Analysis on oil, renewables, mobility and EVs, Mark Lewis.

August 18, 2019 Ben Yeoh

Analysis on oil, renewables, mobility and EVs.

-Oil has a massive flow-rate advantage, but this is time limited.

-Economic and environmental benefits set to make renewables in tandem with EVs irresistible. T

-The death toll for petrol.

Mark Lewis, former utilities analyst and ex-Carbon Tracker now, head of sustainability for BNP AM writes an analysis on oil, renewable energy and EVs.

“Oil needs long-term break-evens of $10-$20/bbl to remain competitive in mobility.

In this report we introduce the concept of the Energy Return on Capital Invested (EROCI), focusing on the energy return on a $100bn outlay on oil and renewables where the energy is being used specifically to power cars and other light-duty vehicles (LDVs). For a given capital outlay on oil and renewables, how much useful energy at the wheels do we get? Our analysis indicates that for the same capital outlay today, new wind and solar-energy projects in tandem with battery electric vehicles (EVs)* will produce 6x-7x more useful energy at the wheels than will oil at $60/bbl for gasoline-powered LDVs, and 3x-4x more than will oil at $60/bbl for LDVs running on diesel. Accordingly, we calculate that the long-term break-even oil price for gasoline to remain competitive as a source of mobility is $9-$10/bbl, and for diesel $17-19/ bbl.

Oil has a massive flow-rate advantage, but this is time limited.

The oil industry is so massive that the amounts that can be purchased on the spot market can provide very large and effectively instantaneous flows of energy. By contrast, new wind and solar projects deliver their energy over a 25-year operating life. Nonetheless, we think the economics of renewables are impossible for oil to compete with when looked at over the cycle. We calculate that to get the same amount of mobility from gasoline as from new renewables in tandem with EVs over the next 25 years would cost 6.2x-7x more. Indeed, even if we add in the cost of building new network infrastructure to cope with all the new wind and/or solar capacity implied by replacing gasoline with renewables and EVs, the economics of renewables still crush those of oil. Extrapolating total expenditure on gasoline in 2018 for the next 25 years would see $25trn spent on mobility, whereas we estimate the cost of new renewables projects complete with the enhanced network infrastructure required to match the 2018 level of mobility provided by gasoline every year for the next 25 years at only $4.6-$5.2trn.

Economic and environmental benefits set to make renewables in tandem with EVs irresistible. The clear conclusion of our analysis is that if we were building out the global energy system from scratch today, economics alone would dictate that at a minimum the road-transportation infrastructure would be built up around EVs powered by wind- and solar-generated electricity. And that is before we factor in the other advantages of renewables and EVs over oil as a road-transportation fuel, namely the climatechange and clean-air benefits, the public-health benefits that flow from this, the fact that electricity is much easier to transport than oil, and the fact that the price of electricity generated from wind and solar is low and stable over the long term whereas the price of oil is notoriously volatile.

The death toll for petrol. With 36% of demand for crude oil today accounted for by LDVs and other vehicle categories susceptible to electrification, and a further 5% by power generation, the oil industry has never before in its history faced the kind of threat that renewable electricity in tandem with EVs poses to its business model: a competing energy source that (i) has a short-run marginal cost (SRMC) of zero, (ii) is much cleaner environmentally, (iii) is much easier to transport, and (iv) could readily replace up to 40% of global oil demand if it had the necessary scale. We conclude that the economics of oil for gasoline and diesel vehicles versus wind- and solar-powered EVs are now in relentless and irreversible decline, with far-reaching implications for both policymakers and the oil majors.”

The 40 page report is here.

My sustainability performance show: Thinking Bigly.

My travel essay about visiting one of the most remote tribes on Earth in the Indonesian Jungle.

