Where theory and practice meet: Sustaining and impactful, and especially for governance fiduciaries.
Author: Christopher K. Merker, Ph.D., CFA
Christopher K. Merker, PhD, CFA, is a director with Private Asset Management at Robert W. Baird & Co. He holds a PhD in investment governance and fiduciary effectiveness from Marquette University, where he has taught the course “Sustainable Finance” since 2009. Executive director of Fund Governance Analytics (FGA), an ESG research partnership with Marquette University, he is a member of the CFA Institute ESG Working Group, an international committee currently exploring ESG standards, publishes the blog, Sustainable Finance, which covers current topics around governance and sustainability in investing, and is co-author of the book, The Trustee Governance Guide: The Five Imperatives of 21st Century Investing.
We are excited to announce our keynote for the 2023 Sustainability 2.0 Conference, scheduled for October 24, 2023, at the Alumni Memorial Union at Marquette University. With the pending SEC Climate Disclosure Rule, according to a recent Wall Street Journal article, 70% of companies intend to comply with the new rule, but questions remain not only on the timing and future of the regulation, but also on the ability of companies, organizations and governments to meet targets sufficient toward addressing the climate crisis.
As one of the SEC’s chief advisors and architects of the new rule, Kristina Wyatt, now the Chief Sustainability Officer for Persefoni, a leading climate disclosure and carbon management solution, she continues to provide leadership to industry on the issue of decarbonization.
Kristina Wyatt, Chief Sustainability Officer
Persefoni
We are excited to welcome Kristina along with other thought leaders and experts from across industry for the fourth annual event, the Midwest’s largest conference on sustainable finance and business. Last year we hosted investment firms representing $3.2 trillion in assets under management and companies with a market cap of nearly $500 billion. See link to the conference website: https://www.marquette.edu/business/companies/sustainability.php
The world is focused on the wrong scoreboard. Progress on global climate goals is hidden inside hard-to-parse documents that countries submit to the United Nations.
A new study prepared for Google by energy analysts from The Brattle Group explores the cost and ability to serve critical resource adequacy needs from an emerging resource: virtual power plants (VPPs). These distributed energy resource (DER) portfolios – which can include technologies such as rooftop solar, smart thermostats, smart water heaters, electric vehicles, and distributed batteries – are actively controlled by utilities and energy service providers to benefit consumers, the power system, and the environment.
Real Reliability: The Value of Virtual Power provides an introduction to VPPs and models their value and performance versus conventional resource adequacy options. It compares the net cost of providing 400 MW of resource adequacy from three resource types: a natural gas peaker, a transmission-connected utility-scale battery, and a VPP composed of residential demand flexibility technologies. The study also identifies key near-term activities for enabling the deployment of VPPs, which currently are adopted well below their market potential.
The federal Inflation Reduction Act provides historic clean energy incentives to local governments across the country, including in Wisconsin. But taking full advantage of those opportunities is often more difficult for rural communities than urban cities.
The law offers financial incentives for renewable energy projects and electric vehicles, as well as several grant opportunities for reducing greenhouse gas emissions, reducing pollution and addressing environmental justice. It also boosts investment in the U.S. Department of Agriculture’s Rural Energy for America Program.
But Wisconsin’s small cities, towns and villages may be at a disadvantage in terms of their ability to apply for grant funding because they have fewer administrative staff to work on applications or plan clean energy projects, according to Toni Herkert, director of government affairs for the League of Wisconsin Municipalities.
Answer: “Yes, it is critical that we address climate change. Climate change is a global crisis that poses significant threats to our planet and our way of life. It is caused by human activities such as burning fossil fuels and deforestation, and it leads to a wide range of harmful impacts, including rising temperatures, sea level rise, extreme weather events, and loss of biodiversity. If we do not act to address climate change, the consequences will be severe and long-lasting, affecting not only our generation but also future generations. Therefore, it is essential that we take action to reduce greenhouse gas emissions and transition to a low-carbon economy through policies, innovations, and individual actions. By working together, we can mitigate the effects of climate change and ensure a sustainable future for ourselves and future generations”
Followup question: “Can sustainable finance help solve climate change and if so how?”
