Tag: ESG

How Investors Really Feel About ESG Initiatives

Posted on by phoffman@channelchek.com
Image Credit: Fauxels (Pexels)

How Investors Really Feel About ESG Initiatives

When a person invests in a mutual fund, ETF, or other managed asset pool that owns stocks, they are usually relinquishing a right to the fund manager. This is the right to vote as a shareholder on one’s own behalf. Shares held in the fund or trust are instead voted by the fund manager.  Are the managers voting in a way the participants in the pooled assets would prefer? Does the environmental, social, and governance (ESG) vote on by fund managers meet their average client’s own leaning for their investment fund shares?

There is newly reported results of a research survey by Stanford University. The survey’s goal was assessing individual investors’ views about ESG investing. The authors surveyed 2,470 investors in the summer of 2022, with accounts ranging from $10,000 to more than $500,000. The survey found that investors’ tolerance or support for ESG measures, including a willingness to have poorer returns, varied by their age, current wealth, as well as the specific ESG issue.

Looking at Return vs. Alternative Objectives

Investors closest to retirement age, 58 years old and over, were the least likely to support ESG objectives. Those farthest from retirement age, 18 to 41 were the most likely. The data showed more than one-third of the younger investors said they would be willing to lose 11% to 15% of their retirement savings to encourage companies to have gender and racial diversity mirroring the general population. Of the more experienced older grouping, only 3% said they would risk or be willing to lose that amount for an ESG priority. A full 66% of the older investors said they were unwilling to lose any money to support ESG principles.

“Older investors want fund managers to generate financial returns to support their spending needs during retirement and don’t have a lot of time to recoup big losses,” says David Larcker, a professor at Stanford’s Graduate School of Business and one of the researchers.

The survey further confirmed that those where a loss was less troubling were more inclined to support and allow a large firm like Blackrock to decide what to support. The results showed wealthier young investors tended to be the largest group of ESG positive investors. For example, young investors with at least $250,000 under management said on average that they would be willing to lose about 14% of their retirement savings to have companies reduce carbon emissions to net zero by 2050. Alternatively, young investors with savings of less than $50,000 they would be willing to lose 6% on average to accomplish that goal.

Not all ESG initiatives rank the same for investors. Those surveyed held a higher level of support for those involving environmental issues. Social issues came next, and they were concerned  the least about governance.

Vote Preferences

The investors surveyed also said they wanted the investment managers’ vote to reflect their own individual personal views related to ESG initiatives. In a related inquiry, 79% of the survey’s respondents with money at BlackRock managed assets said they approved of the firm’s use of its voting power to promote diversity on corporate boards.

Fully reflecting their clients’ views on ESG initiatives would be a high hurdle for investment managers, given the range of investors’ positions on so many issues. One potentiality is Investment managers could split their votes to weight individual investors’ views, Prof. Larcker says. For instance, that could mean voting 70% of their shares in a company in favor of a specific ESG proposal and 30% of their shares against the proposal.

Return Expectations

The older, more experienced respondents also had a significantly different view of expectations of return on investments.

Investment managers may want to provide data to try to improve fund participants’ understanding of the extent to which they have increased their risk to support the plans of an ESG-managed fund. Prof. Larcker suggests this could entail making it clear how returns of voting choices differed financially and from an ESG perspective, he says: “Did a vote improve or hurt the company’s financial performance in the short or long term? Was there a tangible effect on the environment or on employee diversity?”

“Fund managers need to acknowledge that there is likely to be some trade-off between ESG and financial returns,” he says, “and that trade-off may matter to individual investors.”

Take Away

Investing for the social good is not a new concept. The latest incarnation, ESG, has gained much more traction than the socially responsible investing initiatives of the past. The performance data, both financial and goal satisfaction, are difficult to measure. The survey done this past summer demonstrates the differences between demographic groups, a difference of expectations, and the weight of importance of, say, environmental issues over others.

As ESG-based investments evolve, Channelchek will keep you up to date on how others are looking at this category, what is new within the category, and other news that can keep you aware of the changing face of ESG. Sign up for Channelchek emails and information here.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.gsb.stanford.edu/faculty-research/publications/2022-survey-investors-retirement-savings-esg

https://www.gsb.stanford.edu/sites/default/files/publication/pdfs/survey-investors-retirement-savings-esg.pdf

https://www.wsj.com/articles/esg-initiatives-investors-survey-11666975292?mod=hp_user_preferences_pos4#cxrecs_s

How the Investment Playing Field Can Dramatically Change in November

Posted on by phoffman@channelchek.com
Image Credit: The White House (Flickr)

The Mid-Term Elections are Just One of the SEC’s Concerns

The mid-term elections have the potential to alter the course of the markets. It’s easy to recognize how the possible outcomes can cause changes to the overall economy, including industry sectors, fuel prices, and perhaps even national debt levels. But, one area that is less obvious could also impact investors in a big way, regulation. As election day is now days away, many regulatory changes that have been in the works are quickly coming to a head, with the expectations there may be a change in priorities, power, and philosophy. The push to get things through in the coming days may still be undermined by the U.S. system. Here’s why.

