7 min read

Let Sleeping Dinosaurs Lie

Forwarded this email by a friend? Subscribe here.

Hello there,

Volatility is the word of the week with the stock market resembling someone on their fifth cup of coffee of the day. It’s been an overwhelming news cycle for investors between the deteriorating situation in Ukraine, commodity prices going haywire, rising inflation expectations, and the Federal Reserve planning to “carefully” raise interest rates for the first time in three years at its meeting next week. (Here’s what that may mean for you.)

Renewable energy stocks and ETFs jumped this week on the news that the US was banning Russian oil imports. Oil prices are already up over 60% this year, and while further shortfalls may slow the green transition in the short-term, many analysts see the shift to energy independence in the US and EU spurring the long-term growth of low-carbon, cleaner alternatives. We cover a “corny” one in depth in today’s edition. There’s no way of knowing how things will turn out, and there’s a lot of speculation going on, so be careful about losing your (clean) shirt.

While the volatility and the news from the war in Ukraine are driving the headlines, don’t forget that the basics of investing do not fly out the window during hectic times. That’s why we keep updating key resources that can help you as you start out on your values-aligned investing journey. Some that we’ve found particularly relevant (and grounding) over the past two weeks:

And for when terms and acronyms pop up that make your eyes glaze over: our ever-growing glossary of common terms.

News you can use

Graphic of newspaper with magnifying glass

Companies continue to leave or reduce their exposure in Russia, with some notable exceptions documented by a Yale professor. PepsiCo, Coca-Cola, McDonald’s, and Starbucks are among the latest to announce that they are suspending or reducing operations in Russia. JUST Capital is keeping track of company responses as well.
Here’s a live shot of electronic vehicle makers watching the price of nickel, aluminum, and palladium lately. All three metals are used in EV batteries and hit record highs in value this week. Nickel, which is also used in stainless steel and largely comes from Russia, briefly crossed $100,000 per metric ton.
After crypto donations, economic support for Ukraine is coming from another unlikely source: Airbnb. People have booked more than 61,000 nights worth nearly $2 million to show solidarity (they won’t be showing up) by using the platform to put money in the pockets of Ukrainian homeowners. The company is waiving all host and guest fees in the war-torn country.
The international community is finally telling the plastics they can’t sit with us. In a historic move last week, representatives from 175 nations agreed to finalize a legally binding treaty by the end of 2024 to end plastic pollution.
Should more ESG funds include weapons manufacturers? Should they avoid autocracies and imperialist governments? The war in Ukraine is raising many questions about the sustainable investing framework. You can read more about the weapons in ESG discussion here and the exposure of some ESG investments to Russia here.
A new “women in leadership” stat for International Women's Day: Nearly 30% of Russell 3000 board seats were held by women at the end of 2021, says Equilar. While it’s clear that more progress is needed, that number is up from 23.5% a year ago and 15.1% five years earlier.

Biofuels: let sleeping dinosaurs lie

Biofuels are in the news lately for making energy businesses like Chevron and Exxon greener, reducing the carbon footprint (and guilt) of flying and boating, and a lobby that claims it can provide relief at the pump amid surging oil prices.

So what are they exactly? Fossil fuels like coal, oil, and natural gas are derived from organisms that lived millions of years ago. Renewable biofuels, on the other hand, are made from plants and animals that were recently living, also known as biomass, and are of two types. A conventional biofuel is ethanol made from sugary grains like corn and sugarcane. Advanced biofuels include biodiesel and renewable diesel (made from used vegetable oils, animal fats, and grease) and next-generation cellulosic fuels (made from inedible plant matter, like grass and wood waste).

Throughout history we’ve used biofuels to deal with shortages—going as far back as the late 1830s when ethanol blended with turpentine replaced whale oil as a lighting fuel. It was a popular alternative to gasoline during the World War years, and the 1974 Arab oil embargo revived interest in it as well.

