For Earth Day, Some Thoughts on COVID-19 and the Energy Transition

The Overall Picture

The 50th anniversary of Earth Day comes at a pivotal time for the climate movement. The coronavirus crisis has slowed economic activity to a crawl, and this slowing applies to the energy industry, as well. In the face of great uncertainty, we are seeing attempts by fossil fuel advocates to opportunistically advance damaging policies in a moment where public attention is diverted by the crisis. They are promoting outdated programs under the guise of economic recovery and employment needs.

In the midst of the crisis, fossil fuel companies are flexing their political power. Oil and gas executives held a meeting at the White House on April 3rd seeking the administration’s help in maintaining their businesses. The administration is not only receptive to such efforts, but it also supports policies that continue to increase climate and environmental risks government-wide. Among these are the rollback of vehicle mileage standards and the suspension of environmental protection laws restricting pollution. Internationally, political leaders are expressing concerns that the US administration may be using the COVID-19 pandemic as an excuse to ignore or abandon climate commitments. Relative to fossil fuels, the clean energy industry, despite employing more people, is smaller and more fragmented. For this reason, clean energy companies will likely have a more difficult time exerting influence and securing stimulus funding from the US federal government.

Time is not on our side. Short-term resistance to the energy transition may cause policy makers and businesses to double down on the status quo, resulting in efforts to invest billions of dollars in fossil fuel projects. In the absence of policy leadership, it is now more important than ever for long-term responsible and impact investors to allocate capital intentionally, diverting funds from climate polluters in favor of companies that produce climate-friendly solutions. This is true across all allocations, both public and private. While private investments in promising clean energy companies and technologies must continue, we argue that attention to public markets from climate advocates must increase.

What Investors Can Do

For investors concerned about climate change in this uncertain time, ESG and socially responsible screening strategies are a good option, but they are not enough. These strategies do not allow for direct, intentional positioning that supports climate mitigation and the energy transition. ESG funds are constructed by incorporating scores measuring how a company operates with respect to environmental, social and governance criteria, but those scores in most cases do not account for the environmental impacts of the company’s end products and services.

Flexible investment mandates, such as those typically utilized by hedge funds, are ideal structures for taking long and short positions in publicly-traded companies. These mandates can align impact opportunities with return opportunities created from macro-economic trends such as the energy transition. Yet hedge funds as a group appear to be missing from responsible investing strategies,. According to the US SIF, of the approximately $3.3 trillion invested in hedge funds globally in 2018, only 1.3% of hedge fund assets under management incorporated ESG criteria into their strategies, versus 26% of all professionally managed assets.

Given these limited investment options, what are investors to do? We believe investors can achieve meaningful returns while taking actions to support the energy transition.

• Support clean energy companies in the public markets. Company products define impact. Companies within the clean energy ecosystem, both public and private, create products throughout the supply chain that support the transition. While impact investment has historically been associated with the private markets, publicly-traded companies are also impact investment opportunities. A strong private market in a given industry cannot exist without equally strong public markets.
• Go beyond divestment: consider shorting. Shorting extends and strengthens an investor’s public position on fossil fuel companies. A main objective of divestment is to remove a company’s social license to operate. Short positions allow investors to signal:
  • A move from avoidance to a negative financial view of the sector or companies within the sector.
  • An even stronger alignment with the social position on climate change.
  • Degrading of the stock value to other mission aligned investors.
  • A leadership position in the climate movement.

What FFI is Doing

In 2018, FFI launched the Energy Transition Long-Short (ETLS) index. This index strategy combines the elements that have been described above: Long clean-energy companies and short fossil-fuel companies, with the objective of offering investors exposure to the clean energy transition. Our belief is that the pursuit of alpha and investing for the climate are complementary, not mutually exclusive objectives and the purpose of the ETLS is to provide like-minded investors with such exposure.

As we move our business forward, we can say that with The Carbon Underground 200^TM, the ETLS index, and with all our work, we commit to the following principles:

• Limiting our own carbon footprint. We limit air travel and the use of physical office space. We provide the team the flexibility to work remotely. We communicate with investors digitally whenever possible.
• Supporting a just transition. We will contribute a portion of our profits to socially-conscious organizations involved in ensuring a just transition.
• Improving the sustainability practices of financial services supply chain. We engage with service providers, including fund administrators and prime brokers, to improve the environmental and social practices of the supply chain.
• Being a responsible firm. History has taught us that greed is not compatible with sustainability. We set fees and maintain compensation structures that reward success, but limit excess.

Conclusion

Just a few short months ago, we never imagined that Earth Day 2020 would represent such a poignant moment in the climate movement. These are tough times for everyone. Our health and well-being are under threat. And that is why reducing the catastrophic effects of climate change is more important than ever. Some are doing their part through advocacy, some through protest, and some through policy-making. At FFI, we intend to use our investment experience to make a difference.

DISCLAIMER: The views and opinions expressed in this document are those of the authors and do not necessarily represent official policy or position of FFI. The information in this document was compiled from sources believed to be reliable and is for informational purposes only. FFI does not guarantee the accuracy of this information or any results and further assumes no liability in connection with this document. In addition, FFI does not guarantee the timeliness or completeness of the information contained within this document and the information contained in this document is subject to change without notice. This document may contain statements regarding FFI’s intent or current business expectations. No reliance is to be placed on these forward looking statements, and FFI does not undertake any obligation to publicly release the result of any revisions to these forward looking statements. Any and all information contained herein does not constitute any purchase or other advice, does not constitute an offer to purchase or sell, nor does it constitute a promotion or recommendation of any type of product.