The U.S. Government at Work

Federal regulators are in scramble-mode working to finalize proposed rules before what appears will be a change in the balance of power in the legislative branch. The possibility that there may be a Republican-controlled Congress or the expected idea that the democrats will lose control over one of the branches of Congress would soften their ability to institute their aggressive agendas. As the agencies refine their proposals, they also have to be mindful that it isn’t just the new Congress that will be evaluating new regulations. The Supreme Court has recently taken a heightened interest in agencies overstepping their charter, that interest is likely to continue.

It’s easy to see how Congress whose job it is to decide where money is spent, can dampen the agenda of the Department of Education (DOE), Internal Revenue Service (IRS), Food and Drug Administration (FDA), or Gary Gensler’s plans at the Securities and Exchange Commission (SEC). But, the Supreme Court is also more than a casual observer and has shown how willing it is to make sure everyone stays in their defined lanes. 

Recent SEC Initiatives

The SEC has a three-part mission that includes protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. Under Gary Gensler, it has been working overtime to impact the changing marketplaces. The initiatives are considered by some to be beyond the scope of the SEC’s lawful mission.

Gensler, who was appointed by President Biden, has been extremely active. The former Chairman of the U.S. Commodities Futures Trading Commission (CFTC) and MIT economics professor is proposing or finalizing dozens of regulations. Some are minor alterations to existing rules, but many are complete redesigns of how they are handled now. This redesign may make it past an unenthusiastic Congress, as they have more pressing priorities, but they may experience an aggressive halt from the country’s Judicial branch.

Recent Supreme Court Actions

In June of 2022, the Supreme Court decided W. Virginia v. EPA. The decision struck down an EPA regulation fighting climate change. The decision was made based on the grounds that the rule violated the “major questions doctrine.” The Court had never used that term before, but it seemed evident that the court might use the term and intent of the phrase should it be called on to review other federal agencies and commissions.

The Court has the authority and now recent precedent to unwind regulation that goes beyond the original intent of Congress when an agency was created or any subsequent legal grants of authority. The 6-3 ruling against the EPA explained the Clean Air Act, designed for new power plant emissions, did not extend to existing plants requiring them to shift to wind or solar. It’s a nod by the Court to keep bureaucracies from growing beyond the express original legal reason for being. 

The ruling also is relevant in that it looked at Congress’s unwillingness to legislate and legitimize the way that the agency chose to regulate. One Justice in a concurring opinion wrote the decision was in part based on whether the agency was “intruding” in a traditional area of state law. 

How it Could Impact Investors

Under the major questions doctrine, several SEC efforts may become far more difficult.

One high-profile SEC goal involves environmental initiatives. Climate change activists have supported the SEC’s proposal to require companies to increase their disclosure of anticipated climate risks. But it would be difficult for the SEC to weigh its mission against this initiative and easily demonstrate that anyone has a great impact on the other (orderly markets, investor protection, capital formation). If environmental initiatives are to be carried out, they will need to be enacted by the representatives elected to legislate on behalf of citizens.

It is easy to see how priorities focusing more on fiscal restraint rather than environmental awareness could alter the investors playing field with a power change in the Capital building.

The so-called greening of Wall Street is just one example of how the elections will impact the coming year’s winners and losers in the stock market. Consider the SEC’s proposed rules for swaps, which are financial instruments that some investors use to speculate on securities. The SEC’s suggested rule would require public disclosure within a day of these transactions to the public. The proposed rule can be considered an unprecedented intervention in this multi-trillion-dollar market. The argument is strengthened by the reality that Congress could have authorized disclosure in the 2010 Dodd-Frank Act, but did not. The Supreme Court would be expected to rule on behalf of the laws as written.

Another SEC initiative also at risk is the proposed rule on “beneficial” ownership. Such a definition is important for a host of reporting obligations. The SEC is considering expanding what counts as ownership. But questions of ownership have long been a matter of state concern. Gorsuch may have something to say about the SEC’s effort to expand the definition. 

Another example is Kim Kardashian, who was ordered by the SEC to pay a fine for having touted a cryptocurrency on her Instagram account and the compensation she failed to disclose. The SEC has been in a battle with other financial overseers of the U.S. financial system to regulate and control digital currencies, which may or may not meet the definitions of a security or other language that legally created the commission.

Take Away

Regulatory agencies, including the SEC, are likely to have to contend with increased barriers with both the only branch of government that makes both laws and spends money and the branch that deciphers and enforces laws. Rather than argue if this is what should be, or if it slows down progress when wearing one’s investor hat,” investors may only want to consider what industries and what companies within those industries will be the winners and losers – then how does that fit into your overall portfolio strategy.

If you haven’t registered to receive equity research and thoughtful articles and videos from Channelchek, this is a good time to sign-up in preparation for the year-end and 2023. Click here for free registration.

Paul Hoffman

Managing Editor, Channelchek

Less Expensive Batteries Don’t Always Come from Cheaper Materials

Posted on by phoffman@channelchek.com
Image Credit: 24M Technology (MIT News)

Zach Winn | MIT News Office

When it comes to battery innovations, much attention gets paid to potential new chemistries and materials. Often overlooked is the importance of production processes for bringing down costs.

Now the MIT spinout 24M Technologies has simplified lithium-ion battery production with a new design that requires fewer materials and fewer steps to manufacture each cell. The company says the design, which it calls “SemiSolid” for its use of gooey electrodes, reduces production costs by up to 40 percent. The approach also improves the batteries’ energy density, safety, and recyclability.

