By Andrew Poreda, Vice President & Senior Research Analyst
What it means: It sure has been a costly year in terms of weather damage. According to insurance broker Aon, the world has seen at least 29 weather events this year that have caused $1 billion or more in damage. All told, the tally includes 14 severe weather events (thunderstorms, hail, and/or tornadoes), six floods, five droughts, three tropical cyclones, and one European windstorm. Drought has been a particularly acute problem this year: damages are approaching $40 billion and it is the ninth most detrimental drought-specific year on record. On the other hand, the hurricane season has been relatively light, with only three events causing more than $1 billion in losses. Hurricane Ian, the presumptive champion for the most detrimental event, will likely eclipse $100 billion when the tab is finalized. The other big story has been European heat waves, which have affected hundreds of millions of people and killed an estimated 16,000.
Sage’s View: Looking at Aon’s list, the magnitude and frequency of these events should be quite concerning. No part of the world is safe, and the variety of weather events illustrates their unpredictability. Last year in Europe significant monetary damage was done via floods; this year it was droughts. Here in the US, the National Oceanic and Atmospheric Administration (NOAA) estimated that there have been 15 separate billion-dollar events. While cost estimates may differ (NOAA has a much more modest estimate for Hurricane Ian), the potential severity of the physical risks of climate change should be widely agreed upon. Where will weather strike next? It seems like everyone should be prepared. Did anyone anticipate the droughts of the Midwest US to cause the Mississippi River to reach record lows, stranding 45% of US grain exports due to unnavigable shallow water? And to add insult to injury, the low levels also permitted saltwater from the Gulf of Mexico to make its way upstream, impacting Louisiana water treatment plants. The field of short-term and long-term climate scenario analysis will become increasingly critical for both companies and government entities. And with all this talk about weather events, we haven’t even begun to discuss the potential impact of slow-moving climate-related challenges like rising sea levels. Bottom line, the costs of climate change are only going up.
What it means: The Russian-Ukraine War has led to a nuclear power renaissance of sorts. Even staunch adversaries (e.g., Germany) have had to acquiesce and are now reconsidering nuclear power’s role in the energy landscape. For the future of nuclear, much of the interest lies in shifting from large light water reactors to small modular reactors (SMRs). Supporters believe SMRs could be safer, quicker to build, and have lower upfront costs relative to their larger counterparts. Many of these new reactors will rely on a more enriched version of uranium, specifically high-assay low-enriched uranium (HALEU). One problem: only Russia produces it. Russian uranium is not on the sanctions list, but the US Department of Energy is concerned about an adversarial country holding a monopoly. Many companies are planning to produce HALEU in the United States or an ally country, but these projects will take at least five years before any uranium is available. And without conviction from stakeholders of what role nuclear power will play, there is some hesitancy to invest large resources prior to more commitments. “Nobody wants to order 10 reactors without a fuel source, and nobody wants to invest in a fuel source without 10 reactor orders,” said Daniel Poneman, chief executive of U.S. nuclear fuel supplier Centrus Energy Corp (LEU.A). Centrus has an agreement with the US government to produce HALEU, but it is forecasted to produce only one-third of the required fuel annually that the US industry will need by 2030. Other companies, like the French-domiciled Orano, are willing to contribute to the manufacturing, but expect the US government to kickstart it.
Sage’s View: The clear lesson for 2022 is respect the importance of the supply chain. Energy is essential to any economy, so completely outsourcing key components is extremely problematic. Many nuclear power startups have popped up over the years, so one would expect that somebody would have raised the alarm on Russia’s influence (or maybe they did, and no one listened). As we continue to voice our concern over Chinese dominance in areas like rare earth metal processing, solar power components, and electric vehicle batteries, Russian influence in specialty uranium fuel is similarly concerning. The current US Administration appears eager to address this issue, and recently announced they were developing a nuclear strategy. But with only $700 million allotted to HALEU production in the Inflation Reduction Act, it is difficult to be convinced that politicians are serious. In general, American stakeholders seem overly focused on the final output of clean energy sources and technology, and far less serious on all the steps that it takes to make that output a reality. Lots of lip service on developing domestic and allies’ supply chains, but when we look back a few years from now we will likely be disappointed with the progress.
