Category Archives: Nature

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?

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.

JEB! & the GOP Try to Triangulate Papal Encyclical on Climate

By Walter Borden

Recently the standard taking point for climate science deniers regarding manmade climate disruption has been ‘I can’t say, I am not a scientist’. This no doubt thoroughly focus-grouped response is the equivalent of saying ‘I can’t say if smoking causes cancer, because I am not a scientist’. Yet here is Pope Francis, who also happens to have scientific training and work experience in chemistry, preparing to release an encyclical saying that climate change is real, mostly manmade, will primarily hurt the world’s poor, and represents a moral obligation for Catholics to take steps to combat.

Source: New York Times and The Pew Foundation
Source: New York Times and The Pew Foundation

Jeb Bush, showing a remarkable ignorance and/or naïveté of world history and the history of science pronounced he was skeptical of the pope expressing his views:

But I think religion ought to be about making us better as people and less about things that end up getting in the political realm.

The papacy of course has been involved in politics, sometimes for better and some for worse, since the founding of the church. Certainly many Catholics reference the papal edicts regarding abortion and marriage. And many great scientific discoveries and proofs come from monks and those who considered themselves Christian, such as Gregor Mendel, Pope John XXICopernicus, Galileo, Kepler, Newton and Boyle.

So here again, Big Oil and its politicians offer expediency and “truthiness” rather than logic, and sound science. All the while talking of what’s best for future generations and smart policy. Will this tactic play with voters? Maybe not as much as some backers of the GOP think. From the May 17th digital edition of the New York Times:

About 69 percent of adults say that global warming is either a “very serious” or “somewhat serious” problem, according to a new Pew Research Center Poll, up from 63 percent in 2010. The level of concern has still not returned to that of a decade ago; in 2006, 79 percent of adults called global warming serious….One small exception on climate change is that Catholic Republicans are slightly more concerned about climate change than non-Catholic Republicans, although the gap is small: Most Catholic Republicans are also skeptical that human activity is heating the planet.

 

 

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.

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.

A False Choice: Either Jobs or Clean Water, Air, and Healthy Forests

Robert F. Kennedy presents a strong case that King Coal is by and large criminal given the massive amounts of regulatory violations and thus damage to local water, air, and geologic resources it wrecks. To this all one must add coal mining concerns’ repeated and ongoing attempts to mislead and falsely report low to no violations of numerous federal and state laws.

As usual several commenters complain about loss of jobs caused by efforts to restrict and ultimately ban strip-mining. Oh, and subsidies for renewable energy are bad. These arguments are nothing more than a bunch of hot, soot-filled air.

Most mining has been automated over the last decade or so — by the coal mining concerns (which receive tax subsidies and other benefits themselves). So we’re talking about very few jobs — that King Coal would happily eliminate if it could. They should be required to pay for re-eduction/re-location for miners as opposed to plying the line that its a choice between jobs and clean water, air, and intact forests. Its not, at all.

As Paul Krugman wrote the war on coal mining jobs was fought by the mining firms themselves:

“There used to be a lot of coal miners, but not any more — strip mines and machinery in general have allowed us to produce more coal with very few miners. 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.”

Here is the key graph in the Paul Krugman post cited above:

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

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 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

Screen Shot 2014-01-01 at 10.46.39 AM

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.

A Clean Slate for 2013: Rejecting the Politics of Plutocracy, Singularity, and Pollution

By Walter Borden

To address the long term unemployment crisis in 2013, the U.S. must increase investment in its clean economy and infrastructure. U.S. citizens own the world’s most robust non-profit, namely the United States Government. The U.S. can act now for a reason that trumps profit: the General Welfare.  Renewable energy, infrastructure, and pollution remediation increase labor demand and thus, long term, sustainable employment. By contrast, the dirty energy sector primarily provides temporary and short term jobs. Fossil fuels,  automation, and de-unionization have converged to aggressively drive down the middle class share of profits generated by our national economy. The outlook for labor is further complicated by rapid uptake of capital-biased technology: machine intelligence that further shifts profit away from labor by replacing its participation in the economy with robots.