Judging by industry interest, 24M is onto something. Since coming out of stealth mode in 2015, 24M has licensed its technology to multinational companies including Volkswagen, Fujifilm, Lucas TVS, Axxiva, and Freyr. Those last three companies are planning to build gigafactories (factories with gigawatt-scale annual production capacity) based on 24M’s technology in India, China, Norway, and the United States.

“The SemiSolid platform has been proven at the scale of hundreds of megawatts being produced for residential energy-storage systems. Now we want to prove it at the gigawatt scale,” says 24M CEO Naoki Ota, whose team includes 24M co-founder, chief scientist, and MIT Professor Yet-Ming Chiang.

Establishing large-scale production lines is only the first phase of 24M’s plan. Another key draw of its battery design is that it can work with different combinations of lithium-ion chemistries. That means 24M’s partners can incorporate better-performing materials down the line without substantially changing manufacturing processes.

The kind of quick, large-scale production of next-generation batteries that 24M hopes to enable could have a dramatic impact on battery adoption across society — from the cost and performance of electric cars to the ability of renewable energy to replace fossil fuels.

“This is a platform technology,” Ota says. “We’re not just a low-cost and high-reliability operator. That’s what we are today, but we can also be competitive with next-generation chemistry. We can use any chemistry in the market without customers changing their supply chains. Other startups are trying to address that issue tomorrow, not today. Our tech can address the issue today and tomorrow.”

A Simplified Design

Chiang, who is MIT’s Kyocera Professor of Materials Science and Engineering, got his first glimpse into large-scale battery production after co-founding another battery company, A123 Systems, in 2001. As that company was preparing to go public in the late 2000s, Chiang began wondering if he could design a battery that would be easier to manufacture.

“I got this window into what battery manufacturing looked like, and what struck me was that even though we pulled it off, it was an incredibly complicated manufacturing process,” Chiang says. “It derived from magnetic tape manufacturing that was adapted to batteries in the late 1980s.”

In his lab at MIT, where he’s been a professor since 1985, Chiang started from scratch with a new kind of device he called a “semi-solid flow battery” that pumps liquids carrying particle-based electrodes to and from tanks to store a charge.

In 2010, Chiang partnered with W. Craig Carter, who is MIT’s POSCO Professor of Materials Science and Engineering, and the two professors supervised a student, Mihai Duduta ’11, who explored flow batteries for his undergraduate thesis. Within a month, Duduta had developed a prototype in Chiang’s lab, and 24M was born. (Duduta was the company’s first hire.)

But even as 24M worked with MIT’s Technology Licensing Office (TLO) to commercialize research done in Chiang’s lab, people in the company including Duduta began rethinking the flow battery concept. An internal cost analysis by Carter, who consulted for 24M for several years, ultimately lead the researchers to change directions.

That left the company with loads of the gooey slurry that made up the electrodes in their flow batteries. A few weeks after Carter’s cost analysis, Duduta, then a senior research scientist at 24M, decided to start using the slurry to assemble batteries by hand, mixing the gooey electrodes directly into the electrolyte. The idea caught on.

The main components of batteries are the positive and negatively charged electrodes and the electrolyte material that allows ions to flow between them. Traditional lithium-ion batteries use solid electrodes separated from the electrolyte by layers of inert plastics and metals, which hold the electrodes in place.

Stripping away the inert materials of traditional batteries and embracing the gooey electrode mix gives 24M’s design a number of advantages.

For one, it eliminates the energy-intensive process of drying and solidifying the electrodes in traditional lithium-ion production. The company says it also reduces the need for more than 80 percent of the inactive materials in traditional batteries, including expensive ones like copper and aluminum. The design also requires no binder and features extra thick electrodes, improving the energy density of the batteries.

“When you start a company, the smart thing to do is to revisit all of your assumptions  and ask what is the best way to accomplish your objectives, which in our case was simply-manufactured, low-cost batteries,” Chiang says. “We decided our real value was in making a lithium-ion suspension that was electrochemically active from the beginning, with electrolyte in it, and you just use the electrolyte as the processing solvent.”

In 2017, 24M participated in the MIT Industrial Liaison Program’s STEX25 Startup Accelerator, in which Chiang and collaborators made critical industry connections that would help it secure early partnerships. 24M has also collaborated with MIT researchers on projects funded by the Department of Energy.

Enabling the Battery Revolution

Most of 24M’s partners are eyeing the rapidly growing electric vehicle (EV) market for their batteries, and the founders believe their technology will accelerate EV adoption. (Battery costs make up 30 to 40 percent of the price of EVs, according to the Institute for Energy Research).

“Lithium-ion batteries have made huge improvements over the years, but even Elon Musk says we need some breakthrough technology,” Ota says, referring to the CEO of EV firm Tesla. “To make EVs more common, we need a production cost breakthrough; we can’t just rely on cost reduction through scaling because we already make a lot of batteries today.”

24M is also working to prove out new battery chemistries that its partners could quickly incorporate into their gigafactories. In January of this year, 24M received a grant from the Department of Energy’s ARPA-E program to develop and scale a high-energy-density battery that uses a lithium metal anode and semi-solid cathode for use in electric aviation.

