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ESG Focus: The Little Big Things – 03-10-2023

ESG Focus | Oct 03 2023

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

ESG Focus: The Little Big Things – 03-10-2023

This edition zooms in on the latest news in global decarbonisation, in particular, the most recent IEA forecasts (one being for investment of US$4.5trn a year) and their implications; as well as the global march of ESG shortsellers; peak fossil fuel forecasts; forecasts for growth in enabling and cost-reduction technology for renewables; and wind and solar developments.

IEA Forecasts Tripling Of Renewables

The International Energy Agency’s (IEA) forecasts that global installed renewables capacity will need to triple to 11,000 gigawatts (at a cost of -US$4.5trn a year) in order to meet a Net Zero trajectories and says the share of renewables in electricity generation will hit 60% of electricity generation by 2030.

Morgan Stanley forecasts 7256GW of renewables will be installed by 2030, suggesting a -34% shortfall on IEA forecasts given the current rate of developments, permitting, mineral supply and labour constraints.

In June, China advised non-fossil-fuel energy sources now exceeded 50% of its total installed electricity generation capacity, according to the State media agency, two years ahead of its 2025 target.

China’s installed generation capacity was 2565.05 gigawatts. A doubling to more than 5000GW appears to be attainable, and that alone would account for nearly half the IEA forecast, and about two thirds of Morgan Stanley’s forecast.

But Reuters observes inconsistent use of resources has meant China’s energy usage remains weighted to fossil fuels, particularly coal, noting 56.2% of total energy consumption last year stemmed from coal, while renewables, including nuclear energy, accounted for 25.9%.

So it seems installing renewables is not quite the same as using them. But when the switch does flick on – what then?

ESG Stocks Overbought?

US$4.5trn a year is a lot of money so someone is obviously going to make money in this depressed market.

It might explain the huge run in ESG stocks and their recent fall after many conjectured that ESG stocks were, and remain, overbought.

Bloomberg advises hedge fund managers are piling into short positions in ESG stocks, primarily scanning for low hanging fruit like bogus green claims and covid-stimulus-inflated valuations.

Bloomberg interviews several fund managers that cite bloated prices, observing that a lot of capital is chasing ESG ideas in a market that lacks quality stock.

Fund managers say climate stimulus is also feeding an asset bubble, which is keeping many poor companies afloat. 

So, it appears possible that after the short-seller pruning is finished, the market may be set to enjoy another influx of capital (US$4.5trn a year if the IEA is to believed) into the stronger companies that survive the purge.

Meanwhile, Morningstar observes at least one climate category is getting more than its fair share – climate transition funds, which support heavy emitters, supposedly with the aim of cleaning up their emissions act.

Bloomberg suggests this could suggest political backlash against ESG in the US.

I wonder if the short sellers will take aim there? If they do, they will be weighing up against some Wall Street titans who are increasingly backing fossil fuels, including Goldman Sach and Blackrock.

BlackRock has advised there will be no energy transition unless tech can make it cost competitive (particularly wind), according to Oil Price.

This may support my theory that the next wave of investment will be in enabling technology – one of the main destinations for those trillions – particularly given installed renewables capacity is forecast to hit 50% by 2025, much of which, as noted above, is not being used.

Allianz has a few thoughts on this below.

Peak Fossil Fuel By End Of Decade

The IEA also forecasts in its Net Zero map total energy supply will be nearly -10% lower in 2030 than in 2022, which is sobering, and predicts total demand for fossil fuels will fall -25%, leading Morgan Stanley to surmise this implies no new long-lead time oil and gas projects, coal mines, mine extensions or unabated coal plants should be developed if targets are to be reached.

In particular, any gains in fossil fuels are forecast to come from coal and oil, while natural gas is forecast to decline (previous forecasts from various sources had forecast the opposite).

So based on the forecasts above, and China’s progress, it would appear something is likely to crack between now and then.

Morgan Stanley addresses speculation the world will reach peak fossil fuel demand by the end of the decade and concurs in its paper titled Global Energy Transition: Keeping Pace With The Green Scene (September).

Its research suggests oil demand will peak at 105m barrels by 2030 but oil supply will peak mid decade, assuming capital expenditure stays at current levels.

