Our monthly spotlight on the latest in values-aligned investing across Wall Street and the world.
ESG IN THE NEWS
The US Inflation Reduction Act Is A Mixed Bag. On August 7, the US Senate passed the Inflation Reduction Act (IRA). In a nutshell, the IRA caps prescription drug spending for seniors and provides tax incentives for investment in renewable energy and electric vehicles. The idea is to limit energy and prescription drug inflation over the long term. Unfortunately, there are many offsets buried within this bill that also benefit the fossil fuel industry, but were necessary to garner bipartisan support. We highlight a few key points below to shed light on the most important environmental aspects of the legislation.
- Electric vehicle provisions don’t look that great. The IRA allows a $7,500 tax credit for new electric vehicles as long as the cost of the car is below $55,000 and income is below $150,000. A major caveat is that to be eligible for the credit, final assembly of the vehicle has to be in North America. There are also limitations on where battery materials can be sourced. One estimate suggests that 70% of EVs in the US today are ineligible for the tax credit. So, the EV tax credit is not likely to drive a surge in new car sales.
- The Act Extends Renewable Energy Tax Credits. The bill provides for a 10-year production tax credit or investment tax credit (ITC) for zero-emission projects, prolonging an existing program. In addition, energy storage projects are now eligible for a 30% ITC. The extension could future support solar & wind projects as well as battery storage.
- Then There’s The Bad Stuff. The IRA provides ample opportunity for the oil & gas industry to obtain drilling rights for both onshore and offshore projects. For example, each new lease for an offshore wind project must be accompanied by a new lease for an offshore oil & gas project. This opens up 600 million acres of federal waters for oil & gas exploration over the next decade. There is also expedited permitting for infrastructure projects such as oil & gas pipelines. Lastly, there is even a side deal with Joe Manchin to complete a 300-mile natural gas pipeline in West Virginia.
ESG Study Points To Outperformance. A recent study by ESG Book showed that over the past five years, ESG-focused model portfolios outperformed benchmarks from January 2017 through April 2022. Good corporate governance was a big driver of outperformance, followed by environmental and social factors. Todd Bridges, head of ESG research at ESG Book, said, “Over a long-term horizon, regardless of region, there are benefits and better risk-return profiles.”
EU Puts Social Taxonomy On The Back Burner. Similar to the challenges faced in passing the US Inflation Act due to disagreement and deep political divisions, the EU has indefinitely put on hold efforts to develop a social taxonomy for sustainable investing. The social taxonomy covers issues such as gender equality, pay equity, weapons of mass destruction, modern slavery, and humane supply chains. Given the political divide among the countries, work on a social taxonomy is expected to be delayed for years. Hence, the social or “S” issues will not be included in EU ESG regulations. Despite the challenges developing the EU taxonomy, Europe remains a world leader in sustainable investing across the entire range of asset classes, and the US still has a long way to go to catch up.
VALUES IN ACTION
Earth: Beyond Meat stock falls after McPlant test. McDonalds has been testing plant-based burgers using Beyond Meat patties. However, towards the end of July, McDonalds ended US testing for a McPlant burger. Analyst research suggests demand for the meatless burger, which is more sustainable vs. beef, was lackluster. McDonalds has yet to announce a nationwide launch for a meatless burger in the US. McPlant was tested in roughly 600 locations and sales were reported to be disappointing or at the low end of projected ranges. Beyond Meat stock is down 50% year to date and has a $2 billion market cap. The company does not meet Seeds’ rules framework due to financial metrics - small market cap and low profitability.
People: Starbucks unionization effort seeks better working conditions. In recent months, the newly formed union Starbucks Workers United has been working to recruit new members. The union seeks to address understaffing, low pay, race discrimination in promotions, and other issues. Since December 2021, about 2% of total US locations - 200 locations - have voted to join the union or about. For its part, Starbucks has resisted unionization efforts, including offering wage increases and benefits to non-union stores. The company also increased wages to a $15 floor nationally for non-union stores. Starbucks meets Seeds’ rules framework due to the company’s strong scores in human capital management and business ethics vs. peers.
