Why the secret to green investing is more grounded than you might think?
What is a wind farm, really?
Don’t worry, I’m not in the midst of an existential crisis. But after meeting Giannis Komitas -renewable energy investor and COO of National Energy Holdings – for an episode of Conversations on Climate, I’m thinking differently about what a successful wind farm, tidal battery and solar installation really means. It is all because of a single word Giannis used; one that isn’t in many pitch decks or operating reports (but should be!). That word is respect.
Clean energy: an asset class conundrum?
I know Giannis as a board member of the London Business School Alumni Energy Club, and was looking forward to getting the inside track on investing in renewable generation projects – especially now clean energy is a bona fide asset class.
Just take this report from Pictet Asset Management. More that 80% of institutional investors now see clean energy assets as their main type of infrastructure investment over the next decade, and they want more than ever before – no surprise, when the value of private infrastructure has increased eight-fold since 2000. There is a clear pipeline of trillions of dollars coming through as governments, such as the US, finally start moving on decarbonisation, and markets have finally woken up. No asset manager worth her name would turn up to a client meeting without a bundle of ESG & Clean Energy prospectuses under her arm.
So as we sat down I asked Giannis: what is your take on the role of investments in the energy transition? ‘Fundamental,’ was his answer, but he didn’t start with a discussion of CO2e or KwH, of dollar values of % of weighted holdings, as one might expect.
‘People look at solar panels, wind turbines, and they think this is a technology that feels like it’s been there forever,’ he said. ‘It hasn’t. What people perhaps don’t necessarily grasp is that these assets need to live for 25 years alongside highways; in the deep sea; or near towns, office buildings, and parking spaces. Bringing that into reality actually proves a lot more complicated than people think.’
Now with a background as an engineer, his bringing up physical reality as a technical challenge should have been no surprise. So, what worries him as an investor in this space? His view, as it emerged through the conversation, is worth quoting at length:
People need to understand that these are assets that will occupy somebody’s lands…It’s a symbiotic kind of existence, right? This asset will be there for 25 years. If we are imposing on people, they will know – [or] even if they don’t know before we start the cycle, they would find out. So increasingly the industry is very conscious of how we’re dealing with a community surrounding the assets.
You want to have good relations; and because you will be there for such a short time, this cannot be superficial…You need to make sure that you treat the region, the place, the town, the municipality that is hosting you with respect…
What we are finding is there are lots of opportunities to try new things. We’ve had lots of discussions with environmental groups, academics and folks that say: look, this is a fantastic opportunity. This will be a piece of land undisturbed for many years. And just to study how it recovers…This is an opportunity to improve not just the ground and the soil and the vegetation, but how we bringing back animals, insects, etc.
The radicalism of respect
What Komitas is arguing is simple, but profound. Every project – regardless of how many KwH it will generate on paper, or how it fits into a portfolio – exists in physical form, on a particular piece of land or sea, in a particular community of both human and non-human neighbours. And these particularities demand respect.
The more I think back on what Giannis is saying, the more radical it feels. I think there are two reasons for this. Firstly, it runs counter to the basic engine of global capital investment. Gone are the days of local gentry swapping the surpluses of their fields for oversized share certificates in the local railroad. Today, the workings of capital are designed to be as invisible and remote as possible. Particularity cannot withstand the generalising function of modern markets, as all ‘green energy’ projects, regardless of form or function, are bundled together into a single sector or class, rated according to a series of ratios and metrics by some distant analysts, and salami-sliced into anonymous portfolios from across the globe.
To make matters worse, the technologies and cultures of modern capitalism have accelerated away from Giannis’ vision of long-term consideration. The average stock-holding period is less than a year. High-Frequency Trading (HFT) alone accounts for 10-40% of equity markets and only seems to be increasing. How can money care about where it lands, when it will be uprooted again so soon? But infrastructure doesn’t exist on those millisecond timeframes. Anyone who has taken a tour of the aqueducts of Rome, or cruised along the Grand Canals of China, knows that first-hand – here are millennia-old projects which have shaped some of the greatest states in history, and which still operate today.
The second issue at play is that the old infrastructure model of the oil and gas industry, particularly in the Global South, can hardly be said to have a track record of respect. The history books read something like this:
- Step one: acquire land by any means necessary – purchase or theft, bribery or invasion, war or coup.
- Step two: treat it a coloured shape on a map, devoid of life that would require care – indeed, colonial historians draw clear links between the desire to extract resources from new territories, with the dehumanisation of those indigenous people who already lived there.
- Step Three: drill, baby, drill. Never mind the environmental destruction, species loss, spills, the poisoned water tables, the toxic flaring and quakes and cancers.
Yet we cannot just naively assume that clean technologies are automatically respectful, in a way that fossil fuels are not. Giannis really brought this home when he questioned whether we should consider Tesla a ‘cleantech’ company at all – despite the fact that it occupies a large chunk of the portfolios of ESG and Clean Energy funds. Regardless of its carbon economics, perhaps we need to think about Tesla through the lens of respect. Even though we are in renewables, we don’t get an automatic pass. Respect must be earned.
Respect and returns
Komitas’ view is an enlightened one, and makes sense to me; but how are we going to win over those people for whom money remains the primary motive? Giannis’ view of the future suggests there are secular drivers which should encourage care. Deglobalisation is gathering pace everywhere. As renewables become price-competitive, they will rely less on centralised subsidy, and so logically more on the successful execution of a project in local conditions. ESG is also here to stay – and I believe that the S and G elements (which speak most closely to community and respect) are going to see an upswing to rival that of the Environmental, as they did in the 1990s. Getting more granular, we are even seeing the start of a trend towards paying landowners for ‘ecosystem services’ – which offer genuine alpha for renewables operators who work in harmony with local ecologies and communities.
Ultimately, in Giannis’ view, ‘the people that make money are those that are closer to the kilowatt-hour of generation.’ And it is these people who have the most to gain, and lose, in their relationship with their locality. ‘If you are a little bit closer to the operations – to the local communities – I find it’s almost impossible to ignore [these relationships]. You literally have the opportunity to really do something good, with very little. So why not do it?’ Respect and return can go together.
I think Giannis has a point when he describes the clean energy sector as having ‘nomadic’ roots. But in a world of rising interest rates and falling growth, where governments are in retreat and the global system is fragmenting, perhaps it is really time to worry less about what is going on far away, and concentrate more on what is in front of us, over which we have genuine control. Paradoxically, this might just be the answer to convincing sceptics around climate change too.
It is an invitation to lay down roots. Let’s worry less about central banks, and leave the Teflon investing to the HFT algorithms. You might give up a few pips in return, but gain so much more in terms of your risk profile. And most of all, we can give something back beyond what we feed into the grid.