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The Fossil Fuel Transition: An ESG Analyst’s Year-End Reflection
While small-cap stocks were hard hit during the first half of 2022, August’s earnings season revealed a bounce back for the asset class. What does this mean for Trillium’s ESG Small/Mid Cap Core Portfolio?
Dear U.S. Environmental Protection Agency Administrator and Members of Congress,
2023 was a record-breaking year for climate change. Greenhouse gas emissions, global temperatures, and sea level rise were all at an unprecedented high, to devastating effect. At the same time, global renewable capacity saw the largest annual increase ever, electric vehicle sales surged, and the Inflation Reduction Act in the U.S. successfully spurred climate action from the private sector. As an ESG Analyst who covers both the Industrials and Utilities sectors, balancing dismay with optimism was the theme of the year. No event embodied these feelings more than the 2023 United Nations Climate Change Conference (COP 28), which managed to both under-promise and under-deliver on fossil fuel action. Looking back on COP 28 and beyond, I leave 2023 more skeptical of fossil fuel proponents that talk the clean energy talk, but more convinced that Trillium’s approach to energy and power companies can identify companies that are transitioning away from fossil fuels with integrity.
Don’t expect fossil fuel defenders to change their spots
In March 2023, Trillium was invited to participate in in CERAWeek, a global energy industry conference. We were pleasantly surprised at the climate-oriented discussions and movement on methane emissions, though frustrated by the industry’s conviction that fossil fuels are here to stay. One speaker stood out at CERAWeek – the United Arab Emirates’ Industry Minister and CEO of the Abu Dhabi National Oil Company, Sultan Ahmed Al Jaber. Despite his day job, Al Jaber spoke “passionately and persuasively” about the urgency of the climate crisis and the role of the oil & gas industry in rapidly reducing emissions. Though many environmentalists and diplomats were skeptical of Al Jaber’s appointment as president of COP 28, could he be the one to finally get fossil fuel producers on board with meaningful climate action?
Unfortunately, Al Jaber’s presidency went much as expected. The UAE was accused of using its presidency to negotiate fossil fuel deals in private meetings. Al Jaber was quoted denying that a phase-out of fossil fuels is needed to achieve 1.5 degree warming, despite the Intergovernmental Panel on Climate Change’s findings to the contrary. COP 28 was also heavily criticized for the record number of fossil fuel lobbyists in attendance. Despite progress on the Loss & Damage Fund and methane emissions, COP 28 concluded with lukewarm language on “transitioning away” from fossil fuels, far short of meaningful action to phase out fossil fuels.
According to the United Nations Development Programme, fossil fuel exports made up approximately 50% of the UAE’s exports from 2015-2019. The 2024 COP 29 presidency now moves to Azerbaijan, under the direction of Ecology Minister and former executive at Azerbaijan’s state-owned oil company, Mukhtar Babayev. Fossil fuels composed over 90% of Azerbaijan’s exports from 2015-2019. Even though it is apparent that fossil-fuel based economies are not sustainable, I’ve learned from COP 28 and expect COP 29 to continue avoiding key fossil fuel issues.
Trust, but verify: transitioning business models to a low-carbon world
Trillium has long been skeptical of individuals and companies that “support” carbon emission mitigation without meaningful action. The need for a verified commitment to climate action is one of the reasons Trillium measures our progress on carbon emissions through the proportion of portfolio companies that have set, or committed to set, Science Based Targets (amongst other metrics). This is a key element of our 2030 Net Zero Commitment as part of the Net Zero Asset Managers Initiative. Demonstrated commitment to the fossil-fuel-free energy transition is also the cornerstone of our approach to investing in energy and power.
The good news is that companies, and hopefully governments, can change. Danish utility company Ørsted A/S is a good example of a company that has successfully transitioned itself away from fossil fuels through credible commitments, robust CAPEX pans, and coherent strategy. While Ørsted’s transition is relatively mature, Trillium also assesses companies that are earlier in their transition journey. A recent example is NextEra Energy, Inc., one of Trillium’s first forays into a company that is actively transitioning from fossil fuels to renewable energy.
Trillium’s approach to investing in energy and power companies requires that a utility company derive at least 10% of its current revenue from renewable energy or enabling technology and have no commitments to invest in new fossil fuel-based power generation without emissions capture[1]. NextEra meets the baseline revenue hurdle, by my calculations generating about 17% of 2022 revenues from renewable energy and 39.2% from fossil-fuel free energy. NextEra generated 32% of its 2022 megawatt hours through renewable sources. In addition, NextEra has implemented a phased net zero plan to be carbon emissions-free by no later than 2045, relying on the rapid expansion of renewable energy and battery storage rather than carbon offsets or carbon capture and storage (CCS) technology. By omitting offsets and still unproven CCS technology from its net zero strategy, Nextera shows seriousness about transitioning away from its fossil fuel past rather than seeking a “license to pollute.”
