By Andrew Poreda, Vice President & Senior Research Analyst
What it means: Crypto enthusiasts have found a new area for a blockchain application: carbon credits. Since October, over 20 million units of carbon offsets have been converted into digital tokens. The reason for this increase in activity is that the price of ‘nature-based’ offsets have increased rapidly, with a ton of CO2 offsetting priced at $14, up from $4.65 in June. Unfortunately, crypto traders have really targeted the low-quality targets out there, which are usually older and haven’t lived up to their promise of reducing emissions. Much of hype surrounding this new phenomenon is related to the digital currency Klima, which is created by trading in the carbon offset tokens. And many critics are quick to point out that the interest here has more to do with crypto and less to do with the environment.
Sage’s View: The crypto universe needs to address environmental concerns for power consumption and electronic waste, and carbon markets may play a key role in helping shape emissions reductions. But this match seems more tied to those that feed off the speculative nature of crypto trading. The high-quality carbon offsets that will make an impact on climate change have to be analyzed for a few key aspects:
- Additionality (Would the project/action still happen if no one bought the offset?)
- Double-Counting (Are multiple stakeholders claiming the same offset?)
- Permanence (How long will the project continue to provide emissions benefits?)
- Leakage (If an offset saves a forest, will another one get chopped down instead?)
Carbon offsets will likely be a huge component of emissions reductions in certain sectors where it is difficult to abate emissions, so investors must start discerning what makes an effective offset.
What it means: Las Vegas is a popular destination for Los Angeles residents, who can either drive six hours or hop a short flight. What if there were a better option? Brightline Holdings thinks it has a solution. The company’s super-fast train will whisk passengers to their destination in a comfortable, climate-friendly cabin that tops out at 180 mph, and Brightline will even check passengers’ bags at their hotels. Sounds like a win-win for everyone. As short-haul flights have serious greenhouse gas emissions per passenger, high-speed rail in high-density corridors appears to be a perfect solution to put a dent into travel-related emissions. But Americans love their cars, so some have doubts on what ridership levels would be. For funding, Brightline has hit up California’s private activity bond market for discounted loans and plans to get some money from the recent federal infrastructure bill. Brightline remains confident that it has a home run and expects to get 22% of all Los Angeles-to-Las Vegas riders.
Sage’s View: Conceptually, high speed rail is a great option for passengers and the environment. Passengers get to travel at the speed of a plane with emissions that are even better than traveling by car. But if the California high-speed rail debacle has taught us anything, following through on these complex plans is easier said than done. Trying to replicate what is done in Europe (where the rail infrastructure is well established, and cities are closer together) and China (where a strong centralized government can cut through any hurdles like eminent domain) may not make sense here in the U.S. Simply trying to get the land needed may prove too burdensome to get the project off the ground. And then critics are going to doubt whether Americans will eagerly flock to riding trains. So, in a land of limited government resources, we should be cautious of spending too much on high-speed rail lines until someone privately proves they can make it happen. If a company like Brightline can demonstrate success, maybe the government should support similar projects around the country.
What it means: Payment processing firm Mastercard made a big announcement this week, declaring that all employee bonuses (not just management) would now be tied to ESG initiatives. The company will be tying compensation to corporate goals based on emissions reductions, improving financial inclusion, and reducing gender pay gaps. As companies are under increasing pressure to improve on a variety of ESG issues, they are creatively looking at different ways to achieve positive results. Mastercard also announced last year that executive vice presidents and above would have compensation tied to ESG initiatives.
Sage’s View: This is an interesting approach. Companies are trying different avenues to weave ESG into a firm’s culture, but this strategy will likely have some critics. The average employee has little (or perhaps zero) control over influencing issues like greenhouse gas emissions and gender pay gaps, so to have your standard of living tied to the action of others seems problematic (and I would be skeptical as an employee). Management certainly can pull the levers to improve on these areas, which is why many ESG advocates have proposed tying executive compensation to ESG targets. Sage views Mastercard as a top ESG-friendly company, but this action seems like it may be a marketing gimmick for various stakeholders.
