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Signals: Ahead of the Curve
Is oil’s freefall the tipping point in the transition to a low-carbon economy? A modest downturn in demand triggered a crash in oil prices that will strand billions of dollars in fossil fuel assets and, perhaps, signal a dramatic reduction in carbon emissions. That the inciting incident was a worldwide pandemic and not, say, the adoption of electric vehicles or the establishment of a price on carbon, may not matter. Oil, says CarbonTracker’s Mike Coffin, “is in long-term structural decline.” The cost of renewable energy and EVs have been on a steep downward curve, making many new and existing fossil fuel projects unviable. The Spanish energy company Repsol in December became the first oil and gas major to commit to net-zero emissions by 2050 and wrote down $5 billion – for starters – in fossil fuel assets. BP followed last month (see, “Leaders and laggards in the race to net-zero”). Suddenly write-downs look quaint, as fossil fuel producers risk outright default. The oil industry collectively is shouldering $86 billion of debt that will come due in two to four years.
- Leave it in the ground. Oil could hit a low of $20 a barrel, Goldman Sachs predicted this week, and for the moment, neither Saudi Arabia nor Russia looks ready to fold their cards. For comparison, oil drilling in the Arctic breaks even only at an average price of about $78 a barrel. Even U.S. shale producers’ high cost of production and need for cash puts them on precarious footing that may not be eased even if oil prices rebound somewhat over the short- to medium-term (see, “Is the carbon bubble about to burst?”). Low prices provide an opportunity to wean the fossil fuel industry off of subsidies (which remain double the subsidies for renewables, according to the International Energy Agency). Instead, the Trump administration has signaled that it may bail out U.S. producers. Any propping up of oil companies “is a bad scenario for climate,” says Coffin.
- Stranded financial assets. U.S. and global bankers, including JPMorgan Chase, Wells Fargo and Citigroup, provided almost $2 trillion in new fossil fuel financing between 2016 and 2018. JPMorgan, the largest bank and fossil fuel funder, has more than $40 billion in credit exposure to the oil and natural gas industries. To be sure, that’s a fraction of JPMorgan’s lending. More exposed: Banks in oil-rich states such as Oklahoma’s BOK Financial and Bank7 Corp. and Texas-based Cadence Bancorporation make a higher percentage of their loans to the industry, according to Keefe, Bruyette & Woods.
- Shareholder showdown. Fossil fuel producers increasingly are at odds with asset owners and managers, who are looking for the industry to better manage its own decline. Shareholders are pressing for more disclosure on potential for stranded assets from natural gas producers like Sempra Energy and Dominion Energy, which are building out infrastructure in states such as California and Virginia that have pledged to transition to 100% clean energy. The companies appealed to the S.E.C., which granted their request to ignore the resolutions. “As states clamp down on greenhouse gas emissions, long-lived natural gas infrastructure is increasingly likely to be stranded,” said Lila Holzman of shareholder advocacy group As You Sow, which filed the resolutions. By excluding the resolutions, “These companies are seeking to avoid responsibility for a risk that will only grow.”
- Drill down.
The upside of sustainable investing in a down market. The growth in impact investing and sustainable finance has corresponded to an historic bull market. As markets tumble into bear territory, investors want to know: How are sustainable funds weathering the coronavirus correction? “Concerns over performance of ESG funds in down markets appear to be unfounded,” notes Morningstar’s Jon Hale. “Sustainable equity funds have weathered the downturn better than equity funds overall.”
- Sustainable equities outperform. Hale compared one-week and year-to-date returns of all 203 U.S. sustainable equity open-end and exchange-traded funds with those of their peer groups in an updated post. For the week of March 2-6, the returns of almost 70% of sustainable equity funds ranked in the top half of their respective Morningstar categories. More than 40% ranked in their category’s top quartile. Broadening the analysis to the year through March 6, Hale found nearly three-quarters of sustainable equity funds ranked in the top half of their category, while nearly half ranked in their category’s top quartile. Hale’s analysis of passive ESG funds versus conventional index funds yielded a slightly more mixed picture.
