Category Archives: CSR

Is OPEC Calling Peak Oil? Producers Shifting to Solar as Oil Price Slump Endures and Reserves Adjusted Downward

More than ever its clear that an oil based economy is not sustainable from a variety of perspectives, both ecologically and economically. Perhaps counterintuitively, these domains are not obverse to each another, but are interlocked facets of the how the earth sustains lifecycles. They are also twin indicators of humanity’s role in the stewardship of them.

Last week we saw the somewhat mind boggling announcement by Saudi Arabia that it planned to partially wean its economy from oil sales by 2020 and do so completely by 2030.  From Reuters on April 25:

The powerful young prince overseeing Saudi Arabia’s economy unveiled ambitious plans on Monday aimed at ending the kingdom’s “addiction” to oil and transforming it into a global investment power….His “Vision 2030” envisaged raising non-oil revenue to 600 billion riyals ($160 billion) by 2020 and 1 trillion riyals ($267 billion) by 2030 from 163.5 billion riyals ($43.6 billion) last year. But the plan gave few details on how this would be implemented, something that has bedeviled previous reforms….The 31-year-old prince gave assured answers to questions on the plan, and appeared to pitch his comments to appeal across the Saudi social spectrum, and in particular to young people, who face unemployment and an economic downturn despite their country’s oil wealth.

Many were of course skeptical. And while few details were given, the Saudi markets seemed to like the news as they rose by ~2.5% that day. Presumably this is because of publicly announced plans to sell public stakes in the Saudi state run Aramco. Do the Saudi’s think we are in Peak Oil?

Their neighbors in Dubai might think so as well. They are about to bring the world’s largest solar plant online which will provide electricity at 3 US cents per Kilowatt hour.

According to industry analyst Apricum:

All three lowest bids by themselves clearly set a new world record for the unsubsidized cost of solar electricity. A recent bid of 3.6 cents/kWh by Enel Green Power in Mexico did not include the value of additional green energy certificates. Solar tariffs in the USA now regularly dip below 3 cents/kWh, but these include a 30% tax incentive and other subsidies.

Phase 1 Mohammed bin Rashid Al Maktoum Solar Park 13-MW Source: First-Solar
Phase 1 Mohammed bin Rashid Al Maktoum Solar Park 13-MW Source: First-Solar

Twist number two was in an Oilprice.com post covering a scientific analysis of the the recent Global Energy Assessment by the International Institute of Applied Systems Analysis which finds that proven reserves are 50% lower than decades old conventional wisdom would have it:

According to Professor Michael Jefferson [of the ESCP Europe Business School] who spent nearly 20 years at Shell in various senior roles from head of planning in Europe to director of oil supply and trading, “the five major Middle East oil exporters altered the basis of their definition of ‘proved’ conventional oil reserves from a 90 percent probability down to a 50 percent probability from 1984. The result has been an apparent (but not real) increase in their ‘proved’ conventional oil reserves of some 435 billion barrels.”

Global reserves have been further inflated, he wrote in his study, by adding reserve figures from Venezuelan heavy oil and Canadian tar sands – despite the fact that they are “more difficult and costly to extract” and generally of “poorer quality” than conventional oil. This has brought up global reserve estimates by a further 440 billion barrels.

Predictions about the exact nature and timing and of the phase-out process for fossil fuels are premature. Yet, as the the developments above indicate, the pace of the transition away from fossil fuels to renewable energy sources continues to accelerate.

Earth Day 2016 — Beyond Paris & Accounting for All Carbon Emissions

Economist Paul Krugman, while referencing an upcoming carbon pricing piece by David Roberts (@drvox) writes that:

Econ 101 tells us that if you want to reduce emissions of a pollutant, the most efficient way to do that is to put a price on emissions, so that all possible routes to reduction are taken, and the marginal cost is the same for all routes. It’s a real insight, and has had positive impacts on real-world policy — cap-and-trade has worked very well at reducing acid rain.

Krugman goes on to argue that pricing may not be the only solution, it may even be even sub-optimal in some cases, and that regulatory solutions may well develop sooner than robust international carbon markets. He concludes a few paragraphs later:

The point is that just because Econ 101 makes a smart, counterintuitive point doesn’t make that point of central importance….

Yet, we know ex-post from acid rain cap and trade plans that cap and trade regimes deliver results. And we also know that regulatory capture undermines many anti-pollution rules with solar being among the biggest targets. Next, there is the fact that massive amounts of Carbon Pollution remain unaccounted for. So both market making and regulation must be moved forward deliberately.

Door to Door Cover: The Magnificent, Maddening, Mysterious World of Transportation
Door to Door
Cover: The Magnificent, Maddening, Mysterious World of Transportation

Continue reading Earth Day 2016 — Beyond Paris & Accounting for All Carbon Emissions

Plastic Pollution On Track to Surpass Fish By 2020 while ALEC Derails Legislation to Curb the Problem

Fund Balance has covered the damage done to the world’s ocean’s by discarded plastic at great length. Based on World Economic Forum projections more pieces of plastic will contaminate the world’s ocean than there are fish within it by 2050. Only about 5% of plastic is recycled. There is no system in place takes these plastic materials back. So after their use they pollute the ocean. Freshwater systems suffer as well. Plastic pollution interferes with every aspect of the world’s water ecosystem.

Screen Shot 2016-03-21 at 1.50.40 PM
Photo Credit. The US Environmental Protection Agency.

 

All countries to one extent or another experience effects from the way plastic damages fish by filling up their stomachs causing them to starve or killing them by ensnaring them and causing serious injuries and even early death. Nations like the US and China, whose livelihood and or protein sources are highly dependent on the ocean worry.

The World Economic Forum argues that innovation will be essential for the world’s oceans. Yet we all have reason to wonder if such innovation will be choked off before its can be launched. The shadow governance group American Legislative Exchange Council (ALEC) promotes model legislation to prevent local governments from banning plastic bags. Such moves run counter to innovation and seek to create and coddle ALECs corporate backers and their monopolies, particularly the Petroleum Marketers who provide substantial funding for ALEC. Petroleum is used to make plastic. The authors the World Economic Forum study argue that plastic manufacturing should be decoupled from fossil fuels. This will require doable and currently in process innovation. Such efforts will create many new economies and industries, as opposed to protecting one from the competition such innovation would bring. Apparently ALEC is not interested in the health and well being of future generations. If it did, it could use its abundant resources to help innovation of healthy ways to manufacture plastic materials.

Source: World Economic Forum
Source: World Economic Forum

How can such groups claim to be focused on the future when they seek to continue to sell products that make the leave behind a badly damaged ocean for future generations? And what is the impact of such efforts to stifle common sense legislation to ban plastic bags on the drivers for innovation our way out of the plastic trap?

How much of climate change is our fault: Exxon and the marketing of doubt

By Walter Borden

Astrophysicist Adam Frank recently commented on NPR that climate change really is not really humanity’s fault. The crux of his argument is that while the science is settled that human activity has caused climate change, we really could not have known better. Clearly there is some real truth in this assertion. To quote from the article:

But here’s the crux of the issue: 150 years ago when we started building that fossil-fuel based civilization, we had no idea of what we were doing. We’d found this black goo seeping up from the ground and it turned out you could do awesome things with it. In the winter, you could burn it in a furnace and keep your house warm. In the summer, you could burn it in a power plant and use the electricity to keep your house cool. You could also burn it in an internal combustion engine and travel hundreds of miles in a single day. And all that electricity you were generating from the power plant? You could use that to keep the lights on at night and watch moving pictures of stuff happening on the other side of the planet.

 New Mexico's largest electric provider — the coal-fired San Juan Generating Station near Farmington — has been defending a plan to replace part of an aging coal-fired power plant with a mix of more coal, natural gas, nuclear and solar power. Susan Montoya Bryan/AP & NPR website.

New Mexico’s largest electric provider — the coal-fired San Juan Generating Station near Farmington — has been defending a plan to replace part of an aging coal-fired power plant with a mix of more coal, natural gas, nuclear and solar power.
Susan Montoya Bryan/AP & NPR website.

At the outset of large scale fossil fuel utilization and into the 20th century this point is fair. But we must consider the case of Exxon, for example has worked to undermine climate science including widespread dissemination of both its own scientific findings as well as those of other groups. According to the New York Times:

So, even as one in-house memo stated that “fossil fuels contribute most of the CO2” that was turning the earth into an overheated greenhouse, another memo showed that the company would seek to “emphasize the uncertainty in scientific conclusions.

 

Other major players in Big Oil very likely done same. And quite naturally politicians in the House Science Committee (under the chairmanship of Lamar Smith, R-TX) who take large contributions from Big Oil are using sweeping new congressional protocols modeled on the open-ended Benghazi hearings, to harass and intimidate climate researchers. Dr Frank argues that its time to go beyond narratives of greed. Maybe not quite yet. While we all strive to avoid ad hominem, it seems greed driven attacks risk damaging the basic process by which our nation funds basic research. As David Roberts points out in an very thorough post at Vox:

To be clear, Smith has not alleged any corruption, wrongdoing, or even bad science. He hasn’t alleged anything. Nor has he offered any justification for why he needs access to NOAA internal communications. The new rules mean that he no longer has to explain or justify himself to anyone. He’s just hoping to find something he can use.

So, while Dr. Frank’s point has merit, and invective isn’t likely to help much its important we understand its not other factors, and indeed putting profit before future generations apply now as well as to the late 20th century. Because as he stated:

That’s because the real truth is this: While triggering climate change might not be our fault, not doing everything we can about it now that we know it’s happening — that would be our fault. Worse, it would be our failure as a species.

Gulf of Mexico Dead Zone Much Larger than Forecast While Agriculture Industry Leaders Succeed With Sustainable Business Praxis

By Walter Borden

Evidence continues to mount. The time for a rapid transformation away from Industrial Agriculture methods towards Sustainable ones is now. The size of an hypoxic ‘dead zone’ that disrupts and destroys marine life and fishing lifeways in the Gulf far exceeds this year’s forecast, NOAA scientists report. The dead zone — areas in red to deep red that have far too dissolved oxygen to support marine life other than often toxic algal blooms— is the size of Rhode Island and Connecticut combined.

Source: Tech Times and NOAA
Source: Tech Times and NOAA

From Tech Times: ”

The Gulf of Mexico’s “dead zone,” a region depleted of oxygen to the point where fish and other marine life can die, covers 6,474 square miles this year, federal scientists say.

That is above the yearly average and much larger than had been forecast for 2015, the National Oceanic and Atmospheric Administration says.

A “dead zone,” also known as an hypoxia area, is the result of the runoff of nutrients from agriculture and other human activity carried by rivers into the ocean. There, those nutrients accelerate an overabundance of algae that then sinks to the bottom where it decomposes, consuming the oxygen needed to support marine life, the agency explains.

