efficient, it would also promote clean and cheap energy creating prosperity for billions of people. Should the environmental studies of nodule collection continue to be positive, nodules present a promising alternative to solve our natural resource problem in the face of a green transition. As the West looks to become both greener and less dependent on “unfriendly” sources of labor and natural resources, it must take a pragmatic approach toward deep-sea mining, recognizing that there is no such thing as a perfect solution, but this could be the next best thing for achieving the future we want.

This article appeared on Forbes.

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Macro Minute: The Changing Colors of Politics

On the artist’s color wheel, red and green are considered complementary colors, diametrically opposed from one another but known to harmonize when used together. However, for at least a decade, the biggest political proponent of green energy in America has been the “blue” Democratic Party.

The administration’s most recent spending bill, The Inflation Reduction Act of 2022, has been heralded as a huge leap forward for renewable energy in the United States by Democrats, but was opposed by every Republican in the House and Senate. A closer look at where renewable infrastructure is being built, thereby creating jobs and increasing investment, demonstrates that while on Capitol Hill, the reds may be diametrically opposed to green legislation, red and green may actually be quite complementary. We believe that green investment will have meaningful repercussions come election season for years to come.

In our 2021 Annual Report, we discussed how our most probable scenario for achieving net-zero by 2050 would require expansive transmission and generation infrastructure to be built in the American heartland, primarily in traditionally Republican states. In turn we suggested that the development of said infrastructure would result in significant job creation and local investment, that would lead to one of two outcomes – more bipartisan support for investment in green infrastructure as Republicans acted in the interests of their constituents or a change in voting patterns by those being positively impacted by investment and new jobs.

A 2014 study by the University of Maryland found that a $1 spent on infrastructure investment added as much as $3 to US GDP[1] and suggested that the effect could be even larger in a recession. Historically, state and local governments have borne the majority of costs for spending on infrastructure – since 1956, they have been responsible for approximately 75 percent of spending on infrastructure. In that time frame, federal infrastructure spending has increasingly become a smaller percentage of the overall budget.

When the federal government does spend, it is typically through capital investment for new projects or modernization. The nonprofit, nonpartisan Tax Foundation estimates $116 billion of new energy and climate spending, excluding tax credits, from the newly passed legislation.[1] Including leverage available through components of the bill like the Energy Infrastructure Reinvestment Financing program, which provides $5 billion to finance up to $250 billion in projects for energy infrastructure, including repurposing or replacing energy infrastructure, takes new spending to more than $300 billion over 10 years. The last Congressional Budget Office estimate for federal government infrastructure spending was approximately $98 billion per year, meaning the bill would increase spending by around 30% annually, excluding tax credits that will encourage more private investment. Why is this important? Using percent changes in GDP, inflation, and the S&P 500 as barometers for economic conditions, Lewis-Beck and Martini[2] demonstrated the existence of a map from real economic conditions, to voter perceptions, to vote choice. Put simply, voters’ evaluation of the economy is real, and they punish or reward the incumbent candidate based on these conditions.

Bloomberg recently ran an article titled ‘Red America Should Love Green Energy Spending’, showing where a bulk of renewable infrastructure is being built. There are 435 congressional districts in America. 357 have planned or operating solar plants, with 70% of the power capacity found in republican districts. 134 have planned or operating wind plants, with 87% of the capacity found in red districts. Lastly, 192 have planned or operating battery storage facilities, with 58% of the capacity in right-leaning districts. Of the top-10 districts with planned or operating renewable infrastructure, nine are currently Republican-held seats, and within that group, 86% of total capacity is found in Republican districts.

So why might Republicans who are overwhelmingly benefiting from job creation and investment in green infrastructure be against such legislation? First, some of the capacity listed is planned, and has yet to filter through into the local economies they represent. Second, there are elements of both NIMBY-ism and extreme partisanship throughout the country on both sides that lead people to immediately dismiss ideas from “opposing” parties. But most obvious to us is that Republicans also overwhelmingly represent areas with the most emissions. 80% of the top-100 emitting districts are represented in Congress by Republicans, including eight of the top-10.

n the 2020 election cycle, fossil fuel companies spent $63.6 million lobbying Republicans compared to $12.3 million for Democrats, and since 1990 the industry has spent approximately 4.3 times the amount lobbying for Republicans than Democrats. In other words, support for green investment will ultimately come at a cost for the party. However, a myriad of studies have demonstrated that infrastructure investment boosts productivity over time and the literature shows that this will ultimately have an impact on voter preferences. Voter preferences fundamentally drive political rhetoric, so as green infrastructure investment becomes more pervasive, particularly in red states, we expect an increasing impact of renewable energy development on elections. 

