A Portfolio on Sustainable Finance

 Carbon Capture in focus at PE firm CIP 

May 17, 2021 

The world is changing, and one private equity firm this year changed its name and strategy to reflect new market realities. 

In late April, JOG Capital took its 14-year track record and more than $1.3 billion in energy investments and overhauled its investment thesis. Renamed and rebranded as Carbon Infrastructure Partners (CIP), the founders are signaling a new focus and investment mandate: finding alpha in carbon capture. 

Cumulative investment in carbon capture and storage (CC&S) could hit $1 trillion by 2050, Bank of America concluded in a recent analysis. 

That would represent exponential growth from the present size of the industry (by one recent estimate, $1.75 billion). 

CC&S technology is seen as a big part of the puzzle of what our species can and must do to preserve a liveable environment for ourselves on this planet. The idea is that carbon can be removed from the atmosphere (“captured”), usually at a large point site, then sequestered (“stored”) in a way that will keep it out of the environment. This is also a sensible bottom-line activity for corporations if, for example, there is a carbon tax regime in place in its jurisdiction that incorporates offset credits. 

From JOG to CIP 

JOG decided, in the words of a statement, that “rapidly growing demand for high-quality voluntary carbon offset credits, combined with significant additional policy incentives, activates business models for carbon removal assets to directly remove CO2 from the atmosphere,” and that it will offer its investors a piece of that action. 

Craig Golinowski (CIP), president and managing partner of CIP, discussed CC&S with Alternatives Watch recently. Asked whether CC&S involves only storage, he answered that, to the contrary, “Carbon capture does sometimes involve utilization, as with concrete, plastics, or reactants.” 

Sometimes carbon (or, more specifically, CO2) is put to use in the very act of being stored/sequestered. In enhanced oil recovery, captured carbon dioxide is injected into an oil field, which helps render otherwise trapped crude accessible, and moves that much of the greenhouse gas away from the atmosphere at the same time. That, though, is a politically contentious use. Less contentious are the uses to which Golinowski made reference. For example, carbon dioxide injected into fresh concrete can undergo a mineralization process and become permanently embedded. 

Growth of the CC&S market has been affected adversely by the global pandemic. For example, many manufacturing facilities have been shut down due to the pandemic, which has halted work on downstream recapture. Cases and deaths continue to rise in some of the globe’s largest economies, including those of India and Brazil, and that continues to hamper the capital expenditures necessary to establish carbon capture facilities. Despite all that, as Golinowski said: “The market is growing by any of several measures. It has grown a lot in recent years by the announcement of projects. There is a smaller increase in terms of the number of operations underway but the operations have been scaling up.” 

Golinowski also offered some autobiography. “I came to it [this subject of carbon capture] by becoming aware of the number 40 billion. Our species is adding 40 billion tons of CO2 to the atmosphere every year. I heard this number at a conference at Stanford University and I thought that this was an incredibly difficult problem that we’re going to have to solve. CC&S is going to have to be a major part of it.” 

The number 40 billion is now a bit on the low side. In 2019, the number was 43.1 billion. There was a steep drop in emissions during the early months of the pandemic, but by the end of 2020 the month-to-month rate had recovered. At present, 2021 emissions are on track to near the 2019 figure. 

The United States alone emits close to 6 billion tons of CO2 annually. 

The CIP Team 

Golinowski runs CIP in partnership with Ryan Crawford. They have worked together for 14 years, managing $936 million in energy industry PE fund capital across 18 distinct platform investments. They both have experience structuring complex financial transactions as well as knowledge of ESG planning, execution, and monitoring. 

The team also includes Kel Johnston, managing director, and David Moyes, partner. Johnston is a professional geologist with experience both in Canada and in the United States (CIP is investing in CC&S in both countries). Moyes attended the Stanford Graduate School of Business and spent 11 years at Goldman Sachs, where he led technical analysis in support of the launch of a $500 million specialized secondaries vehicle. 

Both Sides of the Border 

CIP has offices in Palo Alto, California, Phoenix, Arizona, and Calgary, Alberta. Its portfolio is sensitive to the political/regulatory realities on both sides of the border. 

Golinowski says that as a rule, Canada’s prime minister Justin Trudeau has taken a somewhat different approach from that which appears to be favored by President Joseph Biden in the US. 