Corporate Integrity: T-Mobile to settle class-action lawsuit for $500 million. Cybersecurity breaches can be expensive. T-Mobile has agreed to a $350 Million payout plus a commitment to invest $150 million to upgrade its data security. The lawsuit stems from an August 2021 hack that resulted in the potential theft of personal information from almost 80 million people. These records include names, addresses, dates of birth, Social Security numbers, and other sensitive information. John Binns, a 21-year-old American hacker, took responsibility for the data theft saying he was able to gain access to T-Mobile’s data center through an unprotected router. T-Mobile does not meet Seeds’ rules framework because its data privacy risk score is above threshold levels.
Orsted A/S – Still a Good Long-Term Growth Story
Orsted is the world leader in offshore wind, but the stock is down 25% over the past year thanks to a short term resurgence in fossil fuels. That said, the company still has favorable long-term growth prospects. Orsted plans to grow its renewable energy capacity from 12 gigawatts to 50 gigawatts by 2030. The company is planning to invest US$50 billion from 2020-2027 to grow in offshore/onshore wind, solar, and renewable hydrogen. Orsted’s sustainability program focuses on reducing its own emissions and reaching net zero emissions by 2040. The company plans to reduce its direct emissions by 98% by 2025 (from 87% in 2021). Indirect emissions (Scope 3) are targeted for 50% reduction by 2032 (from 38% in 2021). Other key sustainability efforts include a commitment to net-positive biodiversity for every project and strong engagement with local communities and stakeholders. Orsted is also working on improving its diversity and going from a 69/31 male-female gender balance to 60/40 by 2030.
A new article by McKinsey Sustainability, Does ESG Really Matter - And Why?, notes that although valid questions have been raised about ESG, the need for companies to understand and address their externalities is likely to become essential to maintaining their social license - the acceptance of a company business practices and operating procedures by its employees, stakeholders, and the general public. ESG considerations are becoming more—not less—important in companies’ decision making.
“Companies can conduct their operations in a seemingly rational way, aspire to deliver returns quarter to quarter, and determine their strategy over a span of five or more years. But if they assume that the base case does not include externalities or the erosion of social license by failing to take externalities into account, their forecasts - and indeed, their core strategies - may not be achievable at all … managers can miss the very point of why they are measuring in the first place: to ensure that their business endures, with societal support, in a sustainable, environmentally viable way.”
- Seeds was named as a finalist for the Finovate Awards 2022 for Excellence in Sustainability.
- Zachary Conway, the CEO and Founder of Seeds scheduled to present next month at the FutureProof festival.
Seeds Investor LLC ("Seeds") is a Registered Investment Advisor ("RIA"), located in the State of New York. Seeds provides investment advisory and related services for clients nationally. Seeds will maintain all applicable registration and licenses as required by the various states in which Seeds conducts business, as applicable.
This document is for your private and confidential use only, and not intended for broad usage or dissemination. Past performance is no guarantee of future returns. Nothing contained in this publication shall be construed as to make a representation or warranty, express or implied, regarding the advisability to invest in or include companies in investable universes and/or portfolios. Opinions shown in this publication are solely those of Seeds and may not be accurate or complete. Seeds does not get any compensation from linking to news articles and does not take any responsibility for the accuracy of such articles or information therein.
*Holding examples mentioned are for illustrative purposes and may or may not represent actual holdings in an individual’s personalized Seeds Portfolio. Investors are to refer to their financial advisor or custodian for a list of actual holdings.
Seeds began managing advisory client assets March 23, 2020. Although this material is based upon information the advisor considers reliable and endeavors to keep current, the advisor does not assure that this material is accurate, current or complete, and it should not be relied upon as such. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of the advisor’s investment services are disclosed in the publicly available Form ADV Part 2A.