Instead, NextEra is demonstrating its commitment to its low carbon plan through clean CAPEX deployment, 100% renewable planned capacity, and the retirement of fossil fuel assets. Since 2016, Nextera has retired six coal-fired power plants, with an additional plant retiring in January 2024. Nextera is also divesting its natural gas distribution assets, including Florida City Gas and NextEra Energy Partners’ Texas natural gas pipeline portfolio. In addition to decreasing Nextera’s carbon risk, these divestments also help finance the company’s renewable energy growth plans.
At the end of the day, actions speak louder than words. Commitments do still matter though, so as an ESG investment analyst, I’ll make some 2024 resolutions myself. In 2024, I will remain skeptical of companies that pay lip service to climate change, while acting in contradictory ways. I will look into companies’ use of new technologies, to determine if they are being used to extend the life of fossil fuel assets or to maximize sustainable opportunities. Most importantly, I will continue working with the Trillium teams to push our portfolio companies to the forefront of climate action, rather than waiting for COP 29.
[1] For more information, see https://www.trilliuminvest.com/esg/approach-to-investing-in-energy-and-power
IMPORTANT INFORMATION
This information is not intended to be a forecast of future events or a guarantee of future results. This is not a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. There is no assurance that impact or investment objectives will be achieved. This information is current as of the date listed and may change without notice.
2023 was a record-breaking year for climate change. Greenhouse gas emissions, global temperatures, and sea level rise were all at an unprecedented high, to devastating effect. At the same time, global renewable capacity saw the largest annual increase ever, electric vehicle sales surged, and the Inflation Reduction Act in the U.S. successfully spurred climate action from the private sector. As an ESG Analyst who covers both the Industrials and Utilities sectors, balancing dismay with optimism was the theme of the year. No event embodied these feelings more than the 2023 United Nations Climate Change Conference (COP 28), which managed to both under-promise and under-deliver on fossil fuel action. Looking back on COP 28 and beyond, I leave 2023 more skeptical of fossil fuel proponents that talk the clean energy talk, but more convinced that Trillium’s approach to energy and power companies can identify companies that are transitioning away from fossil fuels with integrity.
Don’t expect fossil fuel defenders to change their spots
In March 2023, Trillium was invited to participate in in CERAWeek, a global energy industry conference. We were pleasantly surprised at the climate-oriented discussions and movement on methane emissions, though frustrated by the industry’s conviction that fossil fuels are here to stay. One speaker stood out at CERAWeek – the United Arab Emirates’ Industry Minister and CEO of the Abu Dhabi National Oil Company, Sultan Ahmed Al Jaber. Despite his day job, Al Jaber spoke “passionately and persuasively” about the urgency of the climate crisis and the role of the oil & gas industry in rapidly reducing emissions. Though many environmentalists and diplomats were skeptical of Al Jaber’s appointment as president of COP 28, could he be the one to finally get fossil fuel producers on board with meaningful climate action?
Unfortunately, Al Jaber’s presidency went much as expected. The UAE was accused of using its presidency to negotiate fossil fuel deals in private meetings. Al Jaber was quoted denying that a phase-out of fossil fuels is needed to achieve 1.5 degree warming, despite the Intergovernmental Panel on Climate Change’s findings to the contrary. COP 28 was also heavily criticized for the record number of fossil fuel lobbyists in attendance. Despite progress on the Loss & Damage Fund and methane emissions, COP 28 concluded with lukewarm language on “transitioning away” from fossil fuels, far short of meaningful action to phase out fossil fuels.
According to the United Nations Development Programme, fossil fuel exports made up approximately 50% of the UAE’s exports from 2015-2019. The 2024 COP 29 presidency now moves to Azerbaijan, under the direction of Ecology Minister and former executive at Azerbaijan’s state-owned oil company, Mukhtar Babayev. Fossil fuels composed over 90% of Azerbaijan’s exports from 2015-2019. Even though it is apparent that fossil-fuel based economies are not sustainable, I’ve learned from COP 28 and expect COP 29 to continue avoiding key fossil fuel issues.