This year’s dead zone in the Gulf is the size of Rhode Island and Connecticut combined, scientists say, with nutrients flowing from the Mississippi River affecting coastal resources and marine habitats in the Gulf.

The good news is that companies on many fronts continue to make considerable advances in sustainability. Coca-Cola Company is years ahead of schedule in its efforts to replace the water that it uses around the world to make its beverages, it recently announced, as reported in the New York Times. Another consumer staple is the beverage market The Bacardi unit, The Rothes CoRDe, a John Dewar & Sons distillery part-owned by The Combination of Rothes Distillers is:

the latest facility under the Bacardi umbrella to produce energy through a biomass boiler fuelled by Scotch whisky distillery by-products. The Dewar’s facility produces enough energy to power entire communities of neighboring distilleries — along with about 8,000 homes….We generate 8.3 megawatts of electricity every hour of every day. We use some onsite and export the rest — enough for 20,000 people in 8,000 homes,” said Frank Burns, Managing Director at Rothes CoRDe….Converting pot ale (the residue from copper whisky stills) into organic feedstock is another technique used to divert waste from the distilleries. Local farmers use it for their animals. Each of these initiatives helps the company get a little closer to creating a “closed loop” lifecycle for their whisky products.

As oft-noted here before, sustainable business practices and principles are not a fad or fringe aspect of modern management and fiduciary practice. Rather, they are essential for planning for long term success in the 21st Century.

Excellent Video (2:51) On How CO2 is Acidifying & Warming Oceans

Without healthy oceans the food supply for future generations and their very existence are at risk. And we know that even if all carbon being released today from fossil fuels were to halt, the climate would continue to warm for some time. Kind of like how just because you see an iceberg it doesn’t mean that you have time to steer the ship clear.

Coal Bubblenomics: Bank of America Backs Away From Coal Financing

Yesterday Reuters reported:

Bank of America announced Wednesday it will reduce its financial exposure to coal companies, acknowledging the risk that future regulation and competition from natural gas pose on the industry.

The bank announced its new coal policy at its annual meeting, saying it would cut back its lending to coal extraction companies and coal divisions of broader mining companies.

“Our new policy reflects our decision to continue to reduce our credit exposure over time to the coal mining sector globally,” said Andrew Plepler, head of corporate social responsibility at Bank of America.

The announcement comes amid a growing fossil fuel divestment movement, in which universities, churches and large asset owners are being pressured to abandon or curb their investments in high-carbon energy.

Global bank HSBC said in a client research note in April that the recent drop in energy prices has put a spotlight on “stranded” fossil fuel assets, making them a risk to investors.

Screen Shot 2015-05-07 at 10.15.16 AM
Source: New York Times

Here we see CSR and Climate Change considerations making their way into one our nations systemically important and indispensable banks. More work is to be done, though, as BofA shareholders also rejected a resolution requiring the bank to report on its impact on climate change from financing fossil fuel projects.

And while many claim that renewables are only competitive due to subsidies. Setting aside the fact that fossils also are heavily subsidized, solar along with other renewable energy technologies, have also seen a dramatic fall in costs, in the range of more than 60 percent over the last five years. This why nations like Britain that have scoffed at renewables now feature investors and developers actively bringing it online as an energy source.

Nonetheless, despite efforts by various groups like the Alabama Wind, an anti-clean energy group with a notably Orwellian title and whose logo on its Twitter page states “Defend Your Property Rights”, the horse is out of the barn. Or as one solar installer put it in a quote in the New York Times:

The lumbering big utilities that are so used to taking three months to study this and then six months to do that — what they don’t understand is that things are moving at the speed of business. Like with digital photography — this is inevitable.

Water, Water, Everywhere….Time to Stop and Think

By Walter Borden

One can easily argue that water is the sine qua non of life. Pope Franicis stated this most eloquently and firmly yesterday in leading the Angelus Prayer. The Buenos Aires Herald reports:

A branch of Shades Creek, Mountain Brook, Alabama
A branch of Shades Creek, Mountain Brook, Alabama

Francis called water “the most essential element for life” and he urged public and private sectors to work together to ensure all people have access to clean, potable water.

“(Water) is a universal and unalienable right for all people,” the Argentine pontiff said. “Humanity’s future depends on our ability to care for it and share it,” he added.

Of course many large industrialists disagree. They seek to become rentiers, or worse, monopolists of water. Take the example of Peter Brabeck-Letmathe, Chairman of Switzerland based global food, consumer staples, and agricultural service provider Nestlé Global. In 2013 he made waves (and not just with his yacht on lake Geneva) by his quote

The one opinion, which I think is extreme, is represented by the NGOs, who bang on about declaring water a public right. That means as a human being you should have a right to water. That’s an extreme solution.

As a result of the resultant uproar Nestlé Global released a publicity video with Mr. Brabeck-Letmathe, along with a set of questions and answers from its publicity department. They contend that his point was

However, he does not believe it is fair that more than two billion people worldwide lack even a simple toilet, and more than one billion have no access to any kind of improved drinking source of water, while in other parts of the world people can use excess amounts of this precious and increasingly scarce resource for non-essential purposes, without bearing a cost for its infrastructure.

To be sure there are many firms, such as the B Corp WaterSmart that are taking on the challenge with an eye towards fair trade and profit as opposed to the mercenary view. Coverage of this firm and others will be the subject of upcoming posts.

It’s difficult to parse the last sentence quoted from the video. Who in the civilized world doesn’t pay a water and sewer bill directly and/or via taxes allocated for infrastructure? And as for the developing world, there can be no doubt that wealthier nations should chip in on a charitable, or least non-profiteering basis i.e. with capped profits, to provide these regions with clean water. Further, this new approach makes no mention of the fact that at the World Water Forum in 2000, Nestlé successfully prevented water from being declared a universal right all but declaring that local water resources are now targets for the multinational corporations to control. For Nestlé, this means billions of dollars in profits. For the rest of humanity and earth, it means paying up to 2,000 times more for drinking water because it comes from a plastic bottle. Many observers have noted how in countries around the world, Nestlé promotes bottled water as a status symbol. Yet, questions on the quality of the water persist.

Of course, keeping water clean means conservative approaches which permits fossil fuel extraction as well as processing near estuaries, rivers, aquifers, and lakes. What has happened to large portions of New Jersey with its sludge lagoons or ‘Cancer Alley’ in Louisiana where not just American owned firms, but firms from nations such as China are brazenly toxifying the environment with unchecked emissions of methanol?

And, then there are the well known dangers to our fresh water supply presented by fracking, the keystone pipeline,krugman coal blog480 coal mining, and industrial agriculture with its attendant subsidies delivered yearly in the US farm bill. None of which industries, inter alia, provide any significant amount of employment during their boom cycles, and then of course leave befouled ghost towns when they go bust. For example, there was a War on Coal, and as Paul Krugman pointed out, Big Coal won. It automated strip mining:

Basically, it’s a job that was destroyed by technology long ago, with only a relative handful of workers — 0.06 percent of the US work force — still engaged in mining.

None of the oil in the Keystone XL will enter the US energy supply and almost half of US mined coal is sold to other nations. So, most fossil fuel extraction is not about jobs, despite what the owners of Big Coal claim, nor is it about energy independence.

Senator Mitch McConnell, along with his lobbyists and big donors, is out to fight new EPA regulation aimed at transitioning US power source away from coal towards renewable energy. Even in ways outside his purview as a Senator — interestingly his own state of Kentucky, a large coal producer plans to adopt the new EPA mandates. Its clear many Kentucky residents know that the benefits of coal far outweigh the costs.

Lastly as President Obama pointed out this last weekend, the Solar Panels on the Department of energy are not just for show, they save tax dollars and help protect out drinking water from the dirty business of fossil fuel extractions.  Perhaps some polices could be put in place to use the money to upgrade water infrastructure creating long-term, sustainable jobs that preserve the balance between energy security and a clean water supply.

Renewable Energy & Climate Change Mitigation: 2014 Milestones, 2015 Challenges

By Walter Borden

The Executive Branch took the lead for the US Public in addressing Climate Change amelioration in 2014 with both EPA actions as well as international diplomacy. By any standard the US China Agreement on Climate Change is, as The Guardian wrote:

A historic milestone in the global fight against climate change

Christmas Tree of Recycled Plastic Bags made by artists Luzinterruptus.
Christmas Tree of Recycled Plastic Bags made by artists Luzinterruptus.

Solar and wind energy are now price competitive with conventional fuels and installations, especially in the Northeast and Southwest. The US military maintained its tremendous foresight as it advances with solar installations as well as developing equipment for the field.

Stock traders have been bullish (though recently skittish to bearish). Nonetheless, the Guggenheim Solar ETF (NYSEARCA:TAN) vs. the S&P 500 showed huge swings to the upside again marked by very high volatility. Observations that low oil prices will harm solar lack coherence as the main competitor to solar and wind is coal in the world’s energy marketplace. Furthermore oil accounts for less than 10% of the input costs of solar manufacturing and de minimus amounts in plants presently online.

Divestiture from fossil fuel concerns now stretches from the offices of the Rockefeller Foundation to those of the Stanford University endowment, among a great many other institutions.  In other areas of finance, firms like Generate Capital have rolled out innovative methods for providing capital for renewable energy and fresh water infrastructure.

Challenges lie ahead in 2015 to be sure. Many states such as Ohio and Florida are rolling back programs to encourage adoption of clean energy. The incoming U.S. Congress will be controlled by policymakers quite hostile to climate change mitigation, clean energy, and the EPA. Worse still, they are more committed to corporate welfare for the fossil fuel industry than ever. While jobs have been created (and destroyed) in the boom-bust cycle of shale extraction, in a handful of states the notion of the industry undertaking retraining assistance is never mentioned. Thus any hope of 21st Century Public Works project to build our climate friendly infrastructure hinge on the outcome of the Presidential election some two years out.

Many journalists in covering New York State’s ban on fracking missed a central point. For example, Andrew Revkin at Dot Earth wrote:

….even though I felt (and still am convinced) that gas extraction from shale can be done safely and cleanly if properly regulated.

In our current environment regulatory capture — the revolving door between regulators and the industries they are tasked to regulate by the electorate — continues to intensify. So expecting ‘proper regulation’ to protect our water supply and atmosphere is an inviable approach in the Citizen’s United era. (As an aside Journalists Charlie Rose and Cory Johnson, both of Bloomberg TV, have recently professed ignorance as to what regulatory capture is. Yet, its well known many key regulators are paid bonuses to leave their jobs for government all the while expecting to be hired by the same industry that they regulated. Who is going to regulate and fine firms for which they expect to work?) Quis custodiet ipsos?

Utility scale solar in particular presents legitimate concerns due its water requirements for keeping sand and dust off the panels. Though as the World Bank notes many Concentrated Solar Power plans have managed to cut water usage by 90%.