What it means: Pumping oil is currently a very profitable business. Due to federal subsidies, a surprising energy source has emerged that may be even more lucrative: methane gas sourced from landfills. Since incentives make landfill gas twice as profitable as oil from a unit of energy perspective, larger oil and gas companies have taken notice. BP just spent $3.3 billion to purchase Archaea Energy, a special purpose acquisition company (SPAC) spinoff from the Rice Family, known for their efforts in natural gas investing. Archaea has upwards of 80 landfill gas projects in the works and has already accumulated operating profits of $150 million. When garbage rots, it produces methane, which is 24 times more impactful for global warming in the short-term than carbon dioxide. So, finding ways to capture this gas has the potential for huge environmental benefits, and hence the government has granted generous subsidies to do so. Subsidies are so significant that landfill gas can fetch almost five times the price of natural gas ($33mm/BTU vs. $7mm/BTU). With the acquisition of Archaea, BP only strengthens its position as the US leader in biogas.
Sage’s View: Green garbage gas demonstrates that clean energy sources can be profitable and come from unexpected sources. And because society is desperate for clean energy solutions, it will likely benefit from an “all of the above” approach. As landfill gas works seamlessly with our current fossil fuel infrastructure, there are inherent built-in advantages that make this a valuable option, though the ability to scale this past a certain point is obviously limited by the number of landfills. BP’s investments in areas like biogas highlight a trend of the major oil and gas companies investing heavily in clean energy. Foreign companies like BP and Shell lead the way, with Shell going so far as planning to have an estimated 50% of capital expenditures in clean energy options by 2025. US powerhouses Exxon and Chevron are not that far behind, and both plan to heavily invest in areas like hydrogen and carbon capture. With a period of record profits and tons of cash on hand, now is a good time to diversify their future revenue models. From a government support perspective, one must wonder if some of these subsidies need to be updated on a more regular basis. While longer-term support is necessary to help create stability, in the case of landfill gas it looks like these projects would have been profitable with far less generous subsidies. Perhaps that money would be better suited elsewhere, such as supporting domestic mining and processing for rare earth and precious metals, which are all vital for our clean energy economy (there are far too few projects currently in the works). Future legislation may have to be more dynamic to balance spurring innovation, helping efficient allocation of capital from a cost and environmental perspective, and preventing the waste of taxpayer dollars.
What it means: With seemingly everyone weighing in on the ESG debate, it should be no surprise that influential investor and co-founder of Microsoft Bill Gates has his own unique insight surrounding some of the controversies. While he understands that some businesses are going to great lengths to exaggerate their ESG credentials, he asserts that considering ESG factors is essential to evaluating a company. One particular area that he thinks is worth assessing is company innovation. Gates, also the founder of the venture capital firm Breakthrough Energy Ventures, believes that for the ‘E’ it is imperative to note which companies are making investments in green technologies. These companies will be the ones that drive down costs and make various green tech more affordable. And for their efforts, there are a variety of tangible ways to measure the environmental impact. But the rest of the ESG evaluation process is a work in progress: “The whole measurement thing is a little immature,” Gates said of ESG criteria. “The field is going to get mature on that. But having that environmental incentive — a lot of investors really do want to get that information.”
Sage’s View: Innovation is what stimulated the industrial revolution, led us through the information age, and will certainly play a huge role in fighting climate change. The debate clearly lies in how much of a role it should play. The other general levers that can be pulled are enhancing efficiency and modifying consumption. Some stakeholders feel strongly that societies need to change lifestyles, whether it be changing the way we commute, modifying our diets, or living in smaller homes. Dubbed by some as the ‘De-growth’ movement, the hope is to reshape capitalism to deal with some of the world’s impending problems. Some changes to lifestyle, like eliminating wasteful food consumption, are certainly warranted. Another group of stakeholders opine that for fighting climate change, we shouldn’t waste time with unproven technology and instead deal with what is available at our disposal now. Unfortunately, power sources like wind and solar are going to need innovation in energy storage to make them more viable. The electric vehicle movement is also going to need a miracle, or demand is going to flatline due to limits in the global lithium supply and other resources. One word of caution: not every ‘good idea’ is worthy of a blank check. Those investing in self-driving vehicles have learned that the hard way, with $100 billion collectively spent and little to show for it. How are green hydrogen, carbon capture, or nuclear fusion (among many others) going to play out?
