At ACS Group, we believe sustainable housing is important in the battle against climate change. Real Estate is a major contributor of CO2 emissions, contributing 40% to global CO2 Emissions (building operations accounting for 27%, and building materials and construction accounting for 13%).

As we envision a decarbonized future, energy efficient and sustainable homes emerge as a key component.  Some of the companies in our Sustainable Future Fund are leaders in this area and help drive the transition towards more environmentally sustainable housing.

While there are multiple aspects of sustainable housing, in this note we focus on energy efficiency and renewable energy integration. We intend to highlight the latest construction materials, technologies and energy efficiency standards that go into the “House of the Future”.

Energy Efficiency

Energy efficiency plays a crucial role in sustainable housing as it drives reduced energy consumption leading to cost savings for the homeowner coupled with reduced carbon footprint of the house. We have identified the following key approaches as critical for maximizing energy efficiency in houses.

Effective Insulation

Proper insulation helps prevent heat transfer, minimizing the need for excessive heating or cooling. By preventing unwanted heat transfer through walls, roofs, and windows, insulation significantly reduces the reliance on heating and cooling systems.

Efficient Appliances and Lighting:

Traditional appliances are energy intensive and replacing these with energy-efficient refrigerators, air conditioners, and washing machines, can lead to cost savings. Energy-efficient lighting options, such as LED bulbs, offer numerous cost benefits to homeowners.

Energy-Efficient HVAC Systems: Heating, ventilation, and cooling (HVAC) systems account for a significant portion of a house's energy consumption. It is estimated that 50% of a household’s energy bill goes towards heating and cooling. From an environmental perspective, researchers estimate air conditioning alone is responsible for the 1,950 million tons of CO2 released annually, which is 4% of total global greenhouse gas emissions.

Advanced Energy Management:

Advanced energy management technologies allows consumers to optimize energy consumption, enhance operational efficiencies, and reduce greenhouse gas emissions. By providing real-time insights into energy usage patterns and system performance, these technologies compliment the energy efficient insulation, appliances, and HVAC Systems to achieve significant cost savings and realize environmental benefits.

Renewable Energy Integration

In addition to energy efficiency, incorporating renewable energy sources in sustainable houses is essential to achieving a net-zero or positive energy balance. The most popular renewable energy systems catering to residential housing are as follows:

Residential Solar Photovoltaic (PV) Systems

This is most widely adopted method of renewable energy integration. Solar PV systems are typically installed on roof tops or as ground-mounted arrays to capture sunlight. The declining unit cost of solar panels, combined with government incentives and financing options, has made solar energy an increasingly viable option for homeowners. Residential solar PV installations have seen significant growth, with over 2 million installations in the United States and 43,000 installations in Canada.

Air Source Heat Pumps

Air source heat pumps (ASHPs) extract heat from the outdoor air to provide heating and cooling for residential spaces. It accomplishes this by absorbing heat energy from the outside air, compressing it to increase its temperature, and then releasing it indoors through a heat exchanger. ASHPs utilize electricity to power the system, as opposed to fossil fuels which are used in a typical natural gas furnace. In heating mode, the ASHP transfers heat from the outside air to warm the indoor space, while in cooling mode, it reverses the process to extract heat from the indoor air and release it outdoors.

Geothermal Heat Pumps

Geothermal heat pumps (GHPs) utilize the Earth's stable temperature to provide efficient heating and cooling for buildings. They extract heat from the ground through a system of pipes buried underground, known as the ground loop. In the heating mode, the GHP absorbs heat from the Earth to warm the building, while in the cooling mode, it extracts heat from the building and transfers it back to the ground. By tapping into the Earth's natural heat, homeowners can realize substantial cost savings and enhanced energy efficiency.

Energy Storage Systems

One of the biggest challenges with Renewable Energy has been storage and energy on demand. Energy Storage systems enable homeowners to store excess energy generated from renewable sources, reduce reliance on the grid, and achieve significant cost savings. Some of the popular systems in the market are:

Battery Energy Storage Systems (BESS)

BESS is the most popular solution that helps store electricity from renewable sources such as solar panels in rechargeable batteries. The batteries store the energy for later use, typically during peak demand periods or when renewable energy generation is low. The energy management system monitors the battery’s charge level, controls the charging and discharging process to ensure optimal performance. Through an inverter, the stored energy is then converted to electricity to power the home instead of relying solely on the grid. The flexibility to store excess energy during periods of low demand or high renewable energy production, helps homeowners avoid peak-demand charges and take advantage of low demand electricity rates.