The Climate challenge is 75% outside power: https://www.thendobetter.com/investing/2019/7/12/climate-challenge-outside-power

Government Clean Tech R&D spend

July 31, 2019 Ben Yeoh

Further research for Thinking Bigly. Governments / Society are underspending on clean tech energy R&D. Innovation has to be a major part of the climate solution (across energy, food, materials, buildings, transport, land use) and while we can be deploying more technologies now, we also need to be investing more.

Especially versus levels of spending in other domains.

Government Spending on Clean Tech R&D vs Defence (UK/US):

Norway 0.2

Netherlands 0.2

Italy 0.3

Canada 0.7

UK 0.8

Germany 1.3

Japan 1.9

UK Def R&D (govt) 2.4

US 2.7

AstraZeneca (pharma) 5.9

US Defence R&D (govt) 78

US spends $78bn on military R&D and $2.7bn on clean tech.

UK spends $2.4bn on Def R&D and $0.8bn on clean tech.

AZ for random comparator, as private pharma company spends $5.9bn in R&D.

This leads me to my own take of where the importance and focus and political ease of the current policy line up is(see below). Many aspects are hard re: politics but this strikes me as potentially easy. Market-minded people still tend to believe that basic research is suited to government and universities and this can scale up to commercial development.

There may be an argument for moral equity as well because while typically private companies want to reduce “spillover” from its R&D discoveries so that more wealth is generated to them; from the point of view of the planet a spillover generated from eg the UK that goes to eg India would be welcome and the positive spillover could be equitable as the eg UK had burned most the carbon budget in earlier decades creating the negative polluting externality.

More resources on Thinking Bigly here

Specific thoughts on carbon tax here.

And risk thinker Nassim Taleb on climate change and risk here.

Generation Z. A look at their different qualities versus Millennials

July 7, 2018 Ben Yeoh

Source: Barclays, Patel et al (June 2018), Generation Z:Step aside Millennials — Source: Barclays, Patel et al (June 2018), Generation Z:Step aside Millennials

“Sorry Millennials, your time in the limelight is over. Make way for the new kids on the block – Generation Z – a generational cohort born between 1995 and 2009, and larger in size than the Millennials (1980-1994). The current fixation with Millennials makes them the most studied generation, which in turn has caused the use of this term to simplify to a label for anyone that may be young today. The irony here is that Millennials are not necessarily young anymore and we run the risk of overlooking the next cohort – Generation Z – who are now coming of age.

Survey-based research from a range of sources suggests there are fundamental differences separating Generation Z from the Millennials (Figure 1), material enough for marketplaces to take note today. And yet, even as Generation Z enter their prime, many companies have yet to prepare for their arrival. We fear they are either still trying to adapt their business models to the Millennials or hoping simply to re-use whatever strategies they’ve developed for Millennials on Generation Z. We argue that adopting such a homogenous approach will deliver unsuccessful results as it fails to identify the two generational cohorts as different.

We believe this coming of age is worth capitalising on now, with Generation Z in the US already having $200bn in direct buying power and $1tn in indirect spending power as they command significantly more influence on household purchases than prior generations (IBM, Iconoculture). By 2020, Generation Z are expected to be the largest group of consumers worldwide, making up 40% of the market in the US, Europe and BRIC countries and 10% in the rest of the world (Booz Co). " Barclays Sustainable & Thematic Investing team lead by Hiral Patel in a June 2018 report.

ource: Barclays, Patel et al (June 2018), Generation Z: Step aside Millennials — ource: Barclays, Patel et al (June 2018), Generation Z: Step aside Millennials

What makes Gen – Z different?

There are different ways to define a generational cohort; however, no matter how you do it, the attitudes, passions, strengths and weaknesses of each generation are moulded by the world around them. We believe there are three broad trends that shape a generational cohort: i) parenting & household dynamics, ii) world economy & international affairs and iii) technological advances

1) Parenting & household dynamics

At the root of the discrepancy between the two current generations of youth (Generation Z and the Millennials) are differences in parenting & household dynamics, or more specifically the differing generations that raised them.