Nonetheless, fossil fuel is still the primary threat to supplies of fresh water, whether from fracking, coal mining, or aquifer depletion. Rampant plastic pollution injures our hydrosphere and climate change continues to change the ecology of the world’s oceans via acidification. Such changes are dangerous, and the one’s still under study are worrisome in the uncertain nature of their long term effects.

Meanwhile confusion and weak logic reign when it comes to the Keystone XL pipeline. Economist John Cochrane calls it “infrastructure” yet its only purpose is to ship oil from Canada for export and usage in other nations. And, the profits will largely accrue offshore. The hope is that the President will veto this boondoggle — which will create comparatively few jobs, the majority of which will be temporary.

However, it is worth ending on a positive note. Increasing numbers of people recognize the threat of climate change and are integrating ecology into economy. The picture at the beginning of this post is one of a Christmas Tree made entirely of recycled plastic bags. A realization is spreading that the natural world, the source of all life and profits, needs to be given as high a priority as national defense for it is essential to the general welfare.

Microdgrids Remained Online During Sandy — The New Jersey Government Noticed

By Walter Borden

Its been well documented that solar network power generators held-up during hurricane Sandy in New York and New Jersey. This was true for PSG&E systems as well as those supplied by start-ups. As Walter Meyer of Power Rockaway Resilience pointed out:

“While gas generators sat idle without gasoline in Rockaway Beach, solar generators that David cobbled together have been producing power nonstop from the second they hit the ground. Like a renewable Hail Mary into the impact zone, these devices have already been clutch.” 

Microgrid Growth Across the US. Source: GTM Research
Microgrid Growth Across the US. Source: GTM Research

Now the state of New Jersey is taking steps to further assist the Solar and broader renewable energy industry to deploy in New Jersey. Renewable Energy reports:

“Increasing energy resilience, whether through the [ERB], the [state Board of Public Utilities (BPU)] approved resiliency improvement measures implemented by utility companies or NJ’s Clean Energy Program, will minimize the potential impacts of future widespread power outages due to major storms like Superstorm Sandy,” Dianne Solomon, president of the BPU, said in the statement.”

Noting that Sandy caused extensive damage to the state’s energy infrastructure, the BPU said that distributed energy resources, including combined heat and power, fuel cells and off-grid solar inverters with battery storage, allowed some critical facilities, including hospitals, to remain operational while the electric grid was down. Launching the ERB will allow more such facilities to remain operational during future outages.

Solar Microgrids continue to come online across the United States as well as across the world. Several factors drive their emergence: addressing carbon pollution, the need for uninterrupted power supply during severe weather and other crises, and the need for low-pollution, accesible power in remote areas. Diesel fuel after all must be shipped in.

Another popular feature in urban areas is the ability to sell spare power back to the grid. This is a feature consumers love but many utilities resist. And they are now on the march to charge distribution fees to consumers that generate power for the grid.

Nonetheless, many states are moving to scale back renewable energy support (curiously while leaving fossil fuel subsidy and policy support in place). So there is a long way to go for the U.S. to gain energy independence and ensure that our air and water supplies are safe for future generations.

 

Thank You: US Military Leads in Action on Climate Change Mitigation and Low-Carbon Fuel Innovation

We honor the sacrifice and dedication of the women and men of the United States Military. The Fund Balance team takes great reassurance from their collective recognition of the realities and risks for our shared peace, security, and prosperity posed by climate change. The US Military’s determination indicates the urgency for a steady, determined transition to green and renewable energy sources. Its organizational and technological expertise as comprised of active and former service members will play a singular and essential role in planetary deployment of renewable fuels.  Leadership in delivering renewable energy and power in the 21st century on mission-critical scales will help us all avoid economic, social, and ecologic entrapment by the carbon-intense fuels of the 20th. We urge our elected representatives to continue to support the United States Military in these efforts.

After a Marine company began using solar panels while deployed abroad, they reported that their diesel fuel usage dropped by a whopping 90 percent. Source: http://solar.calfinder.com/blog/solar-contractors/solar-power-saves-lives-taxpayer-dollars-on-the-battleground
After a Marine company began using solar panels while deployed abroad, they reported that their diesel fuel usage dropped by a whopping 90 percent. Source: http://solar.calfinder.com/blog/solar-contractors/solar-power-saves-lives-taxpayer-dollars-on-the-battleground

Protecting the Hydrosphere From The Generational Theft of Pollution

Screen Shot 2014-05-14 at 12.19.47 PM

By Walter Borden

There is a canon among many policy makers and their financial backers holding that essentially all regulations diminish prosperity. Yet, evidentiary support for it is sparse. For example, a recent study Aggregate Demand and State Level Employment published by the Federal Reserve Bank of San Francisco finds:

What explains the sharp decline in U.S. employment from 2007 to 2009? Why has employment remained stubbornly low? Survey data from the National Federation of Independent Businesses show that the decline in state-level employment is strongly correlated with the increase in the percentage of businesses complaining about lack of demand. While business concerns about government regulation and taxes also rose steadily from 2008 to 2011, there is no evidence that job losses were larger in states where businesses were more worried about these factors.

Why is it important to make note of failures to link regulatory action and weakened job markets? And, why so for a sustainable economics blog? Firstly, widespread adoption of this view has been  annointed with the great advantage of conventionality: policy makers can’t be evaluated per se as acting irresponsibly in terms of managing labor market health, or so-called job creation, when they have the same extreme hands-off bias towards regulation (particularly in the environmental category) as the industries they are meant to oversee. Hence real concerns of lack of oversight. Continue reading Protecting the Hydrosphere From The Generational Theft of Pollution

LED Sector Q1 2014 Performance

By Walter Borden

Light Emitting Diode (LED) demand continued in the first Quarter of 2014. LED fab utilisation rates have improved to high levels and LED adoption is happening faster than many had expected. LED customers are also reporting increased market demand for LED backlighting products. Many leading customers are placing orders for capacity expansions. Across the industry Q1 was a significant improvement over the last quarter of 2013 with higher revenues, better margins, and falling operating costs. Our work with privately held early stage start-up firms echoes what we hear from publicly trading firms and their coverage by leading analysts.

  • We believe that higher LED consumer usage combined with new and lower cost products, cost reductions, and higher factory utilization will help increase LED usage in residential and commercial real estate.
  • Unfortunately, stock prices in the sector generally have increased much more rapidly than earnings so investors may want to wait for a dip before entering the public market for LED stocks.

A look at Phillips N.V. is instructive. The Dutch conglomerate has reported flat earnings and generally lackluster revenue growth in the Q1 of 2014 with one exception. At Lighting, while sales were flat on a comparable basis, LED-based sales climbed 37 percent, and now represent 33 percent of total Lighting sales for the Dutch conglomerate.

Notably, then,  Phillips had a flat quarter while its LED unit continued to outperform rising 37% in the first Quarter of 2014.

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Source: http://www.usa.lighting.philips.com/

Meanwhile LED and Solar Panel Manufacturer Veeco saw healthy increases in revenue, gross profit, operating and net income in Q1 2014. Continue reading LED Sector Q1 2014 Performance

Solar Power: A Key Sector For Managing Carbon Asset Portfolio Risk

By Walter Borden

Solar power stocks have shone over the past year. After four years of decline the industry experienced vigorous growth in 2013. The first growth spurt in the early 2010’s was propelled in large part by European incentives which induced component and material shortage in 2007-2008. This pushed solar stocks to record  highs and to a subsequent bust the next year. The main driver for the market-wide collapse was significant state-level investments in China that led to a large surplus from output from some 500 Chinese companies that produce modules, wafers, and cells. The Chinese investments fostered an overcapacity in production, which hit the the majority of manufacturers in the space. Most non-Chinese manufacturers were then quickly eliminated from the industry. Weaker Chinese companies also fell to price pressures while other participants wanted out of the business. All the while, start-up manufacturers flooded the market with an ever lower priced inventory predictably spurring the aforementioned bust.

Solar Module Costs Q1 2014

Yet now the solar power industry is poised for another solid year in 2014. Many doubtful observers look to the expiration for tax credits in 2016 as the next great shake out for the solar industry. As the National Geographic Energy Blog explains:

Farther down the timeline but perhaps more ominous is the scheduled expiration of the federal investment tax credit (ITC) that solar enjoys. Implemented in 2006, the ITC can be worth as much as 30 percent of the cost of a project, large or small, and it’s due to expire at the end of 2016. The Obama administration’s 2015 fiscal year budget would replace the investment tax credit with a production tax credit at the end of 2016, meaning that a solar project would benefit only after it is built and producing power.  The production tax credit  “simply can’t address the upfront costs of fuel-free solar projects,” said the SEIA in a statement, “and we believe the Administration’s sudden, 180-degree shift in tax policy could have devastating consequences on the future development of solar energy in America.” Continue reading Solar Power: A Key Sector For Managing Carbon Asset Portfolio Risk

Section V: LED Market Overview

Note: This is the final excerpt from our 2013 Review/2014 Outlook

Section V: LED Market Overview

The LED lighting market is hot and very competitive. From relative newcomers like Cree, Acuity Brands, and OSRAM, to well-known brands Koninklijke Philips and GE Lighting, the fight for market share is intense.  Growth potential is high. We project the LED market’s CAGR (compound annual growth rate) around 45% through 2016. Consequently, risks of oversupply and subsequent profitability declines in the face of downward price pressures bear watching for investors in smaller firms and/or firms with slim margins.

One of the key factors contributing to this market growth is the declining Average Sales Price (ASP) of LEDs. The global Chip on Board LED (COB LED) market has also been witnessing the increasing demand of COB LED in general lighting applications. However, fluctuating global economic conditions could pose a challenge to its CAGR, as well.

The key vendors within the COB LED market space are Citizen Electronics Co. Ltd., Cree Inc., Nichia Corp., Osram Opto Semiconductors GmbH, Philips Lumileds Lighting Co., Samsung Electronics C o. Ltd., and Seoul Semiconductor Co. Ltd.

Demand for LED lighting will surpass that of LED backlight during the beginning of 2014, according to a recent report by J.P. Morgan:

  • LED product ASP drops have contributed largely to increased consumer usage.
  • Current payback time for commercial luminaries A19 and PAR28 has already been reduced to a year or less while LED bulb price has room to drop 30 percent by 2015.
  • Penetration rate in 2013 will reach around 11 percent up over 5 percent last year, projected at LED 20 percent before 2015.
  • The LED lighting market is more dispersed than the LED backlight market where consumers are highly concentrated. The top three global lighting manufacturers Philips, Osram, and GE make up 30 percent of the global market share.
  • This dispersed nature of the LED lighting market will bring more revenue and bargaining space than LED backlight products in the past.

This is sure to attract more consumers to replacement LED bulbs via its economic and ecologic benefits.