Residential Thermal Energy Storage (TES)

TES systems work by storing and releasing heat energy to meet heating, cooling, and hot water demand in homes. These systems utilize various storage mediums such as water, ice, or phase-change materials. During excess or off-peak energy availability, the TES system absorbs heat energy, which is stored in the storage medium. When required, the stored heat is released to provide the desired temperature, reducing the need for conventional heating or cooling methods. By optimizing energy usage and utilizing stored heat energy, residential TES systems offer cost savings and increased energy efficiency for homeowners.

Conclusion

The combined efforts of energy efficiency measures and renewable energy integration can result in a substantial reduction in greenhouse gas emissions. Moreover, promoting energy efficiency and renewable energy in residential buildings can foster innovation, create green jobs, and drive economic growth within the clean energy sector.

To ensure widespread adoption, it is crucial for policymakers and industry stakeholders to provide incentives, financial support, and accessible information to homeowners. This can include tax credits, rebates, and streamlined permitting processes for renewable energy installations. Education and awareness campaigns should also be implemented to inform homeowners about the benefits and potential cost savings associated with energy-efficient and renewable energy solutions.

Our perspective is that energy efficiency and renewable energy integration in houses offer a pathway to a more sustainable environmental future. By prioritizing these measures, homeowners can reduce their carbon footprint, enhance energy security, and contribute to the transition to a low-carbon economy. This change is accelerated when individuals, communities, corporations, and governments work together to facilitate the adoption of energy-efficient and renewable energy solutions in residential buildings. Ultimately, this will lead to a greener and more sustainable future.

At ACS, we believe in investing in companies that play an important role in the decarbonization of housing. These companies fit with our thematic approach of Sustainable Cities and Energy Transition.

References:

ACS Group-Investment in Water Infrastructure

March 2023

At ACS Group, water infrastructure is a theme we’ve identified in the ACS Sustainable Future Fund as having both strong financial and Socially Responsible Investing merits.

We believe increased urbanization will put strain on municipal infrastructure, including existing water infrastructure.  To grow sustainably, cities must address the need for updated and modern water infrastructure. 

What is Water Infrastructure?

According to the US Environmental Protection Agency (EPA), water infrastructure includes all man-made and natural features that move and treat water. It can be classified into three segments:

In North America and Europe, the vast majority of water infrastructure is government owned and managed.  However, the suppliers of components for this infrastructure, such as pipes and valves are typically for-profit companies, including several publicly listed companies.  As such, the largest customers of these companies are governments, and government funding drives much of the investment in water infrastructure.

Why is Water Infrastructure Investment Crucial?

Much of the water Infrastructure in the US and Canada was built in the early 20th century and is long overdue for upgrades.  The American Society of Civil Engineers (ASCE) estimates as of 2019, the total capital spending gap on water infrastructure in the US is upwards of US$81 billion.  The Federation of Canadian Municipalities estimate C$50 billion alone needs to be invested to renew water infrastructure in Canada that are in poor condition. According to OECD, European Union would need a cumulative additional spend of EUR289 billion by 2030 to comply with guidelines.

To this end, ASCE estimates the US has a water main break every two minutes and results in the lose of 6 billion gallons of treated water each day. 

Outdated water infrastructure has serious consequences on quality of life. In 2014, Flint, Michigan witnessed the catastrophic effects of outdated water infrastructure when over 100,000 people, including close to 12,000 children, were exposed to elevated lead levels from aging lead pipe systems.  Elevated lead exposure could lead to serious health issues, including reduced intellectual functioning and increased chances of Alzheimer’s.

The stability of water infrastructure will be further stressed by changing weather patterns brought on by climate change.  It is anticipated that these less predictable weather patterns may create more major weather events, such as urban flooding, stormwater management issues and droughts.  Having the necessary infrastructure in place will be even more critical.

US Funding for Water Infrastructure

The Biden administration passed the Infrastructure Investment and Jobs Act (IIJA) that provides funding of up to US$55 billion to upgrade US water infrastructure.  This includes US$12 billion on wastewater/stormwater management systems and US$4 billion on remediating synthetic chemicals (PFSA) in drinking water. IIJA also includes dedicated funding of US$15 billion to replace lead pipes in the United States.  However, the Brookings Institution estimates the cost of replacing lead pipes from the US drinking water system will exceed US$28 billion, so while this is a welcome step, we note that there will likely be much more funding required in future to address this infrastructure need.