Coining the phrase ‘helicopter parents’, Strauss and Howe have argued that Millennials are in part a by-product of overprotective, indulgent parents (Ipsos Mori: Millennial – Myths & Realities). Millennials were raised by encouraging Baby Boomer parents during a time of economic prosperity and opportunity. This created a new set of middle-to-upper class parents that were desperate to maintain their family’s escalated social standing (Quartz – How Baby boomers ruined parenting forever), using extra-curricular activities and hectic student schedules as a way to demonstrate their status as the parental elite.

On the other hand, Generation Z, it is argued, were raised by the more discerning Generation X, as they grew up in a recession, making them more conservative by nature. Generation Z witnessed first-hand the struggles their older siblings faced and resolved to do things differently. They are characterised as pragmatic when it comes to financial decision-making and have already shown the propensity to move back to traditional views of success (money, career, education) (Millennial Marketing).

2) World economy & international affairs

Though Millennials were raised during a time of economic prosperity, they were old enough to understand the relevance of 9/11 in 2001. Generation Z were either too young or were yet to be born, and thus relate more to the global financial crisis in 2008. This was followed by a wave of global terrorism, which has led to Generation Z growing up during a time of increased existential threat (perceived, if not actual) compared with the Millennials (Guardian).

Furthermore, the internet and social media have significantly impacted the way global news is disseminated. Generation Z appear to be more affected by world events than the previous generation thanks to a 24-hour news cycle that relentlessly pushes out information. For example, we now see widespread awareness of single-topic issues such as global warming, cancer research, the Trump presidency and the European migrant crisis. This makes Generation Z by default more aware of international affairs at a younger age, which, it is argued, is creating a more conscientious generation.

3) Technological advancements

While Millennials were digital pioneers witnessing the introduction of broadband internet, smartphones and social media, Generation Z are digital natives, not knowing a world any different to the hyperconnected one in which we live today. For example, a Millennial would remember the pain of experiencing a floppy disk error or having to experience the social pressure of maintaining an ‘online’ MSN messenger status using dial-up internet. However, Generation Z can’t remember a time without technology at their fingertips. One of the biggest worries for this generation is whether or not they have enough battery life.

Although all such reports have flaws and generalisations, it’s good food for thought on how Gen Z are different. In the way, Millenials are different before them.

From a business point of view, a company needs to be flexible enough (or have a business model geared to ) to accommodate the shift to Gen-Z when arguably many were late to the shift to Millenials already.

You can reach Hiral through LinkedIn for a full copy of the report.

The current Arts blog, cross-over, the current Investing blog. Cross fertilise, some thoughts on autism. Discover what the last arts/business mingle was all about (sign up for invites to the next event in the list below).

My Op-Ed in the Financial Times (My Financial Times opinion article) about asking long-term questions surrounding sustainability and ESG.

Some popular posts: the commencement address; by Nassim Taleb (Black Swan author, risk management philosopher), Neil Gaiman on making wonderful, fabulous, brilliant mistakes; JK Rowling on the benefits of failure. Charlie Munger on always inverting; Sheryl Sandberg on grief, resilience and gratitude.

How to live a life, well lived. Thoughts from a dying man. On play and playing games.

A provoking read on how to raise a feminist child.

ESG matters, both for operational and share price performance. Nordea.

June 4, 2018 Ben Yeoh

Nordea “As ESG performance has grown significantly in importance for companies and asset managers in recent years, it's time to look at the numbers. Is ESG screening a worthwhile tool? In a word, yes. High ESG focus contributes to risk mitigation; our research shows this is mirrored in strong operational and share price performance. We also note that predictive attributes as to future earnings stability and share price volatility suggest that ESG research belongs in company valuation. We argue that companies and investors simply cannot afford not to care.

Note sample size for CCC is small and "special sit" companies often fall in here too eg post a poor ESG controversy.

Key conclusions: We see solid evidence that ESG matters, both for operational and share price performance The relative performance of the top versus bottom ESG performers amounted to as much as 40% in 2012-15 ESG is largely uncorrelated with our quant factors, and incorporating it adds alpha to our value and quality strategies.