  • Specifically we see LED lighting market development trends and lighting product strategy and the market share situation in different areas.
  • 3030 LED has highest lm/$ and is widely distributed in the market and most preferred.
  • 5630 LED: high current spec applied in bulbs and downlight products
  • 5630 LED: limited room for further price cuts as 5630 LED price closes to production costs
  • LED Manufacturers will continue to speed up COB product development.


A Brief Case Study Revolution Lighting Technologies 

Revolution Lighting Technologies (RVLT) is a firm emblematic of the wider LED narrative for new entrants. With revenue of $15 m, net income loss -S19.53m and their market cap is $259.96m the market for their shares appears way ahead of itself. Yet this new firm is wisely using its pricey stock to make acquisitions to challenge bigger players with market caps measured in the billions of USD.

Sales momentum proceeds unabated. New York’s largest commercial property company, SL Green Realty (SLG) is one of the company’s key customers. SL Green has awarded two orders this year – an order for 1,000 LEDs  for a Times Square commercial property in March followed by an 8,000 LEDs order in December after large purchases in 2012.

RVLT started 2013 with an acquisition of California-based LED solutions provider, Seesmart Technologies for $20 million. Revolution’s bankers liked Seesmart’s distributor count of more than 50 and potential project value exceeding $1 billion.

As one of the smallest players in the industry, RVLT’s exposure to any potential price war could hurt the already vulnerable stock value. And, signs of one are already visible, with both Cree and Philips now offering sub-$10 LED lamps. As prices fall, RVLT has few good options but to follow suit, which will directly hit its strong gross margins from 2013.

As awareness about energy efficiency ever-growing in nations across the globe, the LED lamp investment thesis has great prospects. RVLT may be well poised to capitalize on these trends. But, with nil profits and cash flows, shareholders need to be wary of dilution from additional equity issue to raise capital for funding growth. In sum, at the outset we thought that valuation was fanciful for the long and mid-terms and still do which is why we did not add it to our Leading the LED Motif over 2013. Though we did miss the tremendous upside in 2013, we think the fundamentals make the probability of a pullback in 2014 very high and a strong sell-off not unlikely.

  • Revolution YTD return: 470.83%
  • Cree YTD return: 88.31%
  • Acuity YTD return: 65.16%
  • Koninklijke Philips: 42.3%

Fund Balance sees excellent opportunities in the private equity, early stage space LED manufacturers. One start-up firm we work with closely  projects $19 mil net income in its first year. Our Year 3 sales are projected to be $19 mil with net income of $700K on a $ 2.5 mil raise.

The OLED Market:

Light-emitting materials will encounter rapid change in 2014.  From Smartphones to touchscreens they are key to the future of human-computer interaction. These materials are consistent with sustainable investment and business development goals as these materials consume less power than standard LED products and share in the durability.

Active matrix organic light-emitting diode (AM-OLED) entered the display panel market when Samsung Display started operating its large-scale mass production facilities in 2008. Since then, Samsung Display has been the leader in the AM-OLED market expansion. In particular, AM-OLED displays have been well received by smartphone manufacturers, achieving noticeable growth in products ranging from the high end of 3 inch to 4–5 inches.

By 2014, Samsung Display but also LG Display, AUO and Japan Display Inc. (JDI), are set to boost AM-OLED panel production or initiate mass production. Given that, light-emitting material makers are expected to compete in a more advanced market environment with increased demand and a broader base of customers, after the first part of this decade where they had depended wholly on demand from Samsung Display.

In 2013, the AM-OLED light-emitting material market stood at around $350 million based on demand from mass production lines. In 2014, the market size is forecast to rise by about $100 million to $450 million thanks to demand growth from the existing and new AMOLED mass production lines.

Three main points are of interest for sustainable investors in 2014:

  • Organic light-emitting layer structures and development plans of AMOLED panel makers are on schedule for 2104

  • Market trends and forecasts of the 10 main individual materials are very encouraging

  • Supply chains are strong an and market share will expand by material/company and in 2014 based on orders and vendor forecasts

Conclusion:

The LED/OLED market will grow and expand in 2014. Opportunities will abound for established markets and technological innovators that can compete on price and power consumption reductions. The Fund Balance Leading The LED ETF outperformed the S&P, and we are not currently looking to make additions or rebalances, though we will continue to look closely at start-ups and monitor industry wide ASP trends.

Leading the LED 2013 performance for 2013:

Leading The LED

Screen Shot 2014-01-01 at 1.31.13 PM

Section III Solar Stocks 2014

Note: This is an Excerpt from the Fund Balance 2013 Review/2014 Outlook  — Section III: Solar Stocks 2014.

By Walter Borden

Fund Balance Here Comes The Sun ETF Performance for 2013:

Screen Shot 2013-12-31 at 6.17.18 PM

Screen Shot 2014-01-01 at 1.44.54 PM

One of the most widely held ETFs, the Guggenheim Solar ETF (TAN in the chart above), returned 131.3% YTD and –54.96% over the last 5 years.

Solar power investments performed tremendously in 2013. Commercial users of solar power such as WalmartGM, Staples, and Walgreens are just now scratching the surface of what is possible in terms of balance sheet energy cost saving and carbon footprint reductions. Current installed solar production is minimal compared to overall energy consumption, though a paucity of data which is closely held by most suppliers and users, makes gauging returns on capital and cost efficiencies inexact.

From an asset management point of view, as the solar power industry matures buying opportunities become more difficult to spot. We urge growth investors to hold and build positions in companies with long term stable cash flows and to keep some powder dry for nascent prospects in smart-grid, storage, and supporting software and services such as Power Secure International which returned ~130% in 2013. Investors with short time horizons are advised to explore capturing some profit in the first quarter of 2014.

As 2014 unfolds, potential interest rate increases from reduced monetary stimulus as well as policy uncertainty stemming from upcoming expiration dates for tax credits early in 2016 will guide discrimination between long term positions and short term ones in solar power.

New solar Photovoltaic (PV) installations grew at a rapid pace in 2013 to 36 GWs. The cost competitiveness of this electric power source shows rapid improvement as well. While utility-scale PV installations are not yet cost competitive with fossil fuel power plants, commercial-scale installations have attained cost parity in that generation costs of power from solar PV is comparable to the retail electricity prices that commercial users pay in key economic regions.

DC Solar Calc

In the US, demand will continue to pick up in 2014.  Still just 5 states have 82% of all US solar installs. In immature markets in the Southeast, with Georgia showing leadership in both its initiatives as well as its withdrawal of tariffs, which are still in place in other states. We see large opportunities here. Their tariffs on solar generation amount to a penalty on home based solar power generation while voters and stakeholders are taking notice. Leading markets in the Northeast and Western United States remain robust and highly competitive. Hawaii also has stuck with its plan for widespread solar usage in order to wean itself from fossil fuels for residential and many types of commercial power. All of this reinforces a key trend: Over 2014 consistent growth will continue as the cost of solar comes down and the cost of other energy sources goes up.

California continues to lead the solar PV charge, installing 455 megawatts in Q3; North Carolina moved into the No. 3 spot in total PV installations with 23 percent growth.  Nevada moved from 17 to 5 and Vermont from 21 to 12 in the rankings.

Commercial-scale installations could reach ‘‘grid parity’’ in about ten years, if the current federal tax incentives for solar power were to expire at that point rather than sooner.

Impact investors should look to solar stocks in 2014 that are performing well at its outset. Fund Balance expects a continuance of 2013 trends in the near and mid-term. The same can be said for the broader array of underlying macroeconomic conditions. Throughout 2014 demand driven by system prices will slow somewhat after market absorption of significant 2013 price reductions on the heels of the  industry wide buffeting in 2012.

The Price Story

Price stability helped solar market growth while capacity and supply shrunk as companies went out of business (Suntech Power and LDK Solara are two examples). Demand however steadily picked up. A long awaited EU-China solar trade agreement bodes well for international price stabilities. Chinese manufacturers are not signaling plans for expanding or upgrading solar plants until at least 2015 as even its best manufacturers continue to shrink bloated balance sheets.  As Chinese banks appetite for solar risk subsides after the three voracious years shrinks, we expect steady mostly unchanged supply levels from China in 2014.

In the a US in 2013, increasing demand for solar power and stable pricing in the second half of 2013 provided strong support to manufacturers. Once struggling to break even, SunPower (NASDAQ: SPWR), Canadian Solar (NASDAQ: CSIQ), JinkoSolar (NYSE: JKS), and Trina Solar (NYSE: TSL) are now profitable and richly valued.

o

Trends look in their favor though volatile short interest is highHas the market priced this trend into their asset prices and valuations?

Overall then, gross margin trends over the past year for these companies improved rapidly as a result of the aforementioned better pricing as did cost reductions from 2012 when the industry was in a far worse position.

If demand hits many analyst’s upper range of 46 GW in 2014 and as little new capacity is scheduled to come online in 2014, these growth trajectories will continue upwards. For example, SunPower’s 350 MW expansion will not come online until 2015. Margins for producers with scale will continue to improve and sustain market valuations albeit attached with worries of irrational exuberance.

The highest quality suppliers have seen the biggest benefit so far and we think that is where the gains will be this year as well. We think the smart bet is on a profitable company making even more money as the industry improved than a high risk debt ridden company turning things around.

The Bear Case for Solar

On the risk side, at present and into 2014, the primary risk factors for the sector are three fold:

Firstly, standardization and securitization will continue to improve in the financing of new solar assets. Tax equity will remain in place for residential installations. Utility scale investments will get more competitive. Complex deal structures which result from legal and consulting costs along with an absence of standardization will continue to increase costs of capital.  Financing will primarily be available to utilities that can roll-out new solar power capacity at large scales. Technical risk while ever present, has lessened as well in the present innovation cycle, though we project it to continue as a cost driver. Continue reading Section III Solar Stocks 2014

Section II: 2014 Asset Market Overview — General

Section II: 2013 Asset Market Overview — US Markets Finish Strong, Asian and EU Weaknesses Persisted

In 2014, higher economic growth rates with inequality effects via persistent constrained spending power of the US consumer will exact a noticeable fiscal drag in the US, while positive developments from 2013 in US equity markets are mostly priced into valuations and a correction should be on investor’s radar screens; uneven growth will be the trend in the EU; China addresses banking and credit market instabilities; the developing world sees demand for its resources continue to grow. Uncertainty around regulatory and tax policy will impact markets less than opacity about public sector investment levels.

Absent exogenous geopolitical shocks, US investors should expect continuity in build up of momentum from 2013 into 2014 but with more volatility, sideways directionality, and perhaps a correction. This momentum will be further dispersed via diminished purchasing power for US consumers whose wages are not reflecting the wealth effects seen in asset price surges or low interest rates available to the luxury class and blue-chip corporations, and so will not be able to fully participate in robust economic activity. Minimum wage gains will not impact the economy meaningfully until 2015. At the outset of 2014, the expiration of long-term unemployment insurance in US is predicted to shave .3% off the US economy according work by Mark Zandi, Robert Schiller, and others. Home price increase rates are slowing. This can be seen as an example of the velocity of money, or M2V, from the invaluable St. Louis Federal Reserve’s datassets and tools. M2V Stocks indicate persistent decreases in economic transactions in the US Economy.