The ACS Investment Thesis

From a Socially Responsible Investment perspective, we believe that access to clean drinking water and sanitization is a fundamental human right.  We believe that government owning and operating water infrastructure ensures that equitable access to this human right is best preserved.  To enhance the government’s ability to effectively deliver on this, we view the role of private industry as critical.  We highlight that the private sector has brought about innovations in water infrastructure that reduce potable water losses and mitigate urban flooding. 

Some of the most exciting innovations we’ve seen recently in water infrastructure are:

From a financial investment perspective, as the approved funding makes it way to the state and local governments, we expect the water infrastructure companies to benefit from increased order backlog that will help drive revenue growth and earnings visibility. We see companies providing drinking water infrastructure to be the early beneficiaries of the upgrade cycle, followed by suppliers in wastewater and stormwater infrastructure. Our expectation is the spending is not a one-off event, as the need to upgrade and maintain the infrastructure will continue to drive strong demand for the water infrastructure suppliers and contractors. 

From both our SRI and financial perspective, at ACS, we are constructive on companies that play important roles in the modernization of water infrastructure.  This area of investment is a focus for us and supports our thesis on Sustainable Cities.

_________________________________________________

Sources Cited

  1. American Society of Civil Engineers, “Report Card for America’s Infrastructure”, https://infrastructurereportcard.org/cat-item/stormwater-infrastructure/ accessed Feb 2023
  2. Various organizations, “Canadian Infrastructure Report Card”: http://canadianinfrastructure.ca/en/index.html, accessed Feb 2023
  3. Brookings Institution, “What would it cost to replace all the nation’s lead water pipes?”: https://www.brookings.edu/blog/up-front/2021/05/13/what-would-it-cost-to-replace-all-the-nations-lead-water-pipes/, accessed Feb 2023
  4. Environmental Protection Agency, “Bipartisan Infrastructure Law”: https://www.epa.gov/system/files/documents/2021-11/e-ow-bid-fact-sheet-final.508.pdf, accessed Feb 2023
  5. OECD, “Roundtable on Financing Water”: https://www.oecd.org/water/Session2-Financing-needs-and-capacities-for-water-related-investments-in-Europe.pdf, accessed Feb 2023

A January 2023 report from, the Canadian Centre on Substance Use and Addiction (CCSA) has brought one of our divestment areas at ACS Group into focus. The CCSA was created in 1988 by an Act of Federal Parliament to provide national guidance on substance use.

The CCSA has released new guidelines on what constitutes low-risk alcohol consumption.  The new guidelines say that low or moderate risk drinking is no more than six alcoholic beverages a week for both men and women.  This is roughly half the amount of alcohol from prior guidance. The study points to increased risk in cancer and stroke from the consumption of alcohol as rationale for the change. 

There has been a fair amount of coverage of the change in guidelines, in large part because alcohol consumption is very common among Canadians.  As of 2021, roughly 2/3 of Canadians aged 15 or older report consuming alcohol within the past 30 days (that’s 21 million people).  The decision to follow the new guidelines clearly will affect many Canadians.

Yes, but how does this impact investment decision making?

The assessment investors need to make comes in a couple different ways.  Firstly, would a wide spread change in public health guidance advocating for a reduction in alcohol consumption change consumer behaviours? The likely answer is that consumer behaviours do change as a result of forceful public policy.  We’ve seen this in terms of cigarette consumption in many Western Nations.  However, in the short term, we can speculate that global alcohol consumption is not going to be affected by a change in Canadian guidelines.  Perhaps the neighbourhood craft brewer around the corner in Canada will be impacted if Canadian behaviour changes, but global giants like Heineken likely won’t notice.

Secondly, investors should ask it they are comfortable being owners of companies that produce a product associated with increasing evidence of negative health outcomes?  In the ACS Responsible Beta Funds, we have made the decision since the outset of the funds to divest from alcohol makers.  This decision was not a clear cut one.  On the positive side, alcohol consumption for most people is a choice and in moderation is not particularly detrimental.  On the negative side, alcohol is not accepted in many cultures, medical guidance increasingly points to negative health outcomes and there are concerns around substance use disorders.

This is illustrative of how Socially Responsible Investing (SRI) can be used as an investment decision making tool. 

