The Sage ESG Top 5 - Week of 7/8/22 | ETF Trends

By Andrew Poreda, Vice President & Senior Research Analyst

A biweekly roundup of Sage’s top ESG news picks

1. S. Supreme Court Ruling Limits EPA’s Authority In Regulating Greenhouse Gases

What it means: Last week the Supreme Court dealt a huge blow to the fight against climate change. In a 6-3 ruling, the court said that the Environmental Protection Agency (EPA) did not have the broad authority to require states to decarbonize their electricity sectors. The court addressed a never-adopted regulation (the Clean Power Act) from the Obama Administration that was aimed at curbing coal-fired power plants. For the EPA to have authority over various regulations, the court asserted that Congress had to pass appropriate legislation, which is unlikely to happen in a gridlocked Congress. Some rejoiced at the decision, such as the group of 17 Republican attorney generals who brought forth the suit. But climate activists were devastated at the news, and it put the U.S.’ path toward a Net Zero future in jeopardy. Others are also concerned at the potential scope of application from this ruling. Not only could this decision apply to other EPA regulations, but it may also impact other government agencies and lead to a flood of future legal challenges.

Sage’s View: For better or worse, the EPA has been the key avenue for the United States to deal with environmental challenges, whether it be climate change, air pollution, or water contamination. Without it, we essentially have no means to control the negative externalities that are not adequately factored into the prices we pay (other countries have avenues like a carbon tax). With coal power, emissions have a severe impact on health in addition to contributing to climate change, but it would be foolish to think that the energy and utility sectors will adequately self-regulate without a little nudging. So, in the absence of Congressional action, we will probably see a coal revival/survival falling along state lines (based on the political party in power). And while we also need to watch the implications for other EPA areas of influence, such as vehicle emissions, it is worth following what happens to ESG-related regulations in agencies like the Department of Labor (DOL) and the Securities and Exchange Commission (SEC). If approved, it wouldn’t be far-fetched to see the recent corporate climate disclosure rules or fund ESG disclosure rules appealed through the court system. This ruling certainly takes some power out of the hand of the executive branch long-term.

2. Austin’s Nuclear Reactor: How It Could Help Us Travel To Mars

What it means: Many Austin residents have no idea that they have a nuclear reactor in their backyard. Located on the campus of University of Texas at the JJ Pickle Research Center, the small research reactor has been in operation since the 1990s. With space travel to Mars becoming a hot topic, research reactors like this one may be key in shaping what ultimately powers the spaceship journey. Nuclear reactors can go 20 to 40 years with minimal maintenance, provide a dense energy source, and operate in an environment without oxygen. NASA is in the early stages of development, having recently awarded small contracts to three firms for the initial design phase of the nuclear propulsion system, so there is still a lot of work to be done. The operators of the reactor remind readers how safe their reactor is, and with the work they are doing in areas like creating molten salt reactors, safety will only continue to improve.

Sage’s View: The research being conducted around the country on nuclear power gives hope that we will continue to see advancements with the technology. Between the military, civilian research, academic institutions, and start-ups, there is a great deal of work being done that should lead to revolutionary breakthroughs. But the concern is going to be can we scale the technology? Critics of nuclear power point to the debacle going on with the Vogtle Power plant in Georgia, which is billions of dollars over budget and years behind schedule. The nuclear power construction industry has been decimated over years of neglect, so it is almost like they are starting over from scratch. This likely means that large plants may not be the way to go from a cost perspective. Hopefully, these smaller use cases, whether it be a small modular reactor or a propulsion plant for a Mars spaceship, will be able to be reproduced in a cost-effective manner. All signs point to nuclear power becoming safer as technology advances, but can it compete with other energy sources on price?

3. California: Explosive Wildfire More Than Doubles In Size Overnight

What it means: We are just at the beginning of what historically is the start of wildfire season in the Southwestern United States. Unfortunately, this weekend a large fire outbreak occurred near Sacramento. The Electra fire has grown to about 4,000 acres, but as of Wednesday it appeared firefighters had started to get the blaze under control. The exact cause of the fire is still unknown, but it likely stems from a recreation site. With the U.S. already at double the 10-year average for fires this time of year, it could be long season with the drought conditions across the region. And as other parts of the U.S. are experiencing unseasonable drought-like conditions (e.g., Alaska, Texas, Washington, even Hawaii), expect the threat to manifest into problems elsewhere.