Graph of Velocity of M2 Money Stock

2013:Q3: 1.571 Ratio; Last 5 Observations; Quarterly, Seasonally Adjusted, Updated: 2013-12-20 2:01 PM CST

Note: The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy. Source: Federal Reserve Bank of St. Louis.

The broader energy market will continue to be characterized by abundant LNG, tight oil, the arrival of renewables as key components of the US energy mix meaning self-sufficiency for North America and making it a more attractive place to invest. Upward pressure on the USD will be counterbalanced by low interest rate biases for at least the first two quarters. Yet, here again is a bright spot, as we point out in our solar section and broadly speaking for the sustainable category, falling prices for renewable energy and green consumer goods which provide very significant, if mostly overlooked benefit, to an ever larger percentage of the US population.

Companies that focus on smart cost cutting with renewable energy, investing in product and market research, hiring new people, and advocating for smart regulation aimed at targeted reductions of dependency on fossil fuels will be poised to benefit their investors into 2015. All the while acting in the best interest of their respective nations and as good corporate citizens.

Asset Market Outlook 2014

Asset markets have positive price momentum at the threshold of 2014. That momentum helps identify assets that are performing well now. Conditions and measures indicate that the underlying trends for these specific subsets of these assets will continue into 2014.  Our analysis also comports with the findings of the Pew Foundation: acute income inequlaity negatively impacts economic growth. Like the hangover from sugar rushes, ambient toxicity is the result of short term economic choices that ultimately sacrifice the long term resiliency of economies’ basic foundation, our shared ecology.

destroying.jobs_.chart1x910_0-1

Global financial markets posted mixed performance in  2013. Gains in US were offset by mixed performance across Europe, Asia, and other Emerging Markets.  Technology IPOs including Twitter posted strong gains  while US corporate fixed income issuance remained robust in continuance of 2012 record levels.  Broad-based  US equity gains were led by technology, renewable energy, healthcare, and small caps, offsetting weakness in Fossil Based Energy, REIT and commodity-sensitive assets.

In Europe equities posted mixed performance, with gains in Germany, Sweden, and the Netherlands offset by weakness  in the UK, Italy, and Russia. Asian equities were also mixed, where strong gains in Japan, China and Hong Kong were countered by weakness in Australia, India and the Philippines.

US yields rose across most maturities on the improving US economic outlook. Curtailment of US Federal Reserve stimulus efforts now seems imminent by 2016 even with the Fed’s plan to measure tapering bond purchases with continued downwards tweaks on interest rates.

European yields were little changed following recent ECB policy action of lowering rates. The US dollar posted mixed performance, gaining against the Japanese Yen while falling against the British Pound Sterling. The Dollar was little changed against the Euro though this could change if interest rates in Europe fall on expected enduring faiblesse. Though we believe the contrarian case that France will surprise on the upside in terms of economic strength.

The Dollar’s strong gains against Emerging Market currencies including the Indian Rupee, Australian Dollar and Brazilian Real may be partially responsible declines in metals and commodities. Moderating expectations for inflation will ensure fixity for this trend of modest declines into 2014 across silver, aluminum, gold and platinum. Recent sharp gains in LNG will moderate somewhat in 2014, but we do not foresee the beginning of a bust cycle in the US until at least 2015. These is due to continued expectations of tight oil combined with economic growth and lower costs for feedstock. We expect more pressure to be exerted on developing nations to extract resources with little regard for the well being of their natural capital, i.e. fresh and and clean water supplies, as they race to build out electricity infrastructure and earn export income with international trade.

We expect pronounced volatility for oil as political developments to ease sanctions in Iran impact its price which in turn will drive increases in US natural gas exports. Agricultural commodity gains were led by soybeans, rice and coffee, which were offset by declines in sugar, hogs and corn.

Hedge funds gained in late 2013, with a November 2013 gain in Global Hedge Fund Index (HFRX) posting a gain of +0.55% for month, while the HFRX Absolute Return Index rose +0.45%.

In 2013 much was made of so-called policy uncertainty, yet the fiscal cliff met with a collective shrug from the world’s markets, despite public hand-wringing on the part of US creditors nations such as China.

Whither Policy Uncertainty?

Fund Balance does not see impending consequences for policy uncertainty in bond prices and in the stock market. Nor are entrepreneurs demonstrating a reluctance to invest due to lack of clarity regarding future tax and regulatory events. If such uncertainty was so grievous, liquidations by entrepreneurs of their current stock positions for a song should be the norm, and they instead shift assets to the Cayman Islands and the like. Thus, under hypotheses invoked by austerians and bond vigilantes, one would expect the stock market to be low when uncertainty regarding government policy is high while the opposite was true in 2103.  Furthermore, this internal logic would entail expectations of interest rates on government bonds trending high as well since one way uncertainties about future policies get resolved is via inflation.

The events of the last three years has refuted these hypotheses and their logic.  Rather, most business decision makers indicate that considerable business uncertainly stems from the amount of chaos inherent to the US budgeting process in 2014 and 2105. After all, Walmart acknowledges that SNAP reductions hurt its bottom line, telecommunications firms earn revenue from the surveillance state, and the military is the world’s largest procurer of oil, the production of which itself is heavily subsidized by US Taxpayers.  As Economist Bradford DeLong points out:

The markers that would indicate that enterprise was being hobbled by uncertainty about government policy per se—those markers just are not there. This seems to me to be a side issue—another argument that is based on political wishes rather than on economic evidence.

A Note on the Role of China in Relation to the US Economy.

The Peoples Republic of China faces the self-imposed generational challenge of moving over three million people a year from subsistence farming in the countryside to industrial and service employment in the cities. Apart from the questions of how to integrate sustainability into this process, consistent with sustainable investment goals, how might this impact their appetite for US debt? The only way to do this is to purchase U.S. government bonds so that the Bond sellers will have renminbi which are used to buy exports from China.

Contrary to conventional wisdom, this is not a pure free-market transaction. China’s State Council is not acting for profit-maximizing economic reasons although its actions are completely plausible and realistic. As one observer noted, “China’s State Council wants, more than anything else, to maintain full employment in Shanghai. Otherwise their heads are likely to end up on pikes.”

In short, no acceleration of the State Council’s planned shift to reliance on domestic demand from exports in maintaining near full employment in Shanghai is at hand. China is not going to suddenly or even meaningfully reduce U.S. government bond purchase in 2014. The risk is far too high for the Chinese economy and to the futures of its leaders within the Council than it would be to the US economy. For the PRC seems keen to embrace the monetary policy management principals (measured by their actions, not words) of the its trading partners in the EU and US. As the New York Times, in coverage of China’s shadow banking system and internal tensions between vested interests and the Council’s desire to deleverage with higher interest rates, wrote:

That approach involved the central bank’s turning to posts on China’s Twitter-like social messaging service, Sina Weibo, to chasten banks to “make rational adjustments to the structure of their assets and liabilities, and improve their liquidity management using a scientific and long-term approach….

While policy makers say they are worried about upsetting the delicate mechanisms of the current banking system, public criticism continues to grow, even within China’s elite. That suggests further market-oriented experiments could be coming soon.

“Banking in China has become like a highway toll system,” Yao Jingyuan, the former chief economist at the state statistics agency, said late last week during a speech at Nanjing University, according to numerous Chinese news reports. “Banks charge every time money goes through them.”

“With this kind of operational model,” Mr. Yao added, “banks will continue making money even if all the bank presidents go home to sleep and you replaced them by putting a small dog in their seats.”

A Note on Technology and Labor Markets In The US

Fund Balance holds that increased inequality in the US economy, 70% of which is comprised of consumer spending will continue to be a drag on sustainable growth in 2104. Moreover, can the US economy remain vital and growing in the face of inequality and its doppelganger, automation? Oxford researchers found that 45 percent of America’s occupations will be automated within the next 20 years implying that nearly half of U.S. jobs are vulnerable to computerization. 

While many hiring managers argue that there is a fundamental skills mismatch between employers and job applicants in the US, the story is more complex, with inequality and regional differences being key plot lines. For example, Economist Paul Krugman pointed to unemployment by occupation

looking at changes in unemployment rates from the 2007 business cycle peak to the unemployment peak in 2009-10, and then the subsequent decline; it looks like this:

It’s the same as the geographical story: the occupations that took the biggest hit have had the strongest recoveries.

Still, rapid advances in technology do represent a serious potential threat to many jobs historically performed by people. Google’s Eric Schmidt eerily talks of humans needed to prepare to compete with machines for jobs as the firm has been on an acquisition spree for robotics firms.

A recent report from the Oxford Martin School’s Programme on the Impacts of Future Technology attempts to quantify the extent of that threat. It concludes that 45 percent of American jobs are at high risk of being taken by computers within the next two decades.

The authors expect this replacement in two phases. First, computers begin to replace  in vulnerable fields like transportation/logistics, production labor, and administrative support. Jobs in services, sales, and construction sectors may also vanish in this first phases. Then, the replacement rate will decelerate due to bottlenecks in harder-to-automate fields such engineering. This “technological plateau” will precede a second wave of computerization, driven by deep learning. Systems derived from these innovations will compete for jobs in management, science, engineering, and the arts. They conclude that the rate of computerization depends on several other factors including regulation of new technology and access to cheap labor.

Utilizing standard statistical modeling techniques the researchers analyzed more than 700 jobs on an online career network including the skills and education required for each.  They noted:

Our findings thus imply that as technology races ahead, low-skill workers will reallocate to tasks that are non-susceptible to computerization—i.e., tasks that required creative and social intelligence….For workers to win the race, however, they will have to acquire creative and social skills.

Established estimates are that one in four private-sector jobs in the US  now pays less than $10 per hour, well below a standardized living wage for the US. Compared to better-paying positions, these jobs rarely feature regular schedules,  health care coverage, paid vacation time or sick leave — the essentials of middle-class work. In other words, employment increasingly is not a guarantee of life above the poverty line in the US. Indeed, according to census data, more than one in 10 Americans who work full-time are still poor.

Sustainable Ecologics and Economics At The Outset of 2014

fund-balance-logo-smallSustainable Economics and Ecologics

At The Outset of 2014

 

Section I: Impact Investing 2013 Overview/2014 Outlook

THE Intergovernmental Panel on Climate Change reported in September 2013 that it is “extremely likely” that human activity was the dominant cause of global warming or about 95 percent certain — typically the standard of rigor in scientific accuracy.