In this instance, we identified a social concern with alcohol that would preclude making an investment.  As such, we made an investment decision based on SRI principles. 
What has subsequently happened is that the social/health risks of alcohol are being identified by policymakers and new guidelines on moderation have been released. As a result, government policy is beginning to pose a greater negative risk to the alcohol industry and its business model.  While it is early days yet, there is a scenario where alcohol faces the same threats as the cigarette industry, which we would view as a major detriment to stock performance.

By using an SRI lens, we have got out in front of an investment decision that would be based solely on a threat to a business model.  This shows how SRI can be used as a tool to effectively identify and manage risks before they transpire in a company and an industry.

ACS Group-Divestment from Alcohol

Carbon Capture Utilization and Storage (CCUS) has been proposed and endorsed by numerous scientific, academic, and corporate actors as an essential component in the transition into clean energy. It has been backed by climate experts such as the Intercontinental Panel on Climate Change as a key component of achieving net zero emissions in CO2 by 2050. It has been identified as a potentially strong mitigator of CO2 emissions in hard-to-abate sectors such as fertilizers, aluminum, steel, and cement, a bridge to emerging net zero technologies, and a bridge for renewable energy sources.

CCUS technology currently exists in various types and can be divided into two sub-groups of point-source capture and direct air capture. Point-source capture aims to capture carbon directly from industrial processes that would emit CO2 into the atmosphere. Point-source capture technologies can be observed alongside power generation facilities or industrial sectors that heavily emit CO2. The process occurs through the chemical separation of CO2 from streams of gas or synthetic gas, upon which the separated CO2 is stored or used as fuel for the production of industrial or consumer goods. Point-source capture can be further divided into three separate technologies: pre-combustion, post-combustion, and oxy-fuel. Pre-combustion technology entails the removal of carbon at the synthetic gas stage, in which the feedstock (carbon or natural gas) is transformed by oxidation processes into synthetic gas. Under this process, the synthetic gas - consisting of hydrogen, carbon monoxide, and CO2 - is broken down, in which the CO2 is separated, captured, transported, and stored. By contrast, post-combustion technology separates CO2 from flue gases following the combustion stage using a chemical solvent. The flue gas is released through equipment that separates and captures the CO2 within it. Post-combustion capture is the most commonly employed method for industrial emitters of fossil fuels such as cement and steel producers or power generation sites, which can retrofit their facilities to include post-combustion equipment. The final method of point-source capture, oxy-fuel combustion, is the least developed of the three methods. It entails the combustion of fossil-fuel in nearly pure oxygen rather than air, which produces flue gas which is primarily composed of CO2 and water. Capturing the CO2 through oxy-fuel can be easier than standard combustion processes, as the gas holds lower nitrogen content than pre- or post-combustion methods. However, separating oxygen from air demands higher levels of energy than other combustion methods, an obstacle which developers of oxy-fuel technology are attempting to mitigate through technological advancements. Point-source capture plays a central role in reducing the carbon footprints of industries and individual corporations which emit high levels of COin their operations. However, despite its efficacy in preventing the emission of additional carbon into the atmosphere, point-source technology offers little in reducing the amount of CO2 already present in the atmosphere.

Direct air capture (DAC) technology, also known as carbon dioxide removal (CDR) technology, offers the capacity to directly remove existing CO2 from the atmosphere, presenting a more proactive mechanism in the net zero project. Although companies are developing multiple different technological methods, DAC technologies mainly employ solid sorbent filters which chemically link with CO2 and subsequently release captured CO2 into storage or containers to be transported for further use.

Once captured, CO2 can be stored or employed for various purposes. Captured CO2 is stored primarily underground. It is often stored in deep saline formations, which consist of rock formations that are layered with brine. Other common storage areas are coal beds, basalt formations, and shale basins. Captured CO2 can also be stored in oil and gas reservoirs, in which CO2 infusions can be employed to extract more oil and gas from the sites. This process is known as Enhanced Oil Recovery (EOR). Beyond the extraction of additional oil, captured CO2 can be used as fuel for manufacturing goods. Examples of uses for captured CO2 involve outcomes such as jet fuel, automobile seats, biofuel, and building materials.

CCUS is touted by numerous experts as an essential piece in the transition to clean energy. It is especially deemed important in commercial sectors where de-carbonization will require more time to develop, such as aviation, aluminum, or steel. It is also identified as a potential bridge for renewable energy sources such as blue hydrogen, which can be produced from technologies that can separate natural gas into hydrogen and CO2. Moreover, some net zero technologies such as clean fuels and bioenergy are related to CCUS technology, in which strengthening CCUS infrastructure could simultaneously strengthen the scalability of net zero technologies.