The TAKRAF RB293 is a giant bucket-wheel excavator used in coal mining. (Click to Enlarge)
The TAKRAF RB293 is a giant bucket-wheel excavator used in coal mining. (Click to Enlarge)

Dirty energy outputs unsustainable amounts of seemingly cheap energy and goods. Coal extractionists value coal at low domestic prices to skip large royalty payouts when mining federal land all the while fetching much higher prices on international markets. The inevitable societal costs of damaged environments and cleaning up pollution reveals this bargain to be Faustian and, as such, provides a diminishing benefit.  Further, environmental protections and clean energy factor into job growth with wages and salaries that accrue to the economy as opposed to rentier payments that primarily fill Swiss bank accounts.

Restraining dirty energy shifts capital to labor thereby counterbalancing the decadal trend of asymmetric capital accumulation to a shrinking few. Corporate profits continue to surge to multi-year record highs. Yet, as a share of GDP, wages have declined over the past thirty years. This has become in its own way a kind of hidden inflation. Clean energy policies address this imbalance with greater quantities of quality jobs.

Currently in the U.S., our most pressing problem is one of high, long term unemployment. Deficit and debt to GDP ratios matter; yet, the primary driver of deficits is a lack of employment growth. History and empirical evidence show how these ratios, as well incomes inequalities, quickly come down as revenues grow due to greater employment at living wages. Further, industry sits on record hoards of capital, yet chooses not to invest. Now is the time to increase public sector spending to create low impact demand. Clean energy is an optimal starting point for increasing demand per capita in sectors that are sustainable and regenerative.

Resource Rents North America vs. East Asia and Pacific (Click to Enlarge)
Resource Rents North America vs. East Asia and Pacific (Click to Enlarge)

The moral dimensions are plain and demand constant consideration. Most people in most societies feel that extreme inequality is problematic and favor an equitable distribution of the benefits and burdens of their society. Psychologist Lawrence Kohlberg‘s proposed a stage of moral reasoning which considers life to be more valuable than  property rights or profits, and that this is a more adequate moral position for making policies to achieve distributive  justice. Immanuel Kant held  that morality presents itself as an categorical imperative.  Aristotle observed, “It is in justice that the ordering of society is centered.”

A Clean, Compassionate Economy Is A Path to Sustainable Prosperity 

Alleviating contemporary unemployment and ensuring that its does not become a long term crisis requires rejection of  classical economic conventions, namely, that labor is only a cost to be mercilessly driven down and that search frictions are a hard, growing reality: i.e. in the real world, it’s expensive to relocate and retrain.  For the long term unemployed, it is next to impossible.Yet, social innovation and impact investing policies can restore balance.

Some argue that the subsidies required to launch a green economy are too steep. But, that assertion has little evidentiary support and fails a common sense test as well. In reality, clean energy drives labor demand via its need for large, scaled up amounts of infrastructure, operation, remediation and, of course, R&D.

Jobs fell much further and faster during the Great Recession than in the previous 2 (marked by the lines to the left of the zero point on the x-axis) yet job growth in the current recovery is similar to job growth by this point in the previous 2 recoveries. (Click To Enlarge)
Jobs fell much further and faster during the Great Recession than in the previous 2 (marked by the lines to the left of the zero point on the x-axis) yet job growth in the current recovery is similar to job growth by this point in the previous 2 recoveries. (Click To Enlarge)

Reduced labor costs are not resulting in shared prosperity. Does the private sector truly want a continued collapse of labor prices in the U.S.?  Labor is a cost in classical economic thinking. Lower costs mean cheaper goods and services; a greater general welfare in principal – as long as producers do not loose their incentive to pass on cost efficiencies to consumers. Yet, in an era of record corporate profits, employment growth has steeply decelerated. Core CPI has been low, but when stagnant wages are considered along with higher education and healthcare costs, the benefits of lower CPI seem rather ephemeral.

Here again, a green economy points a way forward. A recent MIT carbon tax study lays out scenarios where a carbon tax could either be revenue neutral or partially so when the excess revenue is used to reduce debt or build infrastructure. In addition to raising revenue, it would reduce pollution by incentivizing the transportation industry to generate more efficient products.  This is an instance where the tax code can help create more progressive outcomes, and in this era of ever rising inequality, which recent data suggests is increasingly decoupled from recoveries, can address that inequality. Restructuring the code needs to be a major, bipartisan goal.