Accordingly, in 2014 the principle that environmental and development issues are inseparable from business will continue to integrate with global commercial and social functions. Impact investing in 2013 was characterized by a sense of urgency for adapting precepts of wealth creation and stewardship to 21st century realities. This matched up with the year’s abundant, rational exuberance in asset markets. We expect a cautious optimism to persist in 2014 though much of the reality based upside from 2013 is likely already priced into market values.  A correction then should not be ruled out, and those with short term objectives should consider capturing some profit. Looking further ahead, markets and society will increasingly reject notions that a Faustian bargain holds between employment and shared prosperity on the one hand and fresh air and healthy water supplies on the other.

There is, of course, more work to do. It became clear to many in 2013, in Shanghai, China for example, that regions with little to no regulation of pollution suffer poisoned water, air, and thus economic inefficiency. Wholesale deregulation of energy extraction then are at best short term fixes to long the term economic challenges of mitigating climate change and renewable resource stressors within the context of exploding energy demand across the globe. More troubling news issued from China at the turn of 2014 where the results of the world’s largest natural experiment in unsustainable economics are coming in, and they are nothing short of tragic.

An alarming glimpse of official findings came on Monday, when a vice minister of land and resources, Wang Shiyuan, said at a news conference in Beijing that eight million acres of China’s farmland, equal to the size of Maryland, had become so polluted that planting crops on it “should not be allowed.”….

One-sixth of China’s arable land — nearly 50 million acres — suffers from soil pollution, according to a book published this year by the Ministry of Environmental Protection. The book, “Soil Pollution and Physical Health,” said that more than 13 million tons of crops harvested each year were contaminated with heavy metals, and that 22 million acres of farmland were affected by pesticides.

A signal moment came in May, when officials in Guangdong Province, in the far south, said they had discovered excessive levels of cadmium in 155 batches of rice collected from markets, restaurants and storehouses. Of those, 89 were from Hunan Province  {, where Ms. Ge farms.}

Given the above outcomes and outlooks we share the that view bringing electricity to developing nations is a key goal for sustainable economics for a host of reasons. Xi Chen and William Nordhaus have found that luminosity is a strong predictor and proxy of economic growth rates. As GDP per capita rises quality of life improves and more often than not environmental degradation lessens. Fund Balance sees such considerations as essential for economic planning and maintenance in the US and EU as well.
US vs. China CO2Carbon Footprints: US vs. China
With these principals in mind we look back on the Fund Balance practice in 2104 and its plans for 2014. Continue reading Sustainable Ecologics and Economics At The Outset of 2014

Section I: Impact Investing 2103 into 2014

Sustainable Economics and Ecologics

At The Outset of 2014

 

Section I: Impact Investing 2013 Overview/2014 Outlook

The Intergovernmental Panel on Climate Change reported in September 2013 that it is “extremely likely” that human activity was the dominant cause of global warming or about 95 percent certain — typically the standard of rigor in scientific accuracy.

Accordingly, in 2014 the principle that environmental and development issues are inseparable from business will continue to integrate with global commercial and social functions. Impact investing in 2013 was characterized by a sense of urgency for adapting precepts of wealth creation and stewardship to 21st century realities. This matched up with the year’s abundant, rational exuberance in asset markets. We expect a cautious optimism to persist in 2014 though much of the reality based upside from 2013 is likely already priced into market values.  A correction then should not be ruled out, and those with short term objectives should consider capturing some profit. Looking further ahead, markets and society will increasingly reject notions that a Faustian bargain holds between employment and shared prosperity on the one hand and fresh air and healthy water supplies on the other.

There is, of course, more work to do. It became clear to many in 2013, in Shanghai, China for example, that regions with little to no regulation of pollution suffer poisoned water, air, and thus economic inefficiency. Wholesale deregulation of energy extraction then are at best short term fixes to long the term economic challenges of mitigating climate change and renewable resource stressors within the context of exploding energy demand across the globe. More troubling news issued from China at the turn of 2014 where the results of the world’s largest natural experiment in unsustainble economics are coming in and they are nothing short of tragic.

An alarming glimpse of official findings came on Monday, when a vice minister of land and resources, Wang Shiyuan, said at a news conference in Beijing that eight million acres of China’s farmland, equal to the size of Maryland, had become so polluted that planting crops on it “should not be allowed.”….

One-sixth of China’s arable land — nearly 50 million acres — suffers from soil pollution, according to a book published this year by the Ministry of Environmental Protection. The book, “Soil Pollution and Physical Health,” said that more than 13 million tons of crops harvested each year were contaminated with heavy metals, and that 22 million acres of farmland were affected by pesticides.

A signal moment came in May, when officials in Guangdong Province, in the far south, said they had discovered excessive levels of cadmium in 155 batches of rice collected from markets, restaurants and storehouses. Of those, 89 were from Hunan Province, where Ms. Ge farms.

Given the above outcomes and outlooks share the that view bringing electricity to developing nations as a key goal for sustainable economics for a host of reasons. Xi Chen and William Nordhaus have found that luminosity is a strong predictor and proxy of economic growth rates. As GDP per capita rises quality of life improves and more often than not environmental degradation lessens. Fund Balance sees such considerations as essential for economic planning and maintenance in the US and EU as well.

US vs. China CO2

Carbon Footprints: US vs. China

With these principals in mind we look back on the Fund Balance practice in 2104 and its plans for 2014.

 

Fund Balance Sustainable and Impact Investing ETFs 2013 Results
The Fund Balance Équilibre Impact Investing Market Index returned 51.1.% in 2013 with 167% over 5 years compared with 31.8% and and 128.% 2 for the S&P respectively. Equilibrer is composed of stocks whose prices have mostly risen over the the past 12 months. While it has yet to achieve fixity in terms of its constituents, it serves as a proxy for us of a basic large-cap market tracking index like the S&P 500.
Equilibrer
Screen Shot 2014-01-01 at 1.58.25 PM
While the Dow Jones Sustainability World Index (W1SGI in the charts above and bel0w) returned 19.7% YTD and 69.12 over 5 years.
Screen Shot 2014-01-01 at 9.11.30 AM
A promising development in the calibration and refinement of impact and sustainable investing and capital stewardship: in 2013 Fund Balance will also be utilizing Climate Counts rankings which put companies’ self-reported emissions data in the context of GHG reductions called for by climate scientists while scaling this assessment based on market share. Researchers Bill Baue, Mike Bellamente, Mark McElroy looked at factors such as emissions output and contribution to GDP to assign a company-level carbon budget in determining whether reported emissions are on track with science-based thresholds.

Setting aside questions of Sustainability Indices, talk of bubbles have featured prominently in market analyses. An integral part of energy market analysis and policy planning increasingly requires careful attention to unburnable carbon.

Carbon Bubble Economics

The concept has occurs with increasing frequency, including a much discussed article in the Financial Times, as well as in the growing literature of sustainability investing. Although bubbles are best seen in retrospect, investors should always be alert to the potential, particularly after our experience just a few years ago.

The Carbon Bubble relates to the amount of our planetary fossil fuel reserve that is unburnable? As  governments and energy firms ramp-up climate change mitigation strategies much carbon not currently used may well remain in the ground due to a pairing of decreased demand and significantly higher costs. In short as The Economist wrote: “Either governments are not serious about climate change or fossil-fuel firms are overvalued.”

Markets can misprice risk, as investors in subprime mortgages discovered in 2008.  The value of oil, gas and coal companies depend in part on their reserves. What then of scenarios where reserves can never be dug up and burned?

Over the next decade date determined climate policies will likely converge on rules that leave a large portions of carbon in the ground. Analysis by The Non-profit Carbon Tracker along with the Grantham Research Institute on Climate Change at the London School of Economics finds that if global temperatures are not to rise by more than 2°C, the most that climate scientists deem prudent only ~t 1,000 gigatons of CO2 (GTCO2) can be released between now and 2050. The is the world’s  so-called “carbon budget”.

Most of the reserves are owned by governments or state energy firms; they could be left in the ground by public-policy choice (i.e. if governments take the 2°C target seriously). But the reserves of listed oil companies are different. These are assets developed using money raised from investors who expect a return. Proven reserves of listed firms contain 762GTCO2—most of what can prudently be burned before 2050. Listed potential reserves have 1,541GTCO2 embedded in them.

So companies and governments already have far more oil, gas and coal than they need (again, assuming temperatures are not to rise by more than 2°C). Logically, the response to this would be for governments to leave their reserves untouched and for companies to run theirs slowly down, returning more of what they earn to shareholders. Neither of these things is happening. State-owned companies are taking an increasing share of total energy output. And in 2012 the 200 largest listed oil, gas and coal companies spent five times as much—$674 billion—on developing new reserves as they did returning money to shareholders ($126 billion). ExxonMobil alone plans to spend $37 billion a year on exploration in each of the next three years. Notably the firm is setting an internal price on carbon, much higher than than many other targets  Presumably this effort is a hedge against policy actions which it opposes by and large.

Planning to extract more carbon fuel reserves at first cut seems illogical in the context of unburnable carbon. Perhaps companies are betting that government climate policies will fail. In this case they can burn all their reserves, including new ones, after all. Our best science tells that this his implies global temperatures soaring past the 2°C mark, if not restrained by technological advances, such as carbon capture and storage, or geo-engineering.

And indeed in the current policy landscape make such bets seem rational. On April 16th the European Parliament voted against attempts to shore up Europe’s emissions trading system against collapse.      The system  is the EU’s flagship environmental policy and the world’s largest carbon market.

This suggests the EY has lost their  will to endure short-term pain for long-term environmental gain. Nor   is this the only such sign. Several cash-strapped EU countries are cutting subsidies for renewable energy. And governments around   the world have failed to make progress towards a new global climate-change treaty. So on the other hand, betting against tough climate policies seems almost prudent.

But that is not what companies say they are doing. All the big energy firms claim to be green. They say they use high implicit carbon prices to guide investment decisions. Nearly all claim to support climate policies. None predicts their failure.

Yet markets clearly are mispricing risk by valuing companies as if all their reserves will be burned. Investors treat reserves as an indicator of future revenues. They therefore require companies to replace reserves depleted by production, even though this runs foul of emission-reduction policies. Fossil-fuel firms live and die by a measure called the reserve replacement ratio, which must remain above 100%. Companies see their shares marked down if the ratio falls, even when they pull the plug on dodgy, expensive projects. This happened to Shell, for example, when it suspended drilling in the Arctic in February. And many energy industry analysts and actors have watched rapid draw down of valuations in US coal producers.

Worries about mispricing crop up more and more. Citi Research looked at Australian mining companies. It concluded that “investors who strongly believe in ‘unburnable carbon’ would find it more productive to actively tilt their portfolios” (ie, sell fossil-fuel firms).  HSBC Global Research argues that “if lower demand led to lower oil and gas prices…the potential value at risk could rise to 40-60% of market cap.” The 200 largest listed companies had a market capitalisation of $4 trillion at the end of 2012, so this is a  huge amount. HSBC added: “We doubt the market is pricing in the risk of a loss of value from this issue.”