However, there also exist several barriers for CCUS technology which impede it from occupying a larger role in achieving net zero emissions. The technology remains in early stages of development, with high figures for both fixed costs for installation and variable costs for operations. For instance, fixed cost estimates for very concentrated CO2 streams such as ethanol and natural gas are approximately USD $15-25/t CO2, and between $40-120/t CO2 for dilute gas streams such as cement and power. Although point-source technologies such as post-combustion offer lower fixed costs as many fossil fuel facilities can be retrofitted into carbon capture sites, it simultaneously demands higher variable costs to operate the technology and extract the CO2. DAC technology, meanwhile, is currently the most expensive of all existing CCUS technologies, priced at between $250-600/t CO2. In comparison, reforestation efforts would cost on average below thresholds of $50/t CO2. Although CCUS technologies continue to become more efficient and cost-efficient with simultaneous public and private sector support, the technology has not yet reached a point in which it is widely affordable for widespread use and implementation. Another point of concern is that point-source carbon capture technology - currently the most scalable version of CCUS - only addresses scopes 1 and 2 of CO2 emissions. Scopes 1 and 2 of emissions are limited to emissions produced at the industrial production and power generation. Limited to the first two scopes of emission, point-source capture does not work to reduce a company’s scope 3 emissions, which accounts for the indirect emissions resulting from the activities of a company’s capital goods, purchased goods and services, or owned assets. Given that scope 3 emissions account for more than 90% of total CO2 emissions for numerous companies, currently prominent CCUS methods may not have as broad of an impact in emissions reductions as argued by proponents of CCUS.  

For a more in-depth look at how CCUS technology operates, visit the following resources:

Financial Times | Carbon capture: the hopes, challenges and controversies

New York Times | Carbon Capture Explained | How It Happens

FreeThink | Carbon Capture Technology Explained

Real Engineering | Carbon Capture - Humanity's Last Hope?

Sources:

Carbon Capture From Flue Gas and the Atmosphere: A Perspective

CCS explained - Carbon Capture

Pre-Combustion Capture

Direct Air Capture

What is Socially-Responsible Investing?

Socially-responsible investing (SRI), or sustainable investing, is a broad term used by many investment firms and applied with various nuances.  SRI commonly refers to the practice of excluding from a financial portfolio those companies that are involved in industries affected by negative environmental, social, or governance (ESG) issues.  However, as outlined in the Harvard Business Review (2019), there are many strategies for sustainable investing:

As part of active ownership some SRI firms may also practice shareholder engagement, meaning that they vote in or file shareholder resolutions proposing changes in the way a company operates. Shareholder resolutions can help bring more transparency to a company, demand increased gender diversity on a board, or even pressure a company to begin ESG reporting.  Some examples of successful shareholder resolutions addressing ESG issues can be found here: www.ussif.org/resolutions.

A central premise of SRI is that companies that exhibit negative environmental, social, and governance factors pose both a financial risk as well as a risk to local and global wellbeing.  Ultimately, the industries or companies that an SRI firm decides to exclude vary depending on the firm. 

SRI at Advantage Capital Strategies Group

At Advantage Capital Strategies Group, our approach to SRI refers to the exclusion of companies involved in any of the following industries:

SRI in Canada

Socially-responsible investing is experiencing profound growth both in Canada and worldwide.  The value of Canadian assets deemed to be responsible investments is estimated to be over $2.1 trillion and growing.  In fact, according to the Responsible Investment Association, responsible investments now account for over half of all Canadian assets under management.

Many investment firms offer socially-responsible products or strategies, but only some apply socially-responsible principles to their entire investment portfolio.  Advantage Capital Strategies Group is focused primarily on responsible investing and economic return; these principles are inextricable from our identity, and we believe that they are not mutually exclusive.  In fact, research demonstrates that investments made using SRI principles are lower in risk and outperform traditional funds over 60% of the time.

The SRI Landscape

Globally, SRI continues to grow and capture the attention – and assets – of investors.  In Europe SRI funds hold at least half of all assets, while in the United States investors have been slower to adopt ESG principles, with the Harvard Business Review estimating that about 25% of American assets are in SRI funds.  According to the Responsible Investment Association and the Harvard Business Review, 50% of Canadian assets are in SRI funds, a level similar to Europe. Globally, it is believed that over half of all assets are either already in funds that consider ESG factors or funds that are in the process of evaluating ESG factors. Considering that SRI is still a growing field, it is not difficult to imagine a future in which most assets are held by funds that utilize sustainable investing strategies. 