That project is one of many around the world designed to validate new lithium-ion battery chemistries that could enable a long-sought battery revolution. As 24M continues to foster the creation of large scale, global production lines, the team believes it is well-positioned to turn lab innovations into ubiquitous, world-changing products.

“This technology is a platform, and our vision is to be like Google’s Android [operating system], where other people can build things on our platform,” Ota says. “We want to do that but with hardware. That’s why we’re licensing the technology. Our partners can use the same production lines to get the benefits of new chemistries and approaches. This platform gives everyone more options.”

Reprinted with permission of MIT News  ( http://news.mit.edu/)

Leadership and Embracing Existing Technology May Get Us to Net-Zero Quicker

Posted on by phoffman@channelchek.com
Image Credit: Mussi Katz (Flickr)

Getting to ‘Net-Zero’ Emissions: How Energy Leaders Envision Countering Climate Change in the Future

What’s behind this view, energy leaders say, is their deep degree of skepticism that renewable energy technologies alone can meet the nation’s future energy demands at a reasonable cost.

With the federal government promising over US$360 billion in clean energy incentives under the Inflation Reduction Act, energy companies are already lining up investments. It’s a huge opportunity, and analysts project that it could help slash U.S. greenhouse gas emissions by about 40% within the decade.

But in conversations with energy industry leaders in recent months, we have heard that financial incentives alone aren’t enough to meet the nation’s goal of reaching net-zero emissions by 2050.

In the view of some energy sector leaders, reaching net zero emissions will require more pressure from regulators and investors and accepting technologies that aren’t usually thought of as the best solutions to the climate crisis.

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of Seth Blumsack, Professor of Energy and Environmental Economics and International Affairs, Penn State and Lara B. Fowler Interim Chief Sustainability Officer, Penn State; Interim Director, Penn State Sustainability Institute; Profess of Teaching, Penn State Law, Penn State.

‘Net-Zero,’ With Natural Gas

In spring 2022, we facilitated a series of conversations at Penn State University around energy and climate with leaders at several major energy companies – including Shell USA, and electric utilities American Electric Power and Xcel Energy – as well as with leaders at the Department of Energy and other public-sector agencies.

We asked them about the technologies they see the U.S. leaning on to develop an energy system with zero net greenhouse gases by 2050.

Their answers provide some insight into how energy companies are thinking about a net-zero future that will require extraordinary changes in how the world produces and manages energy.

We heard a lot of agreement among energy leaders that getting to net-zero emissions is not a matter of finding some future magic bullet. They point out that many effective technologies are available to reduce emissions and to capture those emissions that can’t be avoided. What is not an option, in their view, is to leave existing technologies in the rearview mirror.

They expect natural gas in particular to play a large, and possibly growing, role in the U.S. energy sector for many years to come.

What’s behind this view, energy leaders say, is their deep degree of skepticism that renewable energy technologies alone can meet the nation’s future energy demands at a reasonable cost.

Costs for wind and solar power and for energy storage have declined rapidly in recent years. But dependence on these technologies has some grid operators worried that they can’t count on the wind blowing or sun shining at the right time – especially as more electric vehicles and other new users connect to the power grid.

Energy companies are rightly nervous about energy grid failures – no one wants a repeat of the outages in Texas in the winter of 2021. But some energy companies, even those with lofty climate goals, also profit handsomely from traditional energy technologies and have extensive investments in fossil fuels. Some have resisted clean energy mandates.

In the view of many of these energy companies, a net-zero energy transition is not necessarily a renewable energy transition.

Instead, they see a net-zero energy transition requiring massive deployment of other technologies, including advanced nuclear power and carbon capture and sequestration technologies that capture carbon dioxide, either before it’s released or from the air, and then store it in nature or pump it underground. So far, however, attempts to deploy some of these technologies at scale have been plagued with high costs, public opposition and serious questions about their environmental impacts.

Think Globally, Act Regionally

Another key takeaway from our roundtable discussions with energy leaders is that how clean energy is deployed and what net-zero looks like will vary by region.

What sells in Appalachia, with its natural-resource-driven economy and manufacturing base, may not sell or even be effective in other regions. Heavy industries like steel require tremendous heat as well as chemical reactions that electricity just can’t replace. The economic displacement from abandoning coal and natural gas production in these regions raises questions about who bears the burden and who benefits from shifting sources of energy.

Opportunities also vary by region. Waste from Appalachian mines could boost domestic supplies of materials critical to a cleaner energy grid. Some coastal regions, on the other hand, could drive decarbonization efforts with offshore wind power.

At a regional scale, industry leaders said, it can be easier to identify shared goals. The Midcontinent Independent System Operator, known as MISO, which manages the power grid in the upper Midwest and parts of the South, is a good example.

Among the major power grid operators, MISO has a broad, varied territory, which also extends into Canada, which can make management decisions more difficult. FERC

When its coverage area was predominantly in the upper Midwest, MISO could bring regional parties together with a shared vision of more opportunities for wind energy development and higher electric reliability. It was able to produce an effective multistate power grid plan to integrate renewables.

However, as utilities from more far-flung (and less windy) states joined MISO, they challenged these initiatives as not bringing benefits to their local grids. The challenges were not successful but have raised questions about how widely costs and benefits can be shared.