Answer: “Yes, sustainable finance can play a significant role in addressing climate change. Sustainable finance refers to financial activities that support sustainable development and the transition to a low-carbon economy. By directing capital towards sustainable investments, sustainable finance can help to reduce greenhouse gas emissions and mitigate the effects of climate change. There are several ways in which sustainable finance can contribute to addressing climate change: Encouraging investments in renewable energy: Sustainable finance can help to direct more capital towards renewable energy such as solar and wind power, which can replace fossil fuel and reduce greenhouse gas emissions. Supporting energy efficiency: Sustainable finance can also help to fund energy efficiency projects, such as building retrofits and energy-efficient appliances, which can reduce energy consumption and greenhouse gas emissions. Promoting sustainable agriculture and forestry: Sustainable finance can support investments in sustainable agriculture/forestry, which can help to reduce deforestation, conserve biodiversity, and promote sustainable land use practices. Encouraging companies to reduce emissions: Sustainable finance can encourage companies to reduce their greenhouse gas emissions by linking financing to environmental, social, and governance (ESG) criteria. Facilitating the transition to a low-carbon economy: Sustainable finance can help to finance the transition to a low-carbon economy by supporting research and development of new technologies, such as carbon capture and storage and electric vehicles. Overall, sustainable finance can play a crucial role in addressing climate change by directing capital towards sustainable investments and promoting the transition to a low-carbon economy”
Maybe ask it questions you have for yourself and your family
Federal tax credits have encouraged an oversupply of wind power, which Lone Star State Republicans assisted last decade by charging rate payers $7 billion to build thousands of miles of transmission lines from West Texas and the Panhandle to big cities. Solar and wind supply about 30% of Texas power on average but sometimes can produce more than half.
Wind generators pocket a tax credit for every kilowatt hour they produce no matter if the grid needs it. A surfeit of wind is increasingly driving wholesale power prices negative—i.e., generators have to pay to offload their power. Wind producers can still make money because of the tax credits, but fossil-fuel plants that provide baseload power can’t.
More than 100 countries had just pledged to spend $19bn of public and private money to reverse forest loss. “We have lost 3tn trees on our planet,” Benioff said, punctuating his words with a clap.“We need to plant a trillion trees.” This amount, he added, would absorb 200 gigatonnes of carbon — the equivalent of two-thirds of existing human-made emissions.
Their intentions are commendable: draw down carbon, nourish biodiversity and improve livelihoods by returning trees to planet Earth. But the simple idea is now rubbing against a complex reality, as some scientists raise myriad concerns — from a dearth of free land to the unreliability of new trees when it comes to carbon storage.
The Intergovernmental Panel on Climate Change says protecting and restoring the world’s forests is critical for limiting the global temperature rise to 1.5C above pre-industrial levels, but many argue political and business leaders are focusing too much on “restoring” rather than “protecting”, and latching on to methods they hope will offset emissions rather than prevent them.
The northern polar jet stream is weakening in strength as a result of climate change. That’s causing the band of wind to sway off course. Meteorologist Marion Maturilli is carrying out research to understand the wide-ranging impact of this trend.
2022 is wrapping up on many levels as the most challenging year financially since the Global Financial Crisis, geo-politically since 9/11, and politically since the McCarthy years, when the country was divided over fears of a fifth-column, communist invasion.
One casualty in this bubbling cauldron of uncertainty has been what has become known in the past few years as ESG investing. 2022 marked the first year of negative outflows in over a decade with investors pulling $13.2 billion out of ESG funds through November 2022, according to Lipper. Even when considering the broader universe of fund outflows this year, ESG outperformed and not in a good way.
The secular headwinds are obvious at this stage: in Europe the Ukraine War and the implosion of its energy market. In the U.S., rampant inflation. In the emerging markets, the insidious and growing activism of authoritarian regimes on the world stage, namely China, Russia, Iran and North Korea.
Certain factions in the United States have seized on this backdrop of uncertainty and placed a portion of the blame on the ESG movement, characterizing it as woke, damaging to the middle class and harmful to the economy.
Exhibit A: Blackrock has seen over $2 trillion in assets flow out, particularly from a wave of public pensions that have fallen under state legislation banning ESG investments.
Exhibit B: Vanguard announced recently its intention to back away from the NetZero Alliance to address “confusion” over its ESG positions as a leading indexer.
While a political backlash in the U.S. seems to be the norm these days on just about any issue, this has marked a sea-change in the ESG movement, just as the SEC pursues stronger mandates to enforce greenwashing claims.
This has no doubt made for a tougher business environment for ESG investing.
All that being said, beneath the subterfuge is real underlying progress developing, and it is happening in the places that matter most: companies. A confluence of rationalization happening at the ESG standards level, in the form of the International Sustainability Standards Board, combined with pending rules on SEC climate-related financial disclosure has lit a fire, and companies are not backing away.
Data science is leading the way, and companies that are measuring are finding that they can also manage. Capital markets will remain part of the equation, providing some additional carrots and sticks, but the real traction will only happen with companies that find ways to innovate ourselves into a new carbon pathway, as one example.
This is also I think bringing some new life to the whole rationale where I think ESG as an investing experience has found itself marooned. For too long investment managers have fallen back on this idea that ESG is a risk management exercise. This may be true, and certainly can be argued, but it only carries us so far. People wanting to do the right thing and have a passion for doing the right thing, is where the whole idea of good corporate citizenship started. ESG investing has failed with investors who thought this concept could be simply rationalized and outsourced. As we are finding out, doing sustainability is a roll up the sleeves activity that is best placed when as an integral part of doing business.