SRI is practiced by many types of investors, ranging from individuals to pension plan administrators to religious institutions.  Different types of investors may have different reasons for choosing SRI: for some, social activism may be the most important factor, while others may use SRI as a means of limiting asset exposure to companies at risk of being affected by climate change or other ESG factors.

Trends in SRI

Standardized SRI reporting

Unlike financial reporting, which is regulated federally, there is no regulated or standardized method of reporting ESG performance.  Therefore, if a company includes an ESG report in its Annual Report, they do so of their own accord and often according to their own standards.  Some companies report ESG performance using the standards developed by the Sustainability Accounting Standards Board (SASB), an independent organization offering standardized methodology for ESG reporting, but other companies may not report ESG performance at all. 

There are many ways that SRI will grow and change in the future, but one change that researchers anticipate is that ESG performance reporting will become regulated and standardized just like financial reporting.  Such a change would allow for more accurate comparison of ESG performance between companies.

Private company impact investments

There is an increasing view that SRI can fall across asset classes.  Notably, private company investments might be the most conducive to impact investment, as investors have more flexibility in accessing management and setting company direction.  As such, investments can be made with the understanding that the creation of social impact, as well as financial returns are one of the driving factors in company success.

Fiduciary duty

Another change that may arise is in the widening of the definition of fiduciary duty to include consideration of ESG factors. Fiduciary duty refers to the legal obligation of one party to act in the best interest of another party, such as in the advisor-investor relationship, where the advisor is bound to act in the best interest – financially – of the investor.  However, because ESG factors have been demonstrated to influence financial performance, it is possible that the legal definition of fiduciary duty may widen to include necessary consideration of ESG issues.  Implemented on a national or global level, such a shift would effectively make ESG-based investing the standard for investment practices.  There is already some evidence of such a widening occurring: for example, in Ontario, the Financial Services Commission has issued a note requiring pension plan administrators to disclose their approach to considering ESG factors when developing the plan’s investment strategy.

The level of discussion concerning the relationship between fiduciary duty and ESG factors suggests indicates the growing prevalence of SRI at the national and international levels.  There is still more research and growth needed in the field of sustainable investing, and many organizations and institutions are working to fill these gaps.  Advantage Capital Strategies Group is proud to be part of the growing community of sustainable investors working to combine financial return with social responsibility.

For further reading, please visit:

Works Cited

Harvard Business Review Podcast: hbr.org/ideacast/2019/05/why-its-time-to-finally-worry-about-esg?referral=03759&cm_vc=rr_item_page.bottom

Harvard Business Review: hbr.org/2019/05/the-investor-revolution

Financial Services Commission of Ontario: www.fsco.gov.on.ca/en/pensions/policies/active/Documents/IGN-004.pdf

Responsible Investment Association: www.riacanada.ca/responsible-investment/

Responsible Investment Association: www.riacanada.ca/responsible-investment/#benefits-of-ri

Introduction

Advantage Capital Strategies Group identifies industries that have detrimental environmental, social, and economic effects and takes action to mitigate risk both through screening and advocating for change.

The Fossil Fuel Industry Explained

The term ‘fossil fuels’ refers to forms of energy that are created from organic material that is millions of years old. Fossil fuels include: coal, petroleum, natural gas, oil shales, bitumens, tar sands, and heavy oils, all of which can undergo combustion to produce heat for energy.

Companies that profit off of fossil fuels can be involved in the industry at various stages of production. These include:

• Upstream industry: engages in exploration  and production of oil and gas Midstream  industry: transports oil and gas (e.g. pipelines) 

• Downstream industry: refines oil products  and sells and distributes oil and gas (e.g. gas  stations) 

• Utilities industry: converts fossil fuels into  energy that is then sold for commercial and  residential use 

• Utilities often use a mix of fossil fuels and  renewable sources to generate electricity. For  our analysis, we consider a utility company  to be fossil fuel dependent if it derives  more than 30% of its total energy supply or  revenues from coal, oil, or gas. 

In terms of coal, we have chosen to only screen  thermal coal, referring to coal used to produce  energy for utilities. We are not screening for  metallurgical coal, which refers to coal used to  produce steel. This decision is based off the fact  that metallurgical coal is a requirement for the  production of steel and there is currently no  feasible alternative. 