Trust, but verify: transitioning business models to a low-carbon world
Trillium has long been skeptical of individuals and companies that “support” carbon emission mitigation without meaningful action. The need for a verified commitment to climate action is one of the reasons Trillium measures our progress on carbon emissions through the proportion of portfolio companies that have set, or committed to set, Science Based Targets (amongst other metrics). This is a key element of our 2030 Net Zero Commitment as part of the Net Zero Asset Managers Initiative. Demonstrated commitment to the fossil-fuel-free energy transition is also the cornerstone of our approach to investing in energy and power.
The good news is that companies, and hopefully governments, can change. Danish utility company Ørsted A/S is a good example of a company that has successfully transitioned itself away from fossil fuels through credible commitments, robust CAPEX pans, and coherent strategy. While Ørsted’s transition is relatively mature, Trillium also assesses companies that are earlier in their transition journey. A recent example is NextEra Energy, Inc., one of Trillium’s first forays into a company that is actively transitioning from fossil fuels to renewable energy.
Trillium’s approach to investing in energy and power companies requires that a utility company derive at least 10% of its current revenue from renewable energy or enabling technology and have no commitments to invest in new fossil fuel-based power generation without emissions capture[1]. NextEra meets the baseline revenue hurdle, by my calculations generating about 17% of 2022 revenues from renewable energy and 39.2% from fossil-fuel free energy. NextEra generated 32% of its 2022 megawatt hours through renewable sources. In addition, NextEra has implemented a phased net zero plan to be carbon emissions-free by no later than 2045, relying on the rapid expansion of renewable energy and battery storage rather than carbon offsets or carbon capture and storage (CCS) technology. By omitting offsets and still unproven CCS technology from its net zero strategy, Nextera shows seriousness about transitioning away from its fossil fuel past rather than seeking a “license to pollute.”
Instead, NextEra is demonstrating its commitment to its low carbon plan through clean CAPEX deployment, 100% renewable planned capacity, and the retirement of fossil fuel assets. Since 2016, Nextera has retired six coal-fired power plants, with an additional plant retiring in January 2024. Nextera is also divesting its natural gas distribution assets, including Florida City Gas and NextEra Energy Partners’ Texas natural gas pipeline portfolio. In addition to decreasing Nextera’s carbon risk, these divestments also help finance the company’s renewable energy growth plans.
At the end of the day, actions speak louder than words. Commitments do still matter though, so as an ESG investment analyst, I’ll make some 2024 resolutions myself. In 2024, I will remain skeptical of companies that pay lip service to climate change, while acting in contradictory ways. I will look into companies’ use of new technologies, to determine if they are being used to extend the life of fossil fuel assets or to maximize sustainable opportunities. Most importantly, I will continue working with the Trillium teams to push our portfolio companies to the forefront of climate action, rather than waiting for COP 29.
[1] For more information, see https://www.trilliuminvest.com/esg/approach-to-investing-in-energy-and-power
IMPORTANT INFORMATION
This information is not intended to be a forecast of future events or a guarantee of future results. This is not a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. There is no assurance that impact or investment objectives will be achieved. This information is current as of the date listed and may change without notice.
2023 was a record-breaking year for climate change. Greenhouse gas emissions, global temperatures, and sea level rise were all at an unprecedented high, to devastating effect. At the same time, global renewable capacity saw the largest annual increase ever, electric vehicle sales surged, and the Inflation Reduction Act in the U.S. successfully spurred climate action from the private sector. As an ESG Analyst who covers both the Industrials and Utilities sectors, balancing dismay with optimism was the theme of the year. No event embodied these feelings more than the 2023 United Nations Climate Change Conference (COP 28), which managed to both under-promise and under-deliver on fossil fuel action. Looking back on COP 28 and beyond, I leave 2023 more skeptical of fossil fuel proponents that talk the clean energy talk, but more convinced that Trillium’s approach to energy and power companies can identify companies that are transitioning away from fossil fuels with integrity.
Don’t expect fossil fuel defenders to change their spots
In March 2023, Trillium was invited to participate in in CERAWeek, a global energy industry conference. We were pleasantly surprised at the climate-oriented discussions and movement on methane emissions, though frustrated by the industry’s conviction that fossil fuels are here to stay. One speaker stood out at CERAWeek – the United Arab Emirates’ Industry Minister and CEO of the Abu Dhabi National Oil Company, Sultan Ahmed Al Jaber. Despite his day job, Al Jaber spoke “passionately and persuasively” about the urgency of the climate crisis and the role of the oil & gas industry in rapidly reducing emissions. Though many environmentalists and diplomats were skeptical of Al Jaber’s appointment as president of COP 28, could he be the one to finally get fossil fuel producers on board with meaningful climate action?