The Private Sector Isn’t Using Its Multi- Year Trended Record Profits for Shared Prosperity

Continue reading A Clean Slate for 2013: Rejecting the Politics of Plutocracy, Singularity, and Pollution

Annie Lennox to Narrate Documentary centered around Haitian Artist Frankétienne, 2009 Nobel Prize candidate.

***FOR IMMEDIATE RELEASE***

 Annie Lennox to Narrate Documentary centered around

Haitian Artist Frankétienne, 2009 Nobel Prize candidate.

ScreenHunter_01 Jan. 11 00.25
Click image above to donate through IndieGogo

NEW YORK, N.Y.  The New York based Haitian Cultural Foundation is proud to announce that internationally celebrated recording artist and activist ANNIE LENNOX will serve as principal narrator for the powerful, moving, and inspiring documentary film In the Eye of the Spiral.

The film, now raising money on Indiegogo, features seven of Haiti’s most prominent living artists, among whom 2009 Nobel Prize candidate Frankétienne, and proposes a truly new narrative for Haiti – a long-embattled country steeped in vitality and built in no small part on the courageousness of the creative spirit.

Continue reading Annie Lennox to Narrate Documentary centered around Haitian Artist Frankétienne, 2009 Nobel Prize candidate.

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Haiti: Culture, Sustainability & Social Enterprise – “In the Eye of the Spiral” Preview Screening June 14th

Fund Balance is pleased to present this event as part of of our ongoing demonstration that culture, sustainability and social enterprise provide a better organizing principle than predatory debt finance and unrestricted globalization.

In the Eye of the Spiral

Private Preview Screening

Thursday June 14, 6PM-8PM

@ The Olivia, A Stonehenge Property

315 West 33rd Street (between 8th & 9th Ave.)

COCKTAIL RECEPTION • STORYTELLING WITH SPECIAL GUESTS • DANCE
BY PENIEL GUERRIER • SCREENING • PANEL DISCUSSION

 

In the Eye of the Spiral is a documentary film project featuring seven of Haiti’s most prominent living artists.Taking as its point of departure the notion of dynamic chaos incarnated by the incomparable writer-painter-philosopher Frankétienne, this film proposes anew narrative for the embattled Haitian Republic – a narrative steeped in the vitality, the mysticism and, ultimately, the hopefulness of artistic creation.

We sincerely hope you will join in our efforts to finish this film and to bring an amazing community of artists and visionaries to the attention of the world. It is our aim to raise $250,000 to complete the documentary. We look to you for help in reaching this goal.

Panel Discussion: Raynald Leconte (Exec Producer and Co-Director In the Eye of the Spiral), Michael Stern (Creative Director, Stonehenge), Eve Blouin (Co-Director and writer In the Eye of the Spiral), Linda Mellon (Friends of FOKAL), Leland Lehman (Partner, Fund Balance)

Gratitude to FOKAL (OSI Soros / Haiti) for their generous support.

With dignity, profundity and clear sighted visionary power
and wisdom, the Haitian artists we encounter in In the Eye of the Spiral uphold the cultural, spiritual identity of an incredible country
.”
– Annie Lennox

Please RSVP to raynald@haitianculturalfoundation.org 

Annie Lennox has confirmed to be the Principal Narrator for In the Eye of the Spiral film.

Linda Saetre is coming onboard as Executive Producer. Her credits include: (March of the Penguins, A Jihad for Love, The Beauty Academy of Kabul, Tarnation)

For more info visit www.haitianculturalfoundation.org

 

Sponsored by Stonehenge, the Manhattan-based real estate company with 2,500+ apts in their luxury rental buildings.

Learn more
at www.StonehengeNYC.com

Press Release:

Screening to Preview Acclaimed Haitian Documentary

“In the Eye of the Spiral” Previews Thursday Evening

NEW YORK, N.Y.  (June 11, 2012) The Haitian Cultural Foundation will host a special preview of the powerful, moving and inspiring documentary film In the Eye of the Spiral Thursday night at The Olivia – a Stonehenge Property – allowing viewers a rare opportunity to dialogue with the creative team after watching the trailer.

The captivating film, which features seven of Haiti’s most prominent living artists proposes a new narrative for embattled Haiti – a country steeped in vitality and mysticism and the video ultimately seeks to provide hopefulness for a country built upon great artistry and talent.

“If the film is only half as brilliant as the trailer, Haitian art will finally find its seat at the international table of culture where it belongs,” said Jim Luce in The Huffington Post. The nine-minute trailer has also received interest from Rolling Stone. The movie will feature Annie Lennox as the Principal Narrator.