Are Carbon Bubble Concerns are Overstated?

Economist Richard Tol sees little to worry about even if all oil firms values collapse to nil:

Fossil fuel companies are among the largest companies in the world, but their total market capitalization is small relative to the total stock market. Even if they were wiped out completely, the world economy would shrug its shoulders and move on. We have witnessed rapid falls in the stock market value of fossil fuel companies – of all companies as the oil price fell, or of particular companies as disaster struck – and we know from those episodes that the economic impact is limited.

1. Quantities of Unburnable Carbon Cannot Known With Precision

Quantification of climate risk within carbon-heavy assets derives in main part from the widely cited 2°C threshold for irreversible damage from climate change, and its resulting “carbon budget” as determined by the International Energy Agency.  It indicates that at least two-thirds of fossil fuel reserves will not be monetized if we are to stay below 2° of warming. Serious consequences for investors in oil, gas and coal would necessarily ensue.

The IEA’s calculation of a carbon budget depends on the parameter of climate sensitivity.  Yet, the IPCC’s Summary for Policymakers includes an expanded range of climate sensitivity estimates, compared to the IPCC’s 2007 assessment, of 1.5°-4.5°C with a likelihood defined as 66-100% probability. It goes on “No best estimate for equilibrium climate sensitivity can now be given because of a lack of agreement on values across assessed lines of evidence and studies.” The report indicates that recent observations of the climate — as distinct from the output of complex climate models — are consistent with “the lower part of the likely range.”

The draft technical report, Summary for Policy Makers, provides more detail on this. It further assesses a probability of 1% or less that the climate sensitivity could be less than 1°C. That shouldn’t be surprising, since temperatures have already apparently risen by 0.8°C above pre-industrial levels.

2. Transition to Low-Carbon Energy Is Not Occurring At a Rate Sufficient to Threaten Today’s Investments in Fossil Fuels

From 2010 though 2012 global solar installations grew by an average of 58% per year while wind installations increased by 20% per year. Yet hey still contribute a small fraction of today’s energy production. History avers of abundant, significant risk for investors that extrapolate high growth rates indefinitely. Carbon Bubble skeptics also caution that investors should bear in mind the IEA’s 2012 World Energy Outlook.  In short demand will increase exponentially and its no clear replacement for dirty energy seems capable o coming online fast enough. Behavioral shifts around energy consumption are also currenty slow in coming. Notably, in its April 2013 “Tracking Clean Energy Progress,” the IEA warned, “The drive to clean up the world’s energy system has stalled.”

3. Not All Fossil Fuel Assets Have Equivalent Potential for Bubbles

Not all carbon-intensive assets are created equal. The vulnerability of an investment in fossil fuel reserves or hardware to competition from renewable energy and decarbonization does not just depend on the carbon intensity of the fuel type — its emissions per equivalent barrel or BTU — but also on its functions and unique attributes.

Coal for example is rapidly loosing ground for a host of reasons in China and the US. New EPA regulations makeit much harder to build new coal-fired power plants in the US. And fundamental, structural challenges facing coal. ADD CHINA SMOG PICTURE HERE. Power generation now accounts for 93% of US coal consumption, as non-power commercial and industrial demand has declined. This leaves coal producers increasingly reliant on a utility market that has many other (and cleaner) options for generating electricity. That’s particularly true as the production of natural gas, with lower lifecycle greenhouse gas emissions per Megawatt-hour of generation, ramps up, both domestically and globally.

Shanghia Smog

The takeaway: coal accounts for about half of the global fossil fuel reserves that Mr. Gore and others presume to be caught up in an asset bubble.

Not so for oil:

At 29% of global fossil fuel reserves, adjusted for energy content, oil still has no full-scale, mass-market alternative in its primary market of transportation energy.

Electric vehicles offer more oil-substitution potential in the long run, though they are growing from an even smaller base than wind and solar energy. Their growth will also impose new burdens on the power grid and expand the challenge of displacing the highest-emitting electricity generation with low-carbon sources.

Meanwhile, natural gas, at 20% of global fossil fuel reserves, offers the largest-scale substitute for either coal or oil. In any case, it has the lowest priority for substitution by renewables on an emissions basis, and so should be least susceptible to a notional carbon bubble.

4. Fossil Fuel Valuation Models Are Weighted Towards Near Term Cash Flows

The most important factors in the valuation of any company engaged in discovering and producing hydrocarbons: discounted cash flow (DCF) and production decline rates most oil and gas companies valuations derive from risked DCF models where near-term production and profits count much more than distant ones.Rolller Coaster Underwater

So compounded decline curves typical of many large hydrocarbon projects mean that the first 3-5 years  of a project account for more than half its undiscounted cash flows. Hence they will be highly sensitive to long-term uncertainties in aggregate. Industry professionals tell us that this is even truer of shale gas and tight oil production, which yield faster returns and decline more rapidly.

Based on estimates of our own and those of others, the risk of a 10% or greater drop in global demand for oil or gas in the 2030s would not really impact on their price targets for companies, if balance sheet concerns are the only factor once considers. Yet those that ignore sentiment and animal spirits do  so at their peril. 

5. Fund Balance Conclusions – The Probability of a Carbon Bubble is High Fossil Fuel Share Prices May Not Fully Account for Climate Risks

The instantiation of a carbon bubble in fossil fuel assets will ultimately depend on investor ignorance and bias against climate-response risks, presumably because companies haven’t quantified those risks for them. To the extent the latter condition is true, it represents an opportunity for companies seeking to capitalize on the boom in sustainable investing.

Eugene Fama was  named as the 2013 co-recipient of this year’s Nobel Prize in Economics for the Efficient Markets Hypothesis (EFM). Many doubters of Carbon Bubbles point to how the Internet allows average investors have access to most of the same information on this subject as Mr. Gore and his partners. Yet their are still sharp discontinuities: institutional investors and analysts, have the same resources to access even more information. Yet one of his co-recipients and EFM skeptic, Robert Shiller, said ““I just want to be realistic about the world we live in.” Indeed, as the rampant collusion in LIBOR has shown, collusive and shadow banking practices are worringly entrenched in the culture of marketmakers. From TABB Forum on LIBOR and money markets, which are indispensable to the flow of petrodollars:

At stake is the integrity of a market that affects the daily valuations of private and public money alike, from the $261 billion Sacramento-based California Public Employees’ Retirement System to the $237 billion Scottish Widows Investment Partnership in Edinburgh, from the $4.1 trillion BlackRock Inc. (BLK) in Manhattan, the world’s largest asset manager, to the $1.2 trillion Tokyo-based Government Pension Investment Fund, the biggest pension.

“This is a market that is far more amenable to collusive practices than it is to competitive practices,” said Andre Spicer, a professor at the Cass Business School in London, who is researching the behavior of traders.

The news about manmade climate change gets more dire every day. So in conclusion, as much as possible sustainable investors need to track their carbon exposure, consider shadow banking,  policy driven mandates on institutional investors, and contingencies that not all market participants have the ability to see the same information at the same time. Such lack of access to actionable data on carbon fuel price movement will create noise in market signals. Fiducaries and investors need to ensure they are properly diversified in not completely decarbonized in the event of rapid movement to equilibrium, that is the bursting of a bubble.

Screening For Green: Sustainability in The Fixed Income Marketplace

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In 2013 three companies become the first corporate Green bond issuers, Bank of America Merrill Lynch and Swedish property Group Vasakronan. All found solid demand and raised a combined total equivalent to around $2.6 billion. Market issuance in November increased the market size by 50%. Issuers and investors not traditionally interested in Green offerings are entering the marketplace thereby driving up demand. Proceeds from the bonds are used for projects aimed at curbing greenhouse gas emissions or adapting to a warmer climate, to sustainable agriculture in China.

Key thoughtpoints for Impact/SRI and Green bonds:

  • A slate of deals in November doubled the  total raised in 2013 to ~$10 billion
  • The Climate-related bond market stands at $346 billion vs, the ~$2.3 trillion in investment grade bond issuance in the first 3 quarters of 2013.
  • Universal standards and criteria are not in place for defining Green bonds; this market is currently just over $15 billion
  • A signal event for sustainable fixed income markets occired in 2013 where French power group EDF reported its record-breaking 1.4 billion euro ($1.9 billion) deal was broadly similar to its non-Green bond issuances
  • Usage of the instruments to finance nuclear is controversial among many established SRI investors
  • expectations that more will follow.

Even with all the above taken into consideration, these instruments only form a fraction of the multi-trillion dollar global bond market. Yet the entrance of issuers from the private sector marks an important expansion beyond the limited domain of development banks.

Interest among new buyers, corporate bond investors and others an inflection tipping point. While still a a still-niche sector, pricing has revealed consistent demand and enthusiasm for ethical investing which means essential benchmarks of liquidity are forming for the nascent market.

Critics have held that the number of governments cutting their subsidies for renewable energy projects would curtail high demand for Green bonds.  Evidently, even as subsidies wane, companies still want to use debt to finance their projects and accurate market assessments by issuers has delivered attractive pricing for many investors. As markets put more money behind Green bonds, Fund Balance sees a breakthrough for sustainable fixed income instruments that qualify as Socially Responsible Investing, or SRI, including but not limited to Green bonds.

In short, ethical investment in the fixed income domain is becoming ever more mainstream. As a result of the success of these issues, serious interest is being expressed from potential new corporate issuers in sectors such as utilities, telecoms and real estate indicating a breakout from SRI themed investors.

For example, 60 percent of an issue the French firm EDF issue was taken up by SRI investors, some, such as Jupiter Fund Management, which invested for the first time in a Green bond as part of EDF’s issue, were not concerned about the label attached to it. Societe Generale reports that investor demand has risen over the last 18 months and been growing since the first corporate SRI bond was successfully launched last October by Air Liquide.

In conclusion, the main theme in sustainable fixed income is that management teams  in a diversity of arenas increasingly place sustainability high on their priorities for long-term planning.  We recommend same in their planning as they look to the second half of the 2010’s.

The Carbon Markets, Policy, and Technological Innovations 

Physicist Jesse Henshaw observes its “not what you know but what your world is learning”. In the paper System Energy Assessment (SEA), Defining a Standard Measure of EROI for Energy Businesses as Whole Systemsco-authored with Carey King, and Jay Zarnikau, findings are presented that indicate a ” ~500% error in carbon and energy impact measures form not accounting for businesses working as whole working systems”.

The world’s carbon budget is almost certainly far tighter than international policymakers acknowledge and financial planners envision. And with this in mind well functioning, publicly supported carbon markets, cap and trade mechanisms, and carbon tax regimens are of tremendous importance in addressing the challenges of climate change. But behavioral changes and entire redefintions of economic growth and prosperity need be the objective for policy-making praxis and econometric fixities.