[1] Werling and Horst. “Catching Up: Greater Focus Needed to Achieve a More Competitive Infrastructure.”

[2] https://taxfoundation.org/inflation-reduction-act/

[3] Lewis-Beck C, Martini NF. Economic perceptions and voting behavior in US presidential elections. Research & Politics. October 2020. doi:10.1177/2053168020972811

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Divestment Is Not The Answer: An Easy Way Out Of A Complex Problem

Divestment, the act of removing and or excluding particular sectors or segments of the market from investment portfolios, was all the rage at the beginning of the last decade in the face of climate change. Based on my perspective, however, the results of such action by institutions and portfolio managers have been uninspiring.

For citizens of a democracy, voting is the most important action one can take toward shaping the future path of economic and social policy in his or her municipalities, states and nations. George Nathan, an American editor in the early- to mid-1900s, has been credited with saying, “Bad officials are elected by good citizens who do not vote.”

A case can be made that the same level of responsibility held by voters in a democracy sits with the market when it comes to shaping a company’s business decisions. Shareholders, irrespective of size, are typically entitled “to vote in elections for the board of directors and on proposed operational alterations such as shifts of corporate aims and goals or fundamental structural changes,” according to Investopedia. When you consider the democratic tradition of voting to make a change, particularly in American culture, it is hard to “square the circle” when it comes to supporting divestment.

However, recently, the trend seems to be shifting. This year, shortly before Memorial Day, the board at Exxon “conceded defeat” to impact investment firm Engine No. 1, which drummed up (and won) a proxy fight by alleging the company was being disingenuous with its emissions targets and not taking its impact on climate change seriously enough. Through a combination of publicity and engaging with large shareholders, the newly launched firm used activism to, against the recommendation of Exxon’s executives, elect three candidates to the company’s board who are committed to pushing the company’s business model away from fossil fuels and toward renewable energy.

As an investor, one should strive to understand as many of the components of risk that will impact a company’s (or country’s) future rate of growth and ability to operate efficiently. We founded Norbury Partners, a sustainable macro fund, on the premise that it is impossible to make informed investment decisions without considering changing consumer preferences, as well as changes in the regulatory and policy environment arising from climate change mitigation and adaptation and access to basic services. However broad, certain sustainability information can be material to better understand macroeconomic variables and the idiosyncratic risks associated with countries and the future cash flows of corporations.

From severe flooding in low-lying cities caused by mega-storms to drought-stricken commodity harvests, and everything in between, it has become increasingly clear that fundamental data found on company 10-Ks, or in periodic sovereign data, does not always wholly paint a picture of the future. Like people and their voting habits, companies and countries change with the times. Look at the past six months: the United States rejoined the Paris Climate Agreement and the largest economies in the world committed to net-zero targets within the next 40 years.

Rather than divest, rational investors seeking to maximize their returns should look for companies in the early or interim stages of change that will create outsized value in a changing world energy paradigm. Often by the time companies mature, becoming renowned for their sustainability practices and stalwarts in environmental, social and corporate governance (ESG)-focused portfolios, the excess value created when a company managed its downsides and built upside has already been priced into the stock.

Furthermore, what industry is going to see a more significant shift in the changing world paradigm? Someone will have to provide the innovation and energy required to power a growing, more technology-centric world. By participating in a company that has long been called for divestment, Engine No. 1 has demonstrated that investors have a better chance of shaping the future and capturing upside for themselves as active shareholders than they do as spectators in the market.

Finally, the nature of markets guarantees that by divesting, particularly on a large scale, prices will be pushed down with more sellers than buyers. This, in turn, increases the expected return for divested company shares where business will continue as usual, bringing non-ESG-focused investors into the fold who are less likely to make the required changes (or vote along those lines) for a sustainable future.

By last fall, more than 1,200 institutional investors, with more than $14 trillion in assets, had made commitments to the divestment of fossil fuel holdings. Yet, the way I see it, the movement has failed to bring about the change it has been lauded to produce.

