Sustainable investing in a new era of clean energy
In 2020, U.S. investors poured more assets into ESG funds than ever with net inflows of over $17 billion while non-ESG funds saw net outflows of nearly $300 billion during the same period.
Even with the relative outperformance of ESG funds recently, the core draw toward sustainable investing is most certainly an individual’s desire to make a positive impact on the world through investing. Green energy and electric vehicles are currently at the forefront of sustainable investing. So, if an investor is really trying to make a positive impact in that area, what should it look like? Are electric vehicles truly all that “green” while they are charging off an electric grid that is still substantially supplied by fossil fuels? Is it a radical idea to think we may be entirely off track with regard to our complete focus on electric vehicles, batteries, and powering the grid with renewable technologies like solar and wind?
There may be an alternative solution to the energy problem that the mainstream ESG investment community has not considered on a broad level.
*”Intensive efforts have been underway during at least the past 20 years to substantially reduce worldwide CO2 emissions. To date, those initiatives – although well intended, costly and diverse – have yet to make a meaningful impact. Enlightened governmental policies have been instrumental in decreasing cost and increasing the feasibility of renewable technologies (solar, wind, etc.).
However, to actually reduce CO2 emissions, those renewable technologies must be implemented across all economic sectors, (including transportation and electricity generation) to be effective.
Current projections – even with marked increases in previous efforts – show that initiatives to focus conventional renewable technologies on the existing power grid are highly unlikely to create the desired outcome.
The way to create substantive CO2 emission reductions can only be achieved by:
- Large scale, rapid deployment of technologies applicable to all the economic sectors that generate CO2 emissions.
- Technology of such nature that countries worldwide are likely to adopt because it is in their self-interest to do so.
- Lack of barriers to wide-spread adoption (i.e. regulatory issues, access to existing infrastructure, barriers to entry, lack of sufficient siting, etc.).
- Economically viable technology, meaning that it is affordable for everyday people.
Is there an existing technology that can potentially meet these criteria? Hydrogen may be the solution.
Currently, there is a large (but not nearly large enough!) market for hydrogen used in many industrial processes. The great benefit of using hydrogen as a fuel is that when it burns it produces only pure water!
However, the method by which the hydrogen is produced is imperative.
Grey hydrogen is produced by “stripping” the hydrogen molecules from a methane molecule through the utilization of natural gas. This is how most of the hydrogen is currently being produced. CO2 is the byproduct of this process. (It is actually worse than if the methane was simply burned.) Utilizing hydrogen produced in this manner does nothing to solve the climate issue.
There are two other significant ways of producing hydrogen that are currently available:
Blue hydrogen is produced as set forth above, but the CO2 byproduct is sequestered in the process. Blue hydrogen is therefore almost carbon-free. Unfortunately, there are severe limitations to the whole concept of sequestering CO2. Blue hydrogen therefore can play a role but it’s not the answer.
Green hydrogen is produced by electrolysis, utilizing electricity from a non-CO2-emitting source. These sources are primarily solar, wind and potentially nuclear. The specific process utilizes electricity to split a water molecule (H2O) into H2 and O2. The H2 produced can then be burned in different processes with the only byproduct being clean water. Green hydrogen is the answer.
The obvious question is: “If green hydrogen can be used across all economic sectors to stop CO2 emissions, why hasn’t full-scale implementation already begun?” Until very recently there were two answers to that question:
- Prior to the dramatic reduction in the cost of renewable electricity to generate green hydrogen, it was simply far too expensive. However, that is no longer the case due to the very recent drastic reductions in the cost of renewables. The cost of producing green hydrogen can be competitive with liquid hydrocarbon fuels right now.
- The second barrier has historically been the proverbial chicken/egg problem. Companies are reluctant to produce green hydrogen at large scale because the infrastructure is not in place to move the product to market and sell it at retail. This is also where policy efforts would come into play. Rather than incredibly expensive and ineffective expenditures on the power grid and subsidized electric cars, incentives should be established to help with liquefying, transporting and distributing perfectly clean burning green hydrogen. Our existing oil and gas infrastructure could play a large role in this distribution process.
Currently, the incentives required for scaling up the production of green hydrogen are much less than those required to get to a 100% renewable electric grid.
Effectively, the green hydrogen economy is at the same correlative place the oil and gas industry was in its infancy. Oil and gas became the dominant fuels because they were relatively cheap, abundant and spectacularly useful (although not environmentally friendly). In terms of time, the transition to a climate perfect fuel can occur far, far more rapidly than 100% renewable electrification. Furthermore, it is far more effective, will ultimately be cheaper, can be rapidly adopted worldwide, and can unite otherwise competing vested interests in a common goal.”*
Sustainable fund managers and financial advisors should seriously take into consideration the impact this may have on future investments in green energy. ESG investors will benefit by taking into account the long-term implications of green hydrogen and how it can enhance the positive impact they are seeking to achieve. Individual investors should also seriously consider the associated risks and consult with their financial advisor prior to investing in the green energy space.
Dave Knight CFP®, CRPC® works as a financial advisor and ESG investment specialist with Stonepath Wealth Management in Traverse City. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Cambridge and Stonepath Wealth Management are not affiliated.
* Information in this article was sourced from a recent white paper “Common Sense to Combat Climate Change” written by Martin G. Lagina, co-founder of Heritage Sustainable Energy, who also contributed to this article. Lagina has 40-plus years of experience in the production and sale of energy, is a past chairman of the Michigan Oil and Gas Association and has years of experience building and operating utility-scale solar and wind farms.