Now, countries are once again turning to biofuels as they seek cleaner energy sources and energy independence. Since they are said to produce anywhere from 19-86% lower lifecycle greenhouse gas emissions, biofuels are blended with petroleum-based transportation fuels for a sustainable alternative. They are part of the road to net-zero emissions by 2050, especially for trucking, shipping, and aviation, where few electric options exist.

Globally, demand is set to increase 28% by 2026 to reach 186 billion liters. Since biofuels can be more expensive, this is driven mainly by government climate policies and subsidies. For almost two decades the US has had a national program called the Renewable Fuel Standard (RFS), which requires oil refiners to blend billions of gallons of biofuels or buy credits. Governments are also developing targets to promote the use of sustainable aviation fuel; commercial airplanes capable of flying on 100% biofuels are in the works.

One of the drawbacks and moral dilemmas of biofuels is that they require food crops and farmlands to produce. This is particularly difficult during a time of rising food prices, like right now, and the Biden administration is reportedly considering waiving RFS requirements. Cellulosic biofuel is expected to solve this issue, but progress is still slow. There’s also deforestation and water consumption worries, and studies that claim the emissions released are much higher than we think.

If you’re looking to invest in the biofuel industry, some large petroleum refiners like Chevron have biofuel units. There are also smaller companies focused solely on sustainable fuels that could be potential acquisition targets in the future, like Green Plains, Gevo, Global Clean Energy Holdings, VERBIO Vereinigte BioEnergie AG, Aemetis, and FutureFuel Corp.

Spelling out E-S-G

The sustainable investing world has a lot of jargon to keep up with, and most people (us included) are guilty of using the terms interchangeably since there’s so much overlap and fluidity. But as regulators and the financial industry start to develop and improve this burgeoning space, it’s important to understand exactly what you’re being promised and what certain investing strategies mean. Today, we will try to break some of the major elements down for you.

What is ESG? It stands for Environmental, Social, and Governance. It’s a simple framework to think about a company’s role in society and impact on all its different stakeholders, like employees, shareholders, community, customers, and the environment. Below are some issues that come under each letter in ESG.

Environment: carbon emissions, water consumption, pollution, biodiversity
Social: diversity and inclusion, employee health and safety, human rights
Governance: company leadership, shareholder rights, taxes, executive pay

Why do people invest with ESG? Companies with good performance on the many ESG issues have shown to perform better financially in the long term and be more resilient during uncertain times. While ESG often encompasses many of the issues values-aligned investors are concerned with, ESG in its purest form can also be used by those who do not prioritize social impact as a tool to analyze risks to future returns.

How do you measure ESG? In the absence of standardized reporting and accounting, ESG measurement isn’t the easiest task. Companies like Sustainalytics, MSCI, S&P Global, and Refinitiv provide ESG scores and ratings with easy search tools based on available data. These scores seek to boil all the data behind ESG into just a few scores, but the onus is currently on investors to dig deeper and do their research to make informed choices.

What does an ESG fund label signify? Here’s the trickiest part. *insert Miley Cyrus “What does it mean?” TikTok meme* Any fund claiming to make stock selections based on ESG factors can call itself an ESG fund. These could be funds that avoid certain industries and sectors, or those that only include companies with a low risk rating. There are no strict conditions or criteria for this label, which creates the potential of greenwashing and some unhappy surprises when investors actually analyze their holdings.

How do the E, S, and G work together? Interestingly, many companies with high ESG scores are good in one area, but lag in another. For example, many companies with strong environmental and sustainability chops have weak records on key ESG metrics like diversity and the development of a broad and open governance structure. Therefore, digging into the ESG score to see whether a company is truly committed to ESG and to ensure that a company aligns with your values is important, and relying on just a single score can be problematic. This is why some have even recommended adjusting the term to ESGD to ensure the diversity and inclusion data that can be found in both S and G doesn’t lose prominence. Luckily, we expect clearer regulations and standards soon that should address some of the concerns that merging these areas together under one acronym brings. But — as we often find ourselves repeating — “Buyer, Beware.”