Sage’s View: As weather patterns are largely expected to remain the same next year (experts are calling for a rare triple-dip La Nina), this year and next should be problematic from a wildfire perspective. In the near-term, steps toward preventing and mitigating fires will hopefully be fruitful, though current landscapes that are battered by hot, dry conditions make matters difficult. With the economic damage inflicted annually by these fires (whether it is damage to properties or lost productivity due to blackouts) estimated to upwards of $10 billion in California alone, it is not something to take lightly. But these fires may be even worse than just the physical damage. A recent article in Science News showcased that air quality across the entire United States is negatively impacted during wildfire season. So young people as far away as New York City might have long-term impacts on lung development, or someone with asthma in Ohio may have an increased risk of an emergency room visit or even death. So, just another push for renewed vigor on preventing fires. In addition to better forest vegetation management, public education (e.g., no fireworks or bonfires), and fixing outdated electrical grids, what else can we do?

4. Russia Is Set To Switch Off The Gas For Work On A Key Pipeline — And Germany Fears The Worst

What it means: It is no surprise that the entire European Union (EU) is in an energy bind, as it has been a closely followed story since the Russian-Ukraine war began. But as Russia temporarily shuts down the Nord Stream 1 pipeline for “maintenance,” the fear now is that the gas doesn’t start flowing again as the winter months approach. The EU historically receives 40% of its natural gas from Russia, so any further reductions would be devastating. Russia has already cut exports to the EU by 60%, with the claim that reduced flows are a result of key pipeline equipment stuck in Canada for repairs. With no viable plans to make up the difference in Russian exports, Vladmir Putin is in an extremely powerful position to exert some pain on the European economy. Countries have been scrambling to implement emergency action plans, with Germany going as far as to bring coal power plants online to help ration natural gas use and build up supplies in anticipation of winter demand. Some are optimistic that the possibility of shutting off natural gas is merely an empty threat that Russia will leverage as a bargaining chip to prevent further sanctions. But with Vladmir Putin at the helm, anything is possible.

Sage’s View: It may be a stretch to say that the Russian economy is flourishing, but it seems to be in a great position to adequately weather all the sanctions thrown at it for the near future. Usually when a country defaults on its debt it is the beginning of a downward spiral, but higher energy prices (thanks to the war) have left the government flush with cash. So, it wouldn’t be inconceivable that Vladmir Putin, who seems to have regained his swagger, hits Europe before they it has a chance to develop alternative plans. Sage’s recent comment in the International Business Times sums up our view:

“Since the Russians have been very successful in offloading their energy commodities to willing buyers like China and India, it is highly conceivable that the Russians elect to shut off gas to Europe. This war has raged on with no end in sight, so we must expect some bold moves from the Russians to inflict maximum pain on those trying to thwart their efforts. The EU is trying to be aggressive in shifting away from Russian energy, but now is when they are most vulnerable.”

For Europe, a series of missteps have put them in this unenviable situation. Energy security is national security, and countries like Germany chose to rely on a Russian-led fossil fuel experience with the goal of ultimately switching to a Chinese-fueled green energy future. In 2011, Germany had 17 nuclear reactors providing 25% of the country’s electricity but chose to phase them all out. And, instead of trying to reverse course and keep remaining plants open, they chose to re-open retired coal plants. Some green energy future. All the Germans can do now is wait and see how much damage to their economy the Russians want to impose. Long-term, the big question remains whether European countries want to double-down on their current clean energy shift (and face other problems down the road) or take a more pragmatic approach and leverage countries like the United States in providing natural gas to replace what once came from Russia. With the EU Parliament backing rules that consider nuclear power and natural gas projects “green” investments, it appears that most members want the latter route, but don’t expect countries like Germany to necessarily follow.

5. Single-Use Plastic Waste Is Getting Phased Out In California Under A Sweeping New Law

What it means: As the Supreme Court makes it easier to pollute, California is going in the opposite direction. Last week Governor Gavin Newsom signed a law that forced single-use plastic packaging and food servicewear to be compostable or recyclable by 2032. In addition to the future ban, the law set up an accountability group that brings industry leaders together in establishing a better recycling plan. And to account for the harm that plastics inflict through air pollution and water damage, California also placed a $500 million annual fee on the plastics industry starting in 2027. As Americans only recycle approximately 5% of their plastic waste, this is a growing problem that needs to be addressed both domestically and globally.

Sage’s View: With the void of climate/environmental action at the national level, expect laws like this to be a sign of what is to come from certain states. Plastics inflict a wrath of damages on our society, like destroying marine life habitats and causing birth defects from infiltrating our drinking water. Countries like Canada and India recently enacted laws that were far more aggressive in curbing plastics use, as both countries have near immediate timelines to address the issue (whereas California is taking much more of a gradual approach). Either way, these are all commendable actions to stop adding to an already enormous problem. Hopefully, the active efforts to find substitutes for plastics (e.g., one start-up banks on seaweed as a suitable replacement) will afford consumers the opportunity to not have to sacrifice convenience. But what about all those plastics still out there in landfills and oceans? Plastic eating enzymes show some promise, and the University of Texas recently created an enzyme that is effective on multiple types of plastics over a range of temperatures (both issues have hindered progress). Solutions to our plastic problem will certainly be a fascinating area to follow.

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