Waiting for the Right Kind of Pressure

Energy leaders also said that companies are not enthusiastic about taking on risks that low-carbon energy projects will increase costs or degrade grid reliability without some kind of financial or regulatory pressure.

For example, tax credits for electric vehicles are great, but powering these vehicles could require a lot more zero-carbon electricity, not to mention a major national transmission grid upgrade to move that clean electricity around.

That could be fixed with “smart charging” – technologies that can charge vehicles during times of surplus electricity or even use electric cars to supply some of the grid’s needs on hot days. However, state utility regulators often dissuade companies from investing in power grid upgrades to meet these needs out of fear that customers will wind up footing large bills or technologies will not work as promised.

Energy companies do not yet seem to be feeling major pressure from investors to move away from fossil fuels, either.

For all the talk about environmental, social and governance concerns that industry leaders need to prioritize – known as ESG – we heard during the roundtable that investors are not moving much money out of energy companies whose responses to ESG concerns are not satisfactory. With little pressure from investors, energy companies themselves have few good reasons to take risks on clean energy or to push for changes in regulations.

Leadership Needed

These conversations reinforced the need for more leadership on climate issues from lawmakers, regulators, energy companies and shareholders.

If the energy industry is stuck because of antiquated regulations, then we believe it’s up to the public and forward-looking leaders in business and government and investors to push for change.

Musks Twitter Bid Raises Two Corporate Governance Questions

Posted on by aweinsoff@channelchek.com
Source: Steve Jurvetson (Flickr)

Elon Musk Argues Twitter is Better off Without a Board of Directors – Is He Right?

After a wild ride, it looks like Elon Musk’s bid to buy Twitter will move ahead.

Twitter’s board of directors had sued the Tesla billionaire in July 2022 when Musk tried to terminate the US$44 billion deal. The board has yet to drop its lawsuit to force Musk to complete the buyout, while many parts have been thrown out.

The board has in fact been at the center of this saga since the beginning, when Musk launched his hostile takeover bid while criticizing board members for owning almost no shares of the company they oversee. Twitter founder Jack Dorsey called the board the “dysfunction of the company.”

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of Michael Withers, Associate Professor of Business, Texas A&M University, Steven Boivie, Professor of Management, Texas A&M University.

As experts on corporate governance, we believe this feud raised two important corporate governance questions: What purpose does a board of directors serve? And does it matter if a member owns company stock or not?

‘A Bad Board Will Kill’

“Good boards don’t create good companies, but a bad board will kill a company every time.”

Venture capitalist Fred Destin wrote that in 2018, citing what he called an “old Silicon Valley proverb.” The quote has been making the rounds on Twitter recently in light of Musk’s hostile bid. It even seemed to get a nod from Dorsey himself when he replied to a tweet containing the quote with “big facts.”

This tweet and the general conversation that has emerged have important implications for understanding boards and their role in shepherding a company.

Broadly speaking, a board’s most important roles include hiring, paying and monitoring the chief executive officer.

Academic research suggests that board members at large companies – who typically receive generous compensation packages – may be limited in their ability to perform these tasks effectively. In our work, we found that boards often find it impossible to conduct adequate monitoring and rein in wayward CEOs because there’s just so much information for modern boards to process with their limited time. And the social dynamics involved in the board also make it difficult for directors to speak up and oppose other directors.

In a separate study involving face-to-face interviews with directors, we were consistently told that directors take their board service seriously and operate with their companies’ best interests in mind. But they do so with an eye toward collaborating with the CEO and the rest of the executive team rather than serving as impartial observers, as their “independent” status suggests they should.

While our work didn’t focus on this, if the board and the CEO fundamentally disagree about the direction of company – which was often the case between Dorsey and the Twitter board – it would certainly be problematic and could lead to less than optimal decisions being made.

In other words, a board that isn’t functioning effectively can definitely destroy a company’s value. And some reporting suggests that’s what happened to Twitter, whose shares were trading at less than half their 2021 peak before Musk disclosed he had amassed a 9% ownership stake.

A Raider’s Lament

That brings us to the next question: Does not owning a significant stake in a company you oversee make it more likely that you’ll run it into the ground, as Musk seemed to suggest?

A few days after making his takeover offer on April 14, the billionaire, responding to a tweet showing how few shares Twitter board members own, posted that its directors’ “economic interests are simply not aligned with shareholders.”

Source: @ChrisJBlake (Twitter)

Musk’s arguments harked back to takeover bids from the 1980s in which activist investors – or “corporate raiders” – would argue that executives’ interests did not align with those of shareholders. As Gordon Gekko from the film “Wall Street” famously railed against executives of a business he wanted to take over, “Today, management has no stake in the company!”

Musk’s words echo Gekko’s “greed is good” speech, except in regard to independent directors, who comprise the vast majority of corporate boards. By definition, an independent or outside director is one who doesn’t hold an executive role in running the company, such as chief executive officer or chief financial officer.

In reality, Twitter’s board share ownership is very similar to that of other companies.

Independent Twitter directors held a median ownership stake of 0.003% as of May 2022. For comparison, we looked at equity ownership of independent directors of companies listed in the S&P 500 stock index in 2021. We found the median stake was less than 0.01%, and all but a handful of directors held less than 1% of the company’s stock. Median ownership at Musk’s company Tesla is similarly minuscule, at 0.23%.