The Economic Rationale for Investment

Companies that derive a majority of their  revenues from fossil fuels have the potential to  incur significant losses due to stranded assets.  According to HSBC, there are three factors that  could lead to fossil fuels becoming stranded  assets: 1) the implementation of climate change  regulation, 2) economic factors and fossil fuel  price fluctuations, and 3) the development  of innovations in the energy sector such as  advancements in renewables.2 

A reduction in the individual consumption of  fossil fuels could also lead to stranded assets.  As public sentiment towards fossil fuels shifts,  people may focus on reducing their own fossil  fuel consumption by purchasing an electric  vehicle, installing solar panels, or making other  carbon-free lifestyle changes. 

Furthermore, the price of solar and wind is now  on par with many other fuel types for electricity  generation, and electric cars are becoming  mainstream. According to Forbes, the cost per  KwH for solar and wind ranges between $0.06  and $0.10, which is competitive with the cost of  electricity generation from fossil fuels, which is  in the range of $0.05 to $0.17 per KwH.3 

The Social Rationale for Investment 

There is a large overlap between the economic  and social rationales for fossil fuel divestment  as the social response to the negative effects  of fossil fuel consumption can drive fossil fuel  assets to become stranded assets. The worldwide  divestment campaign is one example of a social  movement that poses a threat to the fossil fuel  industry. 

There is a significant worldwide push for fossil fuel  divestment at institutions such as universities  and national funds, with $8 trillion in globally

managed assets committed to the divestment  from fossil fuels.4 In July 2018, Ireland became  the first country to divest its assets from fossil  fuels, a significant achievement in the fossil fuel  divestment movement.5 This movement poses a  significant economic risk for the share prices of  fossil fuel companies, as it represents decreased  demand for the stock. 

Regulators, especially those countries who have  signed the 2015 Paris Agreement on Climate  Change, may feel pressure from citizens or global  allies to impose new legislation restricting the  sale of fossil fuels by either banning certain  fossil fuels completely, imposing a carbon tax, or  heavily subsidizing ‘green’ energies. These forms  of regulation could further depress the value of  the fossil fuel industry. 

The Environmental Rationale for Investment

There is also an overlap between the social and  environmental rationales for divestment. The  environmental impacts of climate change pose a  threat to our local and global communities.  

The overwhelming majority of scientists believe  that humans are causing climate change,  predominantly through the burning of fossil fuels.  According to the International Panel on Climate  Change (IPCC), about 78% of the total greenhouse  gas emission increase since 1970 is due to CO2  emissions from fossil fuel combustion.6 These  greenhouse gases are harmful because they  contribute to the greenhouse gas effect, which  traps heat in the atmosphere and results in  warming on a global scale, i.e. global warming.7 

The 2015 Paris climate agreement agreed to  “holding the increase in the global average  temperature to well below 2 degrees Celsius  above pre-industrial levels and pursuing efforts  to limit the temperature increase to 1.5 degrees.”8 

Without efforts to reduce emissions, the IPCC  estimates that global mean surface temperatures  will increase by 3.7 to 4.8 degrees Celsius by 2100  compared to pre-industrial levels.8  

Warming of 1.5 to 2 degrees Celsius will bring with  it inevitable environmental effects, including  heatwaves, a decrease in the availability of  freshwater, reductions in agricultural yields,  a rise in sea level, and coral bleaching, among  other impacts.9 The difference between 1.5 and  2 degrees comes down to intensity: 2 degrees of  warming will result in more dramatic, negative  changes in all of the above. 

Signatories of the Paris Agreement include  Canada, China, and India, all of whom have  pledged to keep emissions below that amount.  The US is also a signatory, however President  Trump has announced his intention to leave the  agreement by 2020, when it is permitted under  the terms of the agreement. At the current rate of  greenhouse gas reductions, the world will fail to  meet the goals of the Paris Agreement and we are  set to overshoot 2 degrees Celsius of warming.  

The most effective way to reduce emissions is to  stop burning fossil fuels. Recent studies indicate  that “globally, a third of oil reserves, half of gas  reserves, and over 80 per cent of current coal  reserves should remain unused from 2010 to 2050  in order to meet the target of 2 degrees Celsius.”10  This means that these reserves must remain in  the ground and not be extracted or consumed,  a statement that implies we must reduce our  global dependency on fossil fuels. If the global  community exceeds these recommendations, 2  degrees Celsius of warming is likely inevitable. 

Divesting from fossil fuels signals to companies  and the industry that they should be exploring  new and cleaner technologies.