- Impact alpha. An analysis of share prices in France from Feb. 19 to March 9 by the Canadian impact-ratings company Impak suggests “that companies who really integrate the Sustainable Development Goals in their strategy could not only over perform in a bull market but also be more resilient in a bear market.” Impak found that the average share price of Schneider Electric, Legrand and Danone, the three companies with the top “impak scores,” outperformed the French CAC 40 index as a whole. The three companies with the worst impak scores, TechnipFMC, Total and Pernod Ricard, underperformed. “This could be an early indication of the existence of impact alpha,” writes the Impak team.
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Dealflow: Follow the Money
Engineers Without Borders Canada spins off early stage Africa tech investing arm. Toronto-based Engineers Without Borders has been making early-stage venture investments since 2013 as a complement to its non-profit global development work. After a dozen investments, the organization is spinning off its venture arm as Hummingbird Impact to expand investments in tech-enabled social enterprises. Engineers Without Borders will remain a shareholder in the new entity. Hummingbird is looking to raise $20 million to make seed and Series A impact investments and will prioritize ventures promoting women’s economic participation. “I’m worrying about how to fundraise now that all of the conferences I was going to attend this year have either been canceled or postponed,” Muthoni Wachira, Hummingbird’s managing partner, told ImpactAlpha. EWB Canada last year was rocked by allegations of sexual harassment. Wachira, who is based in Nairobi said the spin-off is unrelated and has been in the works for several years.
- Pan-Africa portfolio. Hummingbird’s portfolio includes FarmDrive, a Kenya-based digital lending platform for farmers; Bloom Impact, a Ghana-based small business-focused fintech; and Kenya-based edtech venture M-Shule, among others. Wachira told ImpactAlpha that Hummingbird’s pipeline includes a venture supporting access to e-commerce delivery for underserved customers; an affordable home healthcare startup; and an organization addressing over-indebtedness among low-income customers.
- Technical assistance. The economics of small, early-stage funds, particularly in emerging markets, make it challenging to give startup impact ventures the intensive, hands-on assistance many need. Hummingbird is looking to raise up to $4 million for a technical assistance facility to provide additional support for its portfolio companies.
Blue like an Orange finances MOVii to expand financial services in Colombia. The $10 million structured financing will help the company add digital products and move toward becoming a licensed bank, which will allow MOVii to make loans and take deposits. MOVii offers accounts to displaced Venezuelans, and other immigrants, as soon as they obtain temporary residency in Colombia. It is Blue Like an Orange’s fourth investment and first in Colombia (see, “Blue Like an Orange offers a report card for the Sustainable Development Goals”).
Gates Foundation, Wellcome and Mastercard launch $125 million accelerator to speed coronavirus solutions. The COVID-19 Therapeutics Accelerator will work with governments and the private sector to scale up new and repurposed drugs and treatments. The Gates Foundation is contributing $50 million from its existing $100 million COVID-19 commitment; Wellcome also will put up $50 million and Mastercard $25 million. A key objective: Making products available and affordable in low-resource settings (see, “Neglected No More: Nudging biotech startups to tackle diseases of the developing world”).
Fintech MoCaFi scores funding from N.J. CoVest Fund. Mobility Capital Finance, or MoCaFi, is a mobile community bank that provides financial products, services and literacy tools to the financially underserved. The New Jersey Economic Development Authority is investing $250,000 from its CoVest Fund, which backs early stage tech companies in the state.
Incofin and Danone team up to back water access ventures. Clean and affordable water deals are few relative to fintech or clean energy. “The capital needs of these companies are relatively high,” observed Loïc De Cannière of impact investor Incofin Investment Management. The firm is teaming up with Danone to accelerate investments in decentralized water technologies addressing clean water access in Africa and Asia (see, “Water investments primed to flow in 2020”).
Agents of Impact: Follow the Talent
National Cooperative Bank’s John Holdsclaw named board chair of the Coalition of Community Development Financial Institutions… The Workers Lab’s Innovation Fund is offering $150,000 and support to test ideas that improve the lives of workers… Transform Finance is taking on “Muni Bond Activism to Challenge Excessive Development Tax Incentives” in a webinar Thursday, March 26 (see, and listen to the podcast, “Impact investors start to make stodgy municipal bonds sexy”).
Thank you for reading. More all day at ImpactAlpha.com.