And more firms than many might think are preparing for a price on Carbon. The Huffington Post reports:

Exxon posts its assumption on its website. Company spokesman Alan Jeffers said the company is also operating under the assumption that the price will increase to $80 a ton by 2040.

“We think that will be the net impact of the various policies that various government’s around the world impose in efforts to curb CO2 emissions,” Jeffers told The Huffington Post. “The risk posed by co2 emission in the environment, raising temperatures, climate change, etc., are motivating governments to take action to put a price on carbon, to try to tackle that issue. We want our planning for that to be as accurate as possible.”

Meanwhile, two firms that we follow at Fund Balance, Hess (HES) and Statoil (STO), are leading the industry in their commitments to sustainability and carbon mitigation under the OGSS’s Global Reporting Initiative can be found here and here. Their reports can be seen here and here. At Fund Balance, while we strive to help partners decarbonize portfolios we also work to identify carbon firms addressing the challenges in bringing about determined yet appropriately measured transitions to a low carbon energy future.

Lastly, improving technology, declining costs, and increasing accessibility of clean energy have been quite ubiquitous in 2013.  Key developments:

  • Using thermal salts to keep producing power from solar at night,
  • Electric vehicles that can power buildings (Nissan’s groundbreaking ‘Vehicle-To-Building‘ technology)
  • Solar electricity hitting grid parity with coal.
  • Advancing renewable energy from ocean waves and harnessing ocean waves to produce fresh water.
  • Ultra-thin solar cells from the likes Alta Devices, a Silicon Valley solar manufacturer that are break ing efficiency records.
  • Cutting electricity bills with direct current power.
  • Innovative financing bringing clean energy to more people. In DC, the first ever property-assessed clean energy (PACE) project allows investments in efficiency and renewables to be repaid through a special tax levied on the property, which lowers the risk for owners. Crowdfunding for clean energy projects made major strides bringing decentralized renewable energy to more people — particularly the world’s poor — and Solar Mosaic is pioneering crowdfunding to pool community investments in solar in the United States.  And Washington, DC voted to bring in virtual net metering, which allows people to buy a portion of a larger solar or wind project, and then have their portion of the electricity sold or credited back to the grid on their behalf, reducing the bill.
More can be found on these developments here in a post from Think Progress.

Fund Balance Third Quarter 2013 Report

October 21 2013

FUND BALANCE Quarterly Report

Overview:

AT the close of 2012, some analysts saw the mix of retrenchment of regulatory programs in the EU and lack of a co-ordinated clean energy strategy in the US combined with China’s burgeoning carbon footprint as a gun to the head of Environmental, Social, Governance (ESG) and related (CSR, SRI) investment theses. Many saw it more as a water pistol. We were in the latter group.

In general and in context, Fund Balance sustainable investing advisory continued its strong market out-performance for 2013. While the Equilibrer broader mid to large cap market portfolio has essentially tracked the S&P’s ~22.4% YTD and 5.4% Q3 performance for 2013, the LED specific Leading The LED ETF/portfolio outperformed its peers as has the Here Comes The Sun solar based ETF/portfolio with returns of 43.3% and 267.3% for Q3 2013 respectively.

Important global and international developments merit brief discussion with three general developments of note.

Firstly, China is still enigmatic in terms of its role in the sustainability story. It has both helped drive price points down for solar power so as to allow for competitiveness all the while ramping up its coal consumption and continuing to generate headlines reporting local ecological collapses: entire cities shut down by pollution; whole stretches of rivers toxified beyond life-support thresholds and entire aquifers rendered unfit for human consumption. Hence rapid scale back of its coal consumption becomes even more critical as the World Health Organization announced its findings of definitive links between air pollution and cancer.

Secondly, United States based endeavors, particularly those based in our Western states, continue to surprise on the upside, whether via advances in solar storage, LED innovation, or other clean economy initiatives enacted by California, whose economic mass and dynamism compels neighbors and salesman to bring clean economy wares to its market.

Thirdly, even as the US has surpassed Russia as the world’s largest exporter of refined petroleum product thanks to shale gas and even as fracked natural gas diminishes coal based power generation, the reality of negative implications of a carbon bubble for traditional hydrocarbon marketers continue to sink into the thinking of the populace and fund managers alike. The IPCC in its 5th Assessment of Climate Change avers of the necessity of leaving 2/3 of known carbon reserves in the ground to secure our future. The Fund Balance view is that the risk of carbon dioxide driven climate change portends of a sub-prime like collapse of carbon-based asset values and such represents a significantly graver threat to intergenerational prosperity moving forward than US public debt and deficit spending.

Specific guidance for the solar power sector:

After severe buffeting by regulatory retrenchment and policymaker recalcitrance in 2012, our solar plays as well as those of our peers significantly outperformed the S&P 500 and the small cap weighted Russell 2000 (10.21% return for Q3) both on YTD and Q3 bases.

Solar power usage continues to expand its role in mainstream residential markets as well as commercial ones. Wal Mart for example now has almost twice as much capacity as second-place Costco. Wal-Mart is converting more sun into power than 38 U.S. states.

For market participants that took positions at the beginning of 2012, the question now is: to take profits or not? We recommend those interested in playing the psychology and cycles of the market take a hard look at realizing some gains by selling with an eye to build reserves for coming troughs. Those with long views should still consider some intra- and inter- asset class reallocations, by building positions in sub-sectors like solar storage, maintenance, and microgrid in combination with more early stage private ventures with an eye towards gaining exposure to high risk/reward stewardship. Volatility will continue to feature prominently in the solar equity market as solar power generation increasingly closes on parity with conventional generation on a $/megawatt basis.

In sum, we have no doubts on the long view, robust growth story for the solar sector and consider decisions about exposure a question of one’s investment time frame and goals. But now would be a good time to take some profits if so inclined.

Specific guidance for the LED power sector:

LEDs are lighting the way in Buenos Aires to Dubai to the shelves of Home Depot. Research from economists at Yale show that civilization and prosperity correlate with the amount of artificial light output. Indeed light rendered a 20th century of progress. The clean economics of LEDs portend well for a 21st century of sustainable, equitable, smart growth driven prosperity.

From a macro perspective the Dutch industrial giant Philips serves as good bellweather for the LED market. Salient facts for Philips at the end of the Q3 2013:

  • Philips soaring third-quarter earnings show its continuing leadership in the world’s LED market. It reported its Q3 sales revealing LED sales growth of 33% from a year ago and now representing 30% of Philips’ total US$2.85 billion lighting sales.

  • The company now offers US consumers LEDs for US$5 at the Home Depot, as well as in partnerships with large utilities companies. Further, while all Philips’ divisions reported greater operating profits, the lighting unit saw the biggest improvement, which it’s management crediting strong LED sales and lower restructuring charges.

  • Philips is the exclusive supplier to the Dubai Municipality’s buildings with its intelligent LED solutions. They claim their lighting solutions are saving 50% in electricity usage. Dubai for its part states that its mission is to become the most sustainable city in the world.

Other key factors:

  • Thousands of municipalities have adopted LED streetlighting and millions of households have switched on LED systems and fixtures.

  • LED generated luminance is not only brighter and more efficient but saves citizens money in the long-term making LEDs are a common-sense purchase in economically challenging time.

Fund Balance ETFs/Portfolios YTD and Q3 Results:

1. Here Comes The Sun, the fund balance solar portfolio:

YTD: 267.3%

Q3: 62%

On a 5 point scale for volatility: 5 => maximal volatility

On a 5 pt scale for valuation: 5 => historically high valuation relative to other sectors.Note: Reversion to mean historic broader market valuation levels of 3 coupled with price decreases, if only for a few quarters, should not be unexpected.

 

2. Leading The LED

YTD: 43.3%

Q3: -6.7%

On a five point scale for volatility: 3

5 pt scale for valuation: 3

3. Equilbrer

YTD: 22.1%

Q3: 10.0%

On a five point scale for volatility: 3

5 pt scale for valuation: 3

PE ratio: 20.39

Equilbrer has the potential, pending close of year and backtesting results, of serving a good fit for a SRI proxy for the S&P. For example, consider its PE ratio of 20.39, compared to the those of the S&P:

● S&P 500 TTM (trailing twelve month average) P/E ratio = 17.85 (Equilibrer TTM comparable will not be available until Jan 2014)

  • Mean 15.50

  • Median 14.51

  • Min 5.31(Dec. 1970/Max 123.7 (2009)

Equilibrer YTD performance:

Conclusion

Q4 2013 will require preparation for a measured rebalancing from broad, mid- and large-cap concerns towards a focused, sub-sector driven approach with a long view, looking at funds and early stage ventures with acceptably low levels of technology risk. Further, heightened attention will be paid to the private equity asset class as we see it poised to outperform over the next 5 years.

Investments in energy efficiency alone can create 1.5 million jobs in America by 2030 — so at Fund Balance we see participating in building the clean economy as an important part of good corporate citizenship as well. We will seek out for opportunities in subsectors in the solar market in terms of storage such as Solana and automated systems for cleaning solar panels like Serbot and QBotix, both of which are not publically traded.

Leaders of 70 the largest pension funds in the U.S. are calling on fossil fuel companies to detail their management plans the switch to cleaner energy. These concern is that their portfolio companies’ profitability in the future will slow and disappear as the world shifts away from oil and coal and towards clean energy. These 70 funds are asking 45 of the world’s largest oil, gas, coal and electric companies to conduct detailed studies of how policies to curb climate change will impact the fossil fuel business.

The above is but one reason why the Fund Balance outlook for Outlook for Q4 2013 and into 2014 is that clean energy is will one of the main high return sectors for the coming decade. With this is mind we will continue to bring private equity further to the fore in pursuit of our mission to build wealth by investing and contributing to sustainable economics and culture. Continue to work with solar industry leaders at the individual level such as Jigar Shah and at the institutional level such as The Credit Suisse Impact Investment Group amongst others, to identify opportunities in the private equity asset class. In the public equity markets plan to undertake coverage of a wider and deeper range  to sustainability leaders with a such as Philips, which we have added to Equilibrer.

We conclude with an excerpt from Paul Krugman’s review of William Nordhaus’s The Climate Casino: Risk, Uncertainty, and Economics for a Warming World:

 

So the future is uncertain, a reality acknowledged in the title of Nordhaus’s new book, The Climate Casino: Risk, Uncertainty, and Economics for a Warming World. Yet decisions must be made taking the future—and sometimes the very long-term future—into account. This is true when it comes to exhaustible resources, where every barrel of oil we burn today is a barrel that won’t be available for future generations. It is all the more true for global warming, where every ton of carbon dioxide we emit today will remain in the atmosphere, changing the world’s climate, for generations to come. And as Nordhaus emphasizes, although perhaps not as strongly as some would like, when it comes to climate change uncertainty strengthens, not weakens, the case for action now.