What it means: In the United States, approximately one-third of food never gets eaten. The US Department of Agriculture estimates that 165 million kilograms of food is wasted daily, the equivalent of a fully loaded aircraft carrier. One traditional option to mitigate wasted food is to get it in the hands of a non-profit, but are there other solutions? All that food ends up in landfills to decay and create methane gas, which contributes negatively to global warming (which we now know BP will be thanking us for…). To fight this problem, many food suppliers are employing chemistry to increase shelf life and decrease the chance of spoiling. A good example of the vital role chemistry plays is an apple harvest, which can take a year to get from an orchard to a consumer’s plate. Apples emit ethylene as they mature, which is a delicate part of the ripening process. To slow that ripening, a chemical 1-methylcyclopropene (1-MCI) is utilized on 90% of stored US apples. But now instead of exclusively utilizing 1-MCI in storage, some farmers are applying it to the tree before harvest to buy more time. Storage still remains the primary application, where apples are placed in bins devoid of oxygen with 1-MCI pumped in, and sensors are employed to closely analyze the fruit’s ethylene levels. Exporting provides a unique challenge based on the time it takes to transport (one-quarter of apples are shipped overseas), but chemistry provides innovative solutions. Purfresh, a specialist in controlled atmospheric systems, installs a device in shipping containers that converts oxygen into ozone. The ozone then reacts with the ethylene, putting the apples in a cryogenic-like state. Technology has the potential to allow for any fruit to be delivered anywhere in the world, anytime. But what about saving the food that gets wasted after successfully arriving at the grocery store (two-thirds of food waste in the US)? A few companies, such as AgroFresh and Akorn Technology, have created multi-faceted food coatings that have a wax to prevent moisture loss, and oil to preserve color, and a corn-based protein that controls the respiration rate. Another future option is an anti-microbial sticker that can help suppress mold.
Sage’s View: When food is plentiful and so are people’s bank accounts it is easy to dismiss the problem of food waste. In the US we are lucky to have a plethora of options for all types of food imaginable, and very rarely is there a season when a choice we want is out of stock. But other parts of the world aren’t so lucky, and some can’t even get essentials like grain, one of the fallouts of the Russia-Ukraine War. As the world’s population increases, and climate change can unexpectedly lead to droughts in the areas most relied upon for production, we are going to need a mix of smarter consumption and more breakthroughs in production and storage technologies. And since arable land, water, and fertilizer are also limited resources, we have plenty of other challenges that will need solutions to ensure the success of the world’s future food economy. Ultimately, the biggest weapon in fighting food waste will be human behavior.
For more news, information, and strategy, visit the ESG Channel.
1) Masters, Jeff. World Rocked By 29 Billion-Dollar Weather Disasters In 2022. Yale Climate Connections. October 19, 2022.
2) United States Hit by 15 Billion-Dollar Weather And Climate Disasters This Year. Captive.com. October 17, 2022.
3) Elliott, Debbie. Saltwater Is Moving Up The Mississippi River. Here’s What’s Being Done To Stop It. NPR. October 27, 2022.
4) Mcfarlane, Sarah, et. al. America’s New Nuclear Power Industry Has A Russian Problem. Reuters. October 20, 2022.
5) Gardner, Timothy. U.S. Developing Domestic Uranium Strategy -Energy Secretary. Reuters. October 26, 2022.
6) Helman, Christopher. BP Bets $4 Billion On Green Landfill Gas, Yielding Another Fat Payday For The ‘Shalennial’ Rice Brothers. Forbes. October 18, 2022.
7) Salzman, Avi. Big Oil’s Surprisingly Bright Future. The Case for BP and Exxon. Barron’s. October 21, 2022.
8) Newburger, Emma. Bill Gates Says Investment In innovation Is The Important Part Of ESG. CNBC. October 18, 2022.
9) Kessler, Andy. The Deadly ‘De-Growth’ Craze. WSJ. October 30, 2022.
10) Chafkin, Max. Even After $100 Billion, Self-Driving Cars Are Going Nowhere. Bloomberg. October 5, 2022.
11) Blois, Matt. Chemistry’s fight against food waste. C&EN. October 2, 2022.
Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.
Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.