Featured in the film is the incomparable writer, painter and philosopher Franketienne, who was a candidate for the Nobel Prize for Literature in 2009.

Five UN Ambassadors have already RSVP’d to the event as well as Executive Producer Linda Saetre (whose work includes March of the Penguins, A Jihad for Love and A Beauty Academy of Kabul). In addition to the screening, the evening includes a cocktail reception, storytelling with the guests, a dance by Peniel Guerrier and a panel discussion.

Raynald Leconte, CEO and Chairman of the Haitian Cultural Foundation is serving as Executive Producer and Co-Director of the Film. He brings over 20 years of experience in media and technology to the project, which has garnered significant support from Art Basel Miami and FOKAL (OSI Soros/Haiti).

For more information, please visit www.haitianculturalfoundation.org

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Green Lighting Growth: Climate Patriot Bonds and Carbon Taxes

By Walter Borden

   Green Bonds, Carbon Taxes, and Market Failures

THE gathering dangers of global warming for life necessitate that humanity collapse its dependency on fossil fuel energy (FFE).  Ecological fiduciary responsibility requires shifting balance from political restraint to action. The challenges of managing a drawdown of FFE’s in concert with economic security, while significant, are often exaggerated. Recent research and analysis show that oil and coal-fired power plants exact pollution damages larger than the economic value they add. For example, accounting for the gross external damages (GED) from coal would add ~17.8¢ per kilowatt-hour (kWh) of electricity generated.  In 2012, German utilities will obtain rooftop solar on long-term contracts for ~23¢/kWh.  Large projects will receive just 18.7¢/kWh.  This makes it very likely that solar electricity will be cheaper than that from coal by late 2013 in Germany.  And as a result of California’s clean air bill A.B. 32 it will not be far behind. It is clear that GED considerations further strengthen the economic argument for decarbonizing our economy and that the trend of lower cost cleaner energy is accelerating. This can be contrasted with growing purchase and societal costs, often going unpaid, of FFEs.

What would a program similar to the Germany’s do for market and external costs in the U.S. market? More abundant sunshine in the many areas of the US (29% in Minneapolis and up to 70% in Los Angeles) makes parity with Germany easily attainable.  Americans could buy solar energy on long-term contract fors 18.6 ¢/kWh in Minneapolis and just 15.4 ¢/kWh in Los Angeles, taking into account only current subsidies.  Factor in the federal 30% solar tax credit, and solar could be had for 14.3¢/kWh in Minneapolis and 11.8 ¢/kWh in Los Angeles.

Impediments remain to growing solar as percentage of US energy sources. For example GEDs and Energy Return on Energy Invested (EROEI) of solar modules are different. Solar cells are built in Europe with its mix of electricity generation of nuclear, wind and other sources and must be compared to building  solar cells in China, which has mostly coal-generated electricity and higher GEDs.  A more robust body of research for Life Cycle Analyses (LCA) of solar plants is needed  as they are increasingly built at scale.

Solar Array Based on the Fibonacci Sequence. Public Domain.

But, what about financing and scaling across the US? The existential   challenges of deploying renewable energy (RE) sources to address global warming can be met like those of the Great Depression, World War II, and space exploration:  21st century versions of War Bonds and Patriot Taxes integrated with coherent public-private partnerships to develop RE sources and infrastructure. Two of the world’s largest economies in Germany and California are leading the way. Yet fossil fuel marketers still dominate the debate contending that higher (FFE) prices hurt the public economy and that renewables are impractical despite the evidence to the contrary.

Ambitious politicians assure the public they can control the cost of energy and low energy prices. They argue that there is no need or, indeed, no substantial benefit from clean energy investment subsidies but support  ~12x more subsidies for FFE over RE . Meanwhile, public investment in RE projects that benefit the economy and ecology are to be found everywhere, and financial, technological, and policy innovations instantiate sustainable growth. Both Germany and California are ahead of schedule for supply from their RE investments. Yet Germany is planning to cut its subsidies via its Feed-In-Tariff (FIT) while RE plants in California come online. So more hard work to implement policy to accelerate deployment and remove market barriers lies ahead. Continue reading Green Lighting Growth: Climate Patriot Bonds and Carbon Taxes