What it means: Interest in ESG investing has soared over the years, with assets managed to an ESG mandate swelling to over $46 trillion in 2021 (representing 40% of assets under management). But with some of the fallouts of the Russia-Ukraine war, many are now questioning the future of ESG investing. ESG funds generally underperformed in the first quarter of 2022, and with energy companies poised to do well in the years ahead, many are concerned about the prospects of ESG investing. Many critics feel that ESG is poised to underperform for years, and the higher fees that many ESG funds charge will only exacerbate the problem. But many of the leaders in asset management remain committed to ESG/sustainable investing, and the article pointed to Blackrock’s Larry Fink touting a prosperous future in last week’s earning call. But the piece also highlighted the need for sorting out certain issues, like how to better address the “S” in ESG.
Sage’s View: Many would argue that ESG investing passed its first big test back in the huge market dislocation of March 2020, when ESG funds tended to do better than conventional funds (and energy exposure played a large part in the relative success). But with the current situation, we shouldn’t go as far to say that ESG failed, but rather the Russia-Ukraine war exposed the need to address key issues. Excessive fees for ESG funds have been a concern for a while and will continue to be a hot topic. Also, many ESG managers’ stances on energy and defense companies should hopefully evolve, and a more pragmatic view is warranted. But we certainly shouldn’t try and jump to conclusions on performance after one bad quarter. Even studies that look back a decade are going to be largely inconclusive, as there were very few ESG funds to choose from back in 2012. There is a lot of work to be done in the ESG investing world, but based on investor interest and asset flows, ESG certainly isn’t failing.
What it means: The Biden Administration unveiled a program with the aim of saving financially distressed nuclear power plants from shutting down. Funded as part of the recent $1 trillion infrastructure bill, nuclear power plant operators can submit an application for the funds needed to keep their plants running. As nuclear power provides over half of America’s carbon-free energy, any shutdown of plants would have a material impact on goals to achieve Net Zero by 2050. Many nuclear power plants have been closed early for various reasons, and the cheap price of power from natural gas has complicated financial decisions. Some are now comparing this “bailout” of nuclear power to President Bush’s efforts to save the auto industry back in 2008. But even with monetary support, many plants are expected to close early, such as Diablo Canyon, the last California nuclear plant, expected to close in 2025.
Sage’s View: For stakeholders who think we can close nuclear power plants early and also decrease emissions from power production, just look at Germany (got to love those coal power plants opening up . . .). Without affordable and copious energy storage, continuous sources of power are needed, and every nuclear power plant that closes means another fossil fuel power plant takes its place. If we value emissions reductions, some intrinsic price on the benefits that nuclear power provides must be considered, and so a subsidy like this makes just as much sense as providing the subsidies to wind and solar power (curious to see which one gives more bang for buck from an emissions reduction perspective). But the U.S. needs to look not just at ways to support current plants, but also at ways to encourage future nuclear plants. We look forward to seeing how the Biden Administration plans to support the small modular reactor (SMR) as it develops into a viable option for carbon-free power.
- Hodgson, Camille. Carbon-Linked Crypto Tokens Alarm Climate Experts. Financial Times. April 15, 2022.
- Varghese, Romy. Will a Fast Train to Vegas Lure Road Trippers from Their Cars? Bloomberg. April 18, 2022.
- Kumar, Arunima. Mastercard to Link All Employee Bonuses to ESG Goals. Reuters. April 19, 2022.
- Foster, Lauren. Sustainable Investing Failed its First Big Test. A Reckoning Is Coming. Barron’s. April 15, 2022.
- 5. Natter, Ari. U.S. is Set to Launch A $6 Billion Effort to Save Nuclear Plants. Bloomberg. April 18, 2022.
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Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.
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