Unfortunately, Al Jaber’s presidency went much as expected. The UAE was accused of using its presidency to negotiate fossil fuel deals in private meetings. Al Jaber was quoted denying that a phase-out of fossil fuels is needed to achieve 1.5 degree warming, despite the Intergovernmental Panel on Climate Change’s findings to the contrary. COP 28 was also heavily criticized for the record number of fossil fuel lobbyists in attendance. Despite progress on the Loss & Damage Fund and methane emissions, COP 28 concluded with lukewarm language on “transitioning away” from fossil fuels, far short of meaningful action to phase out fossil fuels.
According to the United Nations Development Programme, fossil fuel exports made up approximately 50% of the UAE’s exports from 2015-2019. The 2024 COP 29 presidency now moves to Azerbaijan, under the direction of Ecology Minister and former executive at Azerbaijan’s state-owned oil company, Mukhtar Babayev. Fossil fuels composed over 90% of Azerbaijan’s exports from 2015-2019. Even though it is apparent that fossil-fuel based economies are not sustainable, I’ve learned from COP 28 and expect COP 29 to continue avoiding key fossil fuel issues.
Trust, but verify: transitioning business models to a low-carbon world
Trillium has long been skeptical of individuals and companies that “support” carbon emission mitigation without meaningful action. The need for a verified commitment to climate action is one of the reasons Trillium measures our progress on carbon emissions through the proportion of portfolio companies that have set, or committed to set, Science Based Targets (amongst other metrics). This is a key element of our 2030 Net Zero Commitment as part of the Net Zero Asset Managers Initiative. Demonstrated commitment to the fossil-fuel-free energy transition is also the cornerstone of our approach to investing in energy and power.
The good news is that companies, and hopefully governments, can change. Danish utility company Ørsted A/S is a good example of a company that has successfully transitioned itself away from fossil fuels through credible commitments, robust CAPEX pans, and coherent strategy. While Ørsted’s transition is relatively mature, Trillium also assesses companies that are earlier in their transition journey. A recent example is NextEra Energy, Inc., one of Trillium’s first forays into a company that is actively transitioning from fossil fuels to renewable energy.
Trillium’s approach to investing in energy and power companies requires that a utility company derive at least 10% of its current revenue from renewable energy or enabling technology and have no commitments to invest in new fossil fuel-based power generation without emissions capture[1]. NextEra meets the baseline revenue hurdle, by my calculations generating about 17% of 2022 revenues from renewable energy and 39.2% from fossil-fuel free energy. NextEra generated 32% of its 2022 megawatt hours through renewable sources. In addition, NextEra has implemented a phased net zero plan to be carbon emissions-free by no later than 2045, relying on the rapid expansion of renewable energy and battery storage rather than carbon offsets or carbon capture and storage (CCS) technology. By omitting offsets and still unproven CCS technology from its net zero strategy, Nextera shows seriousness about transitioning away from its fossil fuel past rather than seeking a “license to pollute.”
Instead, NextEra is demonstrating its commitment to its low carbon plan through clean CAPEX deployment, 100% renewable planned capacity, and the retirement of fossil fuel assets. Since 2016, Nextera has retired six coal-fired power plants, with an additional plant retiring in January 2024. Nextera is also divesting its natural gas distribution assets, including Florida City Gas and NextEra Energy Partners’ Texas natural gas pipeline portfolio. In addition to decreasing Nextera’s carbon risk, these divestments also help finance the company’s renewable energy growth plans.
At the end of the day, actions speak louder than words. Commitments do still matter though, so as an ESG investment analyst, I’ll make some 2024 resolutions myself. In 2024, I will remain skeptical of companies that pay lip service to climate change, while acting in contradictory ways. I will look into companies’ use of new technologies, to determine if they are being used to extend the life of fossil fuel assets or to maximize sustainable opportunities. Most importantly, I will continue working with the Trillium teams to push our portfolio companies to the forefront of climate action, rather than waiting for COP 29.
[1] For more information, see https://www.trilliuminvest.com/esg/approach-to-investing-in-energy-and-power
IMPORTANT INFORMATION
This information is not intended to be a forecast of future events or a guarantee of future results. This is not a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. There is no assurance that impact or investment objectives will be achieved. This information is current as of the date listed and may change without notice.
No genuine effort to slow or combat climate change can ignore Energy and Power. Trillium seeks to find the companies best-positioned to lead―and benefit from―the ongoing energy transition. Learn more about our approach to investing in Energy and Power.
Advocacy Impact Report - Second Half 2021
Trillium considers it fundamental to our mission and our fiduciary responsibility to engage with the companies that we hold in our portfolios to press for positive change that we believe will help improve ESG policies, performance, or impact. Learn more about our recent engagement activities.