ESG as a driver for operational improvement. We find a consistent correlation between ESG ratings and operational metrics. For example, companies with top ESG ratings have higher ROE and ROCE, and lower net debt/EBITDA than the market. Returns, margins and share prices are also more stable for the top-rated companies and we find that improving ESG performance bolsters stability in returns, implying it is not a lagging indicator.

ESG adds alpha to already proven quant factors We find ESG of great interest as an addition to our quantitative framework. An intuitive auto-correlation between ESG and quality, which share a lot of characteristics, did not materialise, but ESG added alpha to our quality strategy.

Link to research from Nordea

This chimes with a recent BAML Study using a different ESG database – see blog here.

You can also see it in conjunction with these papers here:

from MSCI and ESG and higher RoIC companies

from Caroline Flammer on long term incentives and causal evidence for ESG nad other Academic ESG papers.

My Op-Ed in the Financial Times (My Financial Times opinion article) about asking long-term questions surrounding sustainability and ESG.

How to live a life, well lived. Thoughts from a dying man. On play and playing games.

A provoking read on how to raise a feminist child.

ESG incidents analysis

May 6, 2018 Ben Yeoh

Which sector had the most ESG incidents (2014-16) ? Banks, according to Sustainalytics research.

-Banks account for 19% of all incidents, more than twice the amount of the next most exposed industry (Food Products).

-With an incident risk coefficient of 0.52, the Automobiles industry is the riskiest from a size-adjusted industry perspective.

-Other industries with a high probability of producing incidents include Aerospace & Defense, Precious Metals and Banks.

-Real Estate firms are least likely to get caught up in incidents. Only 26 out of 376 real estate companies (7%) were involved in an incident from 2014-2016.

-Market cap analysis demonstrates that large firms are the most prolific contributors of incidents. Mega-caps produce an average of 106 incidents per firm, compared to 15 incidents per large cap firm, four per mid cap firm and three per small and micro cap firm.

Link to the Sustainalytics Research.

More thoughts:   My Financial Times opinion article on the importance of long-term questions to management teams and Environment, Social and Governance capital.

Here is some MSCI research looking at ESG in high return companies.

Here is some quant research from BAML on ESG.

One of the best Munger speeches on how to think about a mental model of inversion can be found here.

If you'd like to feel inspired by commencement addresses and life lessons try: Neil Gaiman on making wonderful, fabulous, brilliant mistakes; or Nassim Taleb's commencement address; or JK Rowling on the benefits of failure. Or Charlie Munger on always inverting; Sheryl Sandberg on grief, resilience and gratitude or investor Ray Dalio on Principles.

Cross fertilise. Read about the autistic mind here.

MSCI: On ESG in higher ROIC companies

April 21, 2018 Ben Yeoh

MSCI: “Among a universe of companies that have generated substantial value for their shareholders over the last decade (Jan. 2007 – Dec. 2017), we found that companies with strong management of industry-specific ESG risks and opportunities outperformed peers with poorer management of those same ESG risks and opportunities over the five year period from Jan. 2013 to Dec. 2017.”

“In this paper we apply an ESG filter to a highly selective universe of 100 companies that have already been screened for value creation as measured by ROIC, economic spread, margins and asset turnover ratio. We found that, over the last five years, companies with higher ESG Ratings exhibited higher average return on invested capital, compared to companies with lower ESG ratings. They were also valued at a premium over their other top performing peers with lower ESG Ratings. …. the main additional value of our ESG ratings did not come from our governance assessment in this case, but rather from how well these firms managed their industry-specific environmental and social risks, which varied considerably across different business models.”

You can download the paper through MSCI here. You can find the co-author Panos Seretis on Linkedin.

Caveats: Not peer reviewed, time frame limited and it has the ROIC-cost of capital framework as the economic value add but still an interesting and useful addition to the body of ESG research.