Whether this makes a difference to a company’s success is hard to assess because research on the topic is rather sparse, in large part because board members have so little equity.

Mixed Research

Academic researchers on effective corporate governance in the 1970s argued that outside directors should avoid owning many shares in the companies they oversee to maintain objectivity. More recently, management scholars have suggested that higher stakes could provide a way to motivate directors to monitor management and make decisions more in line with shareholder interests.

Some researchers have found that boards with larger ownership stakes can improve a company’s operational performance and better align outside directors with the interests of shareholders.

But other work that examined multiple studies shows the impact of director stock ownership is mixed at best, with some studies suggesting higher stakes potentially lead to negative outcomes, such as excessive executive and director compensation.

Since the passage of the Sarbanes–Oxley Act of 2002 after massive accounting scandals at Enron, WorldCom and elsewhere, corporate governance issues such as board oversight have become increasingly important. This led to a number of changes intended to align the interests of managers and those of shareholders, including a focus on board independence and adjusting executive compensation.

Although our research shows boards are limited in their ability to monitor management, they’re still better than nothing.

In his original letter to shareholders announcing his bid, Musk vowed to “unlock” Twitter’s potential as a private company, without a public board. We may finally learn if he’s right.

The Case for Hydrogen Fuel Cell Vehicles

Posted on by phoffman@channelchek.com
Image Credit: TruckPR (Flickr)

Is Hydrogen, Not Lithium-ion, the Automotive World’s Real Future?

Lithium-ion (Li-ion) batteries provide incredibly functional and versatile storage of electric power for cell phones, laptops, leaf blowers, Bluetooth speakers, and a myriad of other portable electric tools and appliances. But is it the best way to store power to drive the big motors found in a car or tractor-trailer? Hydrogen could provide a lighter, more potent, less environmentally harmful way to store power. And with greater range. Are car companies being steered down an inferior or potentially impossible path?

China plans to have a million hydrogen-powered vehicles on roads by 2035, and Japan, which has a much smaller population, is shooting for 800,000 units by 2030. Perhaps the world’s most abundant element is worth a deeper look before billions are spent on infrastructure to support the Li-ion model.

What’s a Fuel Cell

According to ThoughtCo.com, the most abundant element in the universe is hydrogen, making up about three-quarters of all things. Helium, then oxygen, makes up most of the rest of all matter. By comparison, all of the other elements are rare.

There are combustion engines that run on hydrogen, but it’s fuel cell electric vehicles (FCEVs) that are driven by motors, similar to those now going into Fords, Teslas and Volvos. The FCEV uses a hydrogen fuel cell.

These electric power storing fuel cells consist of a positive (cathode) and a negative electrode (anode), separated by an electrolyte membrane to chemically release electricity. This happens when oxygen from the surrounding air is exposed to the cathode. As liquid hydrogen, which fills the fuel cell in similar quantities that may be required of gas or diesel in a fossil fuel-powered vehicle, accumulates on the anode, they break apart into protons and electrons from the reaction with the electrolyte.

As protons travel through the membrane to the cathode, electrons are forced through a circuit. The circuit includes the electric motor, which releases the power to drive the vehicle down the road,  powering an electric motor in the process. The electrons complete the path and reach the protons on the cathode; here, they react with oxygen to create H20 vapor.

Benefits to Cars and Trucks

The emissions of an FCEV, if you can call it that, is pure water. This is the very definition of clean and sustainable for the planet. In fact, the water vapor released is completely recyclable. But with it being composed of two of the most abundant elements, the need to recycle it as a way to store energy doesn’t exist.

Cars and large trucks have a far longer range than battery electric vehicles (BEVs). The fuel cells can convert far more stored hydrogen into electricity than current EV batteries, making their range more in line with what drivers of cars and trucks expect from their vehicles.

The speed of powering up the fuel cell is also similar to refueling a vehicle with petrol. Refilling the fuel cell takes minutes. The combination of longer range and speed to get back on the road makes it a functionally attractive option for drivers.

Downside

Similar to recharging a lithium-ion battery, a power source is needed. Currently, this power source isn’t often wind, solar, or tidal, it’s fossil fuels. Hydrogen produced by coal or oil is seen as having dirty electrons; hydrogen produced by natural gas is called blue hydrogen. Using wind or sun to turn water into its atomic components is possible and does not need to be done in a large refinery in some remote place, but the outlets for this still need to be built.

The main reason is the lack of infrastructure. In order for hydrogen cars to become a viable option, there needs to be a network of refueling stations in place. This is a chicken-and-egg situation as car manufacturers are reluctant to mass-produce FCEVs without the existing infrastructure, and investors are unwilling to build hydrogen refueling stations without strong demand for them. Sales of fuel cell-powered vehicles in the U.S. in 2021 totaled 3,341. There aren’t entrepreneurs or even energy companies racing out to build a hydrogen refilling station when they’re not likely to experience any business.

Take Away

Although hydrogen still isn’t becoming a mainstream option, it is an alternative fuel source that is certainly worth keeping an eye on. With the right infrastructure in place, hydrogen cars could become a viable option for those looking for a clean and sustainable way to power their vehicles — if not now, definitely in the future.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://insideevs.com/news/565185/us-hydrogen-car-sales-2021/

https://www.thoughtco.com/most-abundant-element-in-the-universe-602186

https://www.marketwatch.com/story/battery-electric-cars-are-the-future-not-so-fast-hydrogen-powered-cars

Survey Says ESG Fund Managers Don’t Want to Divulge Too Much

Posted on by cpatches
Image Credit: NIO Inc.