The analyst says this will lead to global oil supply rolling over around 2024, and then declining sharply thereafter.

Rapid Decline In Clean Energy Equipment Costs

Morgan Stanley is observing many signs suggesting a rapid fall in clean energy equipment stocks.

The analyst says the pace of innovation, manufacturing scaling and, in some cases, government support, are all resulting in lower equipment costs.

But it says this is likely to be offset, or possibly more than offset in some instances, by rising labour costs. 

Morgan Stanley believes developers of clean energy solutions for customers are the primary beneficiaries of this rapid cost decline (and all those trillions), rather than retailers or consumers.

Allianz Highlights Wind Opportunities

Speaking of clean energy equipment costs, previously we have spoken about cost blowouts in wind turbine projects and the possible rise of solar and transmission technology as a long-term alternative.

Allianz provides its thoughts as an insurer on the subject in a report titled A Turning Point For Offshore Wind.

The insurance company advises damage to cables is the top cause of insurance claims, followed by turbine failure, while spiralling costs (supply chain bottlenecks, inflation and rates) have halted many major wind projects.

Allianz also observes speed of build-out is creating pressure on materials and supply chains, port infrastructure and available construction and maintenance vessels. 

Bigger turbines and new technology are also driving bigger exposures for insurers which need to be managed.

Biodiversity issues are also rising for wind power, says Allianz:

“Navigating biodiversity issues in coastal communities will also become more important as demand for ocean space is set to increase fivefold by 2050”.

The solution? Allianz suggests insurers and developers need to work more closely to manage these risks.

In particularly, the insurer highlights investment is needed in tech innovation, risk trends and loss patterns for the industry. 

Allianz points to offshore logistics drones for maintenance and repair of turbines, floating wind technologies, specialist maintenance vessels, energy islands (which share power between grids and nations – think transmission) and multi-purpose wind farms that produce green hydrogen or house battery storage facilities.

The report considers these areas to be strong growth prospects – perhaps somewhere for all those trillions to go?

China Overtakes Europe

Meanwhile, China has overtaken Europe as the world’s biggest wind market, observes Allianz, with half of the world’s offshore wind installation in 2023 expected to be in the country.

All up, more than 99% of the total global offshore wind installation is in Europe and the Asia Pacific, and Allianz expects wind will play a big role in Asia as countries attempt to decarbonise.

BloombergNEF predicts annual European onshore installations are forecast to rise 25% by 2030, so there’s life in the old girl yet.


-Speaking of turbine innovation, the Swedes have built a wooden turbine (renewable if taken from renewable forests) which cuts turbine’s renewable footprint by more than 90%.

Once completed, the tower will be the world’s tallest turbine of timber and has already been presold to a utility. The blades and machine use standard equipment. 

-The father of solar, Martin Green, discusses capturing solar in space with Bloomberg, a topic that has also crossed Elon Musk’s mind, who, having created his own internet in space, and a successful rocket launching facility, is at least in a position to do so, if feasible. The European Space Agency is also testing the idea.

Green observes there is more energy in space, all coming from the same direction, 24 hours a day, and that if you can convert the energy there and send it back to earth efficiently, it is plausible. However, he believes terrestrial solar will continue to be cheaper so there’s probably not much need.

Bloomberg observes other materials are being explored other than silicon, one being perovskite crystals, which FNArena recently mentioned in a separate story relating to carbon capture. The journal observes the synthetic perovskite cells are made from lead-based compounds, which is likely to be as environmentally friendly as lead-acid batteries.

Green doubts this, given silicon’s abundance and the fact it is stable, efficient and non-toxic.

-Ireland has rejected a proposal for a liquefied natural gas import terminal on the Shannon estuary and a related gas fire plant.

Bloomberg reports Ireland is probably the first country to refuse an LNG plant on the basis of climate.

It appears Ireland has its own energy ambitions, observing the capturable energy from wind on its west coast is greater than what can be potentially captured elsewhere in Europe.

-The European Union has started to enforce its carbon border adjustment mechanism (taxing carbon on imports), requiring six importers from hard to abate sectors to report on emissions.

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

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