Works Cited 

1. Encyclopedia Brittanica: www.britannica.com/science/fossil-fuel 

2. HSBC Global Research: www.businessgreen.com/digital_assets/8779/hsbc_Stranded_assets_what_next.pdf 

3. Forbes: www.forbes.com/sites/dominicdudley/2018/01/13/renewable energy-cost-effective-fossil-fuels2020/#55c17b114ff2

4. Corporate Knights: www.corporateknights. com/channels/responsible-investing/qa money-talk-bill-mckibben-15568031/ 

5. New York Times: www.nytimes.com/2018/07/12/climate/ireland-fossil fuels-divestment.html 

6. IPCC: www.ipcc.ch/site/assets/uploads/2018/02/ipcc_wg3_ar5_summary for-policymakers.pdf 

7. NASA: climate.nasa.gov/causes/

8. United Nations Climate Change: unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement 

9. Vox: www.vox.com/energy-and-environment/2018/1/19/16908402/global warming-2-degrees-climate-change 

10. United Nations Climate Change: unfccc.int/news/most-fossil-fuels-must-stay-in-the-ground-new-study

Introduction

Advantage Capital Strategies Group identifies industries that have detrimental environmental, social, and
economic effects and takes action to mitigate risk through screening and advocating for change.
We are not currently divested from fast fashion but are aware of the industry as a possible screen
in the future.

The Fast Fashion Industry Explained

“Fast fashion” refers to those clothing retailers who produce affordable clothing based off runway looks for the latest season. These clothes are “fast” because they come straight from the runway to the rack, but that speed – and the very low price tag of these clothes – has repercussions.

Many fashion retailers are guilty of using fast fashion practices in their product line, but some are worse than others. Online retailers Boohoo and Missguided are often considered to epitomize the fast fashion industry because of the incredible low prices they charge for their clothing – sometimes as low as £4. New items are constantly added to their online retail stores, sometimes as often as a few times each week, urging customers to purchase the latest fashion for the same price as a cup of tea.

We have not identified any fast fashion companies on the S&P 500. In IDEV, Industria de Diseno Textil (ITX), Hennes & Mauritz AB (HM B), Fast Retailing Ltd (9983), and Boohoo Group (BOO) are commonly referred to as fast fashion because of the price point of their clothes.

The Economic Rationale for Investment

Fast fashion is at risk of being negatively impacted by government regulation. In the UK, a bill was recently proposed that would prohibit fast fashion retailers from discarding or burning unsold stock, as well as charging a small fee on every item sold to help fund research into sustainable clothing practices.2 Such proposed legislation poses an economic risk for fast fashion retailers.

While many fast fashion companies have experienced positive growth in the past 10 years, we have observed a prominent slowing of their growth rates, with some posting negative returns in the past two years.

The Social Rationale for Investment

It is also problematic that fast fashion factory workers are often not subject to proper labour rights and are not paid livable wages, even in countries such as the UK.3 Testimony heard by British MPs claimed that some garment workers
in the UK were being paid £3 an hour, an illegally low wage. These workers are often prevented from unionizing.

The Environmental Rationale for Investment

Perhaps surprisingly, the fashion industry, particularly fast fashion, is a major polluter, often cited as the second biggest polluter after oil and gas. Textile dyeing and finishing is the second biggest polluter of clean water after agriculture, and 8% of global greenhouse gas emissions can be traced back to the fashion industry. The UNestimates that about 2,000 gallons of water are required to make a single pair of jeans. If the fashion industry continues to produce at this rate and using the same practices, the UN estimates that the industry will be responsible for a quarter of the world’s carbon budget by the year 2050.

The fashion industry in general has a pollution problem, not just those companies considered to be fast fashion. However, fast fashion companies are more problematic because the price and quality of the clothes they produce inherently imply that these items should be worn a limited number of times and discarded once the season ends; sometimes, the clothes aren’t even worn at all. The average life span of a product from a retailer like Boohoo is five weeks.

Indeed, one major problem associated with fast fashion is that it is not made to last; according to Quantis, approximately 60% of all clothing “ends up in incinerators or landfills within a year of being produced”.4 The UN also estimates that “the equivalent of one garbage truck of textiles is landfilled or burned” every second.

Fast fashion is also problematic because items are often made using synthetic fibers such as polyester, which release micro-plastics when washed. It is estimated that 35% of all microplastics in the ocean are from synthetic clothing. Unsold stock is often incinerated instead of being recycled or donated, releasing pollutant into the air.

Further Reading

Works Cited