ESG Fund Sponsors are Reacting to Increased Scrutiny

Cautious exchange-traded fund (ETF) sponsors are creating a smokescreen to avoid trouble for themselves.

Environmental, Social, and Governance (ESG) investing works best with openness and transparency. Until now, ETF and mutual fund managers have shown themselves eager to share their ESG guidelines and how the underlying investments fit. After all, achieving and maintaining a designation that allows your fund to grab a chunk of the $2.5 trillion category is good business. Pending regulations which could impact the underlying investments and fund’s ESG status’ have caused fund managers to exercise more caution than they have in the past when sharing information.

ESG Fund Survey

Sage Advisory is a $16.5 billion financial advisor serving clients that choose ESG as a theme for their investments. In each of the past four years, Sage has surveyed fund managers to produce their Stewardsip Report. The 2002 report was released today.

ETF providers that responded to the survey offered much less manager disclosure and transparency about their environmental, social, and governance activities compared with the previous year’s responses. According to the report, there was also a distinct change in tone. The advisory group wrote in its report, this is likely because of pending regulation in Europe and from the U.S. Securities and Exchange Commission that would more clearly define ESG investments. If something the fund manager is doing changes its category, the fund manager would prefer to know and take action before investors find out through a third party.

“There was a noticeable difference in terms of reading the responses, and seeing the restrained language, almost kind of a legalese language to the responses that had not been there in the past,” said Emma Harper, senior research analyst for ESG risk management at Sage Advisory who compiled the survey.

About the Survey

The ESG survey has 69 questions and covers seven areas of stewardship, including proxy voting, climate, and governance. Sage sent surveys to 34 ETF providers and received responses from 23 issuers, including seven of the ten largest ETFs in the U.S. by AUM. Including non-ESG assets, the respondents combined AUM is about $37.5 trillion.

Ms. Harper said, “It was almost by-the-book in the way they are explaining things, rather than all the flourishing details and pretty pictures of the things they can do.”

Harper said it was harder to get responses regarding proxy voting, specifically the number of times they voted against management. Large ETF providers have always tended to vote with company management and against shareholder proposals.

“Across the board this year, we had a number of providers saying ‘that’s confidential,’ or ‘here’s our voting record in general; go find that percentage for yourself.’ It wasn’t an easy straight answer for a number of them,” Harper said.

Regulators

Some asset management firms are thought by government watchdogs to be overstating ESG credentials. This suspected “greenwashing” could cause huge outflows if proven. Worse yet, regulators have been acting on concerns. German officials raided Deutsche Bank’s DWS unit over greenwashing claims, and the SEC fined BNY Mellon $1.5 million over misstatements about ESG for some mutual funds.

With one in three dollars in U.S. fund investments said to follow ESG industry rankings, the SEC’s fraud radar has been turned up, and they are investigating. The Commission is also proposing stronger disclosures and reporting, and wants to assure that a funds label accurately reflects its management style.

Currently, there are no standards that define ESG, just as there are no standards that define styles such as growth or value.

Take Away

In its report, Sage said it believes the proposed regulations and fines “has both positive and negative consequences.” Without a clear definition, investors will become frustrated and may find the sector less attractive. As greenwashing becomes more difficult and investors are better able to judge the fund’s purpose, investors can better understand the underlying assets. 

ESG funds and ESG investing became a big thing during the pandemic era investment craze. It was a sector that had high returns that fed on themselves as more investors chased its snowballing momentum. It now constitutes one out of every three dollars in a fund. As the sector ages and regulators require better definitions, the growth of funds may be hampered by a lack of available investments. Alternatively, the appetite for these funds may decline as other investment “fads” take its place.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.sageadvisory.com/Form-ADV-Part-2A.pdf

https://www.sageadvisory.com/perspectives/2022-annual-etf-stewardship-report/

https://www.bloomberg.com/news/articles/2022-09-02/esg-funds-face-reckoning-as-bear-market-slows-investing

Could Cryptocurrency Become a Catalyst for Renewable Energy Projects?

Posted on by cpatches
Image Credit: Kecko (Flickr)

Crypto Mining can Retire Fossil Fuels for Good. Here’s How

To many, cryptocurrency may be considered the antithesis to ESG. Bitcoin, for instance, it consumes more energy per year than countries such as Finland and Belgium. However, new regulations and approaches to cryptocurrency and cryptocurrency mining could reduce carbon emissions as the industry turns to renewable energy and innovative solutions. Karen Jones, a Space Economist at The Center for Space Policy and Strategy, examines how ESG concerns from investors, the financial sector and governments are changing cryptocurrency and how, in turn, cryptocurrency could become a catalyst for renewable energy projects.

The future of blockchain is bright, but first we need to bring our expectations back to earth. To realize its full potential, the decentralized finance (DeFi) market must operate within regulatory guard rails — to protect both investors and the planet.

  • Cryptocurrency mining using proof of work calculations is very energy-intensive, but it isn’t the only option.
  • New regulations and new approaches to mining cryptocurrencies could also see reduced carbon emissions as the crypto industry turns to renewable energy and innovative solutions.
  • And looking long term, could space-based solar power one day fuel a space-based blockchain revolution?