As citizens of a democracy, it is our right and our duty to exercise our vote in order to institute change. As investors, we should be looking for the upside to be found in energy companies transitioning to technologies more suitable for the future that policymakers have committed to. And as students of markets, we must recognize that by divesting shares and pushing prices down, we increase a stock’s expected return, thereby inviting marginal investors less committed to ESG and a sustainable future as shareholders, and creating a feedback loop of “more of the same,” with little prospects of advancing toward our goal.

Voting should not be something we talk about every four years. Utilize your ability to be an active market participant to drive the change you want to see.

Article also submitted to Forbes

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What A Divided Congress Could Mean For Sustainable Infrastructure Investing

In a fitting end to an already tumultuous year, the 2020 election cycle has (nearly) ended with President-elect Joe Biden announcing members of his cabinet and further refining his platform. One key tenet of his preelection policy agenda was an infrastructure bill with a focus on the renewable sector, but the prospect of a divided government will meaningfully change the size and scope of any legislation passed.

As it stands, there will be 50 Republican senators and 48 Democratic senators, with two seats remaining to be decided in the Georgia runoffs this January. The best historical precedents for these races are the 1992 and 2008 Georgia Senate runoffs, both in presidential election years, which saw a decline in turnout from the general election and the Democrats losing more support than Republicans.

Given the aggregate Republican lead in both races on Election Day, it will be a steep hill for the Democratic Party to climb. Even in a narrowly controlled Democratic Congress, we predict it will be difficult to set pollution limits on greenhouse gases given the producer and consumer states from which certain senators hail. In the face of a divided government, Biden will have to pull on different levers to pursue an infrastructure and clean energy agenda. Following the last two presidents, I expect a healthy amount of regulatory and executive action to be used for achieving policy goals.

A narrow margin in Congress means a less aggressive Clean Energy Standard than Biden campaigned on and may require the inclusion of somewhat forgotten energy industries like nuclear and hydropower. A technology-agnostic clean-energy standard for utilities and the grid would likely include the continued use of natural gas power plants with carbon-capture technology because renewable energy remains intermittent.

From where we stand, improved battery technology can take two paths: First, batteries at the grid level could decrease natural gas dependence by solving the intermittence issues of renewable energy, and second, batteries at the electric vehicle (EV) and home level could increase the dependance on natural gas for the grid as residential consumers consume more electricity. This is all to say that prospects for traditional energy sources are not as bleak as one might think and that the accelerating adoption of EVs might accelerate demand for natural gas in the short to medium term and impact commodity prices.

The government also has massive buying power. We expect the Department of the Interior to be far more active in its pursuit and purchasing of alternative energy sources. Offshore wind and solar are proven technologies with decreasing costs that can be looked to by the administration to “green-ify” the grid without the need for massive fiscal stimulus simply by using the existing government balance sheet.

Some analysts believe that even with a Republican-led Senate, the multibillion-dollar planned spending on the electric grid from President-elect Biden’s “Build Back Better” plan could pass as part of a broader bipartisan stimulus bill focused on jobs and infrastructure next year. Said grid spending could encompass and support energy efficiency and weatherization technology. Grid innovation, in large part, is a necessary complement to the aggressive adoption of EVs while energy efficiency and weatherization legislation will impact builders, owners and retrofitters of both commercial and residential real estate.

In our experience, investors cleanly (forgive the pun) put environmentally innovative energy investments into two buckets: new technologies and process innovation. I believe that the forthcoming Biden innovation will use a mix of executive action and legislation to participate in both buckets, with a divided government forcing a greater emphasis on legacy process innovation than a democratic sweep would have otherwise pursued.

Three of the largest segments we expect the government to invest in are electric vehicles, electric vehicle infrastructure and hydrogen power. Having already discussed the first two, we will focus on hydrogen power: a possible substitute from electric generation in natural gas power plants. New York, Virginia and Ohio recently paid more than $3 billion for three power plants that will initially run on natural gas but be outfitted for using green hydrogen, produced by wind and solar, as collection ramps up. We expect hydrogen storage to be an ever-increasing pillar of the energy complex and look to companies in the space to offer value in the coming decade.

In conclusion, a divided government sets the stage for a smaller, albeit interesting, infrastructure and clean energy agenda that will impact both new inventions and legacy energy tech. We’re interested to watch how the incoming administration navigates all-too-familiar D.C. gridlock, a global pandemic and a recovering economy. A few other industries worth watching are renewable diesel and natural gas, energy efficiency as a service, and energy efficiency in oil fields and digital infrastructure.

Article also submitted to Forbes