Since the great cryptocurrency meltdown of May 2022, DeFi has been in the spotlight. Regulators are considering new ways to protect investors and discourage fraudulent activities after hundreds of billions of dollars in value were wiped out and entire currencies became essentially worthless, nearly overnight.

The Cost to the Planet

Now the market faces another challenge. Regulators and Environmental, Social, and Governance (ESG) motivated investors are applying pressure to reduce carbon footprints across many industries — especially the relatively new cryptocurrency market.

Even after this year’s major hit to the market, the global market capitalization for cryptocurrency is still approximately $1.04 trillion. And these companies — this technology, as it stands — is built on the mass consumption of energy.

Senior US politicians have warned that the seven largest crypto companies expect to increase their computing capacity to 2.4 gigawatts. That is a 230 percent increase from current levels, and enough energy to power 1.9 million homes. They called the miners’ energy consumption “disturbing.”

In early May this year, researchers at Columbia University estimated that global mining for Bitcoin alone, just the most popular among hundreds of cryptocurrencies, consumed more energy than the entirety of Argentina and emitted roughly 65 megatons of carbon dioxide into the atmosphere every year.

Cryptocurrency Legislation is Ramping Up

Blockchain-based currency is still in its wild west days, but policymakers are taking notice.

United States legislators have proposed a bill that aims to establish a framework for regulating cryptocurrency, including provisions directing the Federal Energy Regulatory Commission to study the energy impact of the cryptocurrency industry.

The crypto market currently involves energy-intensive mining to solve cryptographic problems, a key component of the blockchain for proof of work, the calculation computers complete to create a new Bitcoin. To reduce power needs, many blockchain applications are shifting from the energy-intensive proof of work consensus to proof of stake, which still validates entries onto the shared ledger, but emits far fewer greenhouse gas (GHG) emissions in doing so.

Despite the huge emissions caused by parts of the industry, not all crypto mining efforts have such large carbon footprints, even when they use proof of work. Mining can rely upon solar, wind, hydroelectric and geothermal renewable energy systems. To discourage carbon-intensive crypto mining operations, New York legislators have proposed a moratorium to partially limit cryptocurrency mining operations that use proof of work authentication methods to validate blockchain transactions. The moratorium would not apply to mining operations that utilize renewable energy.

The Paris Climate Agreement’s goal of Net Zero 2050 is ushering in an era of self-scrutiny, as industries examine their own industrial processes and carbon footprints. One way to do this is to evaluate the cradle to grave lifecycle assessment of a crypto transaction. Sometimes referred to as an environmental lifecycle analysis (E-LCA), this framework provides a structure for conducting an inventory and assessment of a product’s environmental footprint.

Moving towards a lifecycle assessment will also help companies produce data driven ESG statements. As ESG standards guide investors to green products and services, more industries, including crypto companies, will conduct a self-analysis of their own carbon footprints and environmental lifecycles. And good actors will be motivated to assess and broadcast their virtuous carbon-free lifecycles.

Although most environmental lifecycle-related disclosures are currently voluntary, this could change. The United States Securities and Exchange Commission (SEC) has proposed rules for registrant companies to conduct Scope 1, 2, and 3 emissions inventories. If these proposed rules become law, publicly traded cryptocurrencies would need to understand their life cycle emissions intensity, from direct operations (Scope 1), electricity purchases (Scope 2), and indirect upstream and downstream activities (Scope 3) emissions.

Crypto Mining as a Catalyst for Renewable Energy Projects

While there is always a fear that conducting an environmental assessment might reveal “inconvenient details,” it also represents a unique opportunity.

Crypto mining companies are often located near power sources to feed their power-hungry computers. As a result, crypto mining can be a catalyst or market driver for new renewable energy projects. For instance, Digital Power Optimization, in New York, now runs 400 mining computers from spare electricity produced by a hydroelectric dam in Hatfield, Wisconsin. There are many remote geographic areas where the energy demand market is not large enough to support a utility scale renewable energy site.

It is this symbiosis of crypto computer farms and remote green energy projects which offers the potential for mutual benefits — and it may not stop with rural projects.

Many cryptocurrency stakeholders and enthusiasts expect the DeFi market to expand its reach into near space, the moon and beyond — and this idea is not far from being realized. A range of distributed ledger technologies are already being considered for the space domain.

A multi-signature Bitcoin transaction has been demonstrated on the International Space Station. Other companies are moving forward with various space applications, including fundraising, smart contracts, autonomous satellite communications and blockchain applications for managing a range of satellite assets in a decentralized and accountable way.

Perhaps one day in the future an orbiting space-based solar power plant could generate several gigawatts of clean energy and power a range of blockchain applications in space.

Opportunities for consensus-based protocols across the space value chain
Image: The Center for Space Policy and Strategy

Several countries, including China, India and the UK are seriously considering space based solar power. As the world seeks decentralized, accountable and carbon free technical solutions, it is this type of cooperative partnership between clean energy providers and blockchain applications that can answer the call.

About the Author:

Karen L. Jones is a Space Economist at The Center for Space Policy and Strategy.

This article first appeared on the World Economic Forum website in August 2022.