“Trudeau,” he says, “has been very intensely focused on emissions policy. While the US, under the new administration, is offering carrots for CC&S by paying to capture and store carbon, Canada is offering a stick for failure to get the net down.” 

A White House statement on April 22 specified that the Biden-Harris climate plans involve the government’s use of its procurement power to support early markets for carbon capture, as well as for new sources of hydrogen. The carrot is unsubtle: those industries are to be encouraged by buying that they produce. 

In Canada, on the other hand, here is the stick of tax policy. “Canada has a carbon tax at the federal level. In 2022, it will be C$50 a ton. That is scheduled to increase in 2030 to C$170. That should have considerable bite.” Final Note: A Test Case The world’s first commercial-scale CC&S operation opened at the Boundary Dam coal plant, in Saskatchewan, in 2014. That project has not performed up to the expectations of the optimists of that day, and its management has acknowledged “unforeseen operational challenges and design oversights.” Notwithstanding its shake-down problems, the Boundary Dam CC&S operation has captured four million tons of carbon pollution. Four million tons is not nothing. As noted in a recent story in Canada’s National Observer, this is the equivalent of a million passenger vehicles driving about for a year.

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Fulcrum raises climate transition alpha strategy 

May 11, 2021 

Fulcrum Asset Management, of London and New York, has launched a new Climate Change Fund, a diversified global equity fund that expects to hold between 150 and 200 stocks invested across 25 themes, aimed at having a positive impact on climate change mitigation (as defined by the Paris Agreement of December 2015) and at offering investors a diversified exposure to the global equity market. 

Article 2.1(a) of the Paris Agreement commits the participating nations to “holding the increase in the global average temperature to well below 2 0 C above pre-industrial levels.” In pursuit of that goal, 2.1(c) proposes that finance flows be rendered “consistent with a pathway toward low greenhouse gas emissions and climate-resilient development.” The Luxembourg-domiciled Climate Change Fund was created very much in that spirit. It was launched as an SICAV-UCITS, that is, the analog to an open-ended mutual fund in the US. 

As of February 2021 CCF had assets under management of $122 million spread out among 162 positions. The largest of those positions represented 2.4% of the whole. Even the top ten represented just 17.6% of the whole. 

The underlying investment thesis is that the fact of climate change is gradually being priced into global equity markets, so that proactive investors have an opportunity to capture transition alpha. The top five themes are: rails, cloud services, agriculture, household, and digital factory. Regionally, more of the allocations are to North America or western Europe. 

Conversation with Aslakstrom 

In a recent conversation with Iselin Aslakstrom, Fulcrum’s director of responsible investment, and the recent recipient of a Master of Studies in Sustainability Leadership from Cambridge University, AlternativesWatch sought to understand the way positions are chosen. 

Ms Aslakstrom said that each entity under consideration as a possible portfolio company is assigned an “assigned temperature rise,” which serves as the “foundation of how the fund is put together.” This involves a Sector Projection, a determination of “how much a single sector [such as energy, financial, or health care] must decarbonize in order to meet the Paris Agreement.” The projection was then used as a baseline for assessing an individual company’s decarbonizing. 

Portfolio targets have been tightened, until recently the fund did adopt some positions with implied temperature increase of up to 2.5 degrees (Celsius), but 2.0 is the new ceiling, with a weighted average around 1.5 decrees. 

AW wondered how these calculations translated into alpha. This far it seems to do so. It had its inception on August 3, 2020 and got a 6.6% return that month. The return for global equities, as represented by MSCI ACWI, for the same month was 6.1%. The following month, September, was a negative one for both the CCF and the MSCI, but again the former came out ahead,by a wider margin. CCF fell -2.5%, but MSCI fell -3.2%. The pattern has continued. The two performance lines zig and zag together, but the CCF keeps building its lead. 

As to the how of that lead: Aslakstrom says: “There is obviously an element of skill on the part of the portfolio manager," in picking positions that perform, diversify, and contribute to the planetary goal of sustainability. In general, “we have been able to find companies that are well -positioned to enter a time of transition out of a carbon-based economy.” 

Collaborations and Investors 

In a statement last August when the fund opened, the CEO of Fulcrum Asset Management said, “We are delighted to respond to client demand for an ambitious and innovative climate change solution. We believe that we have a unique opportunity here to bring to the market something that could have a real effect on climate change mitigation while still providing diversified exposure to the global equity market.” 

The new fund is the product of at least two collaborations: one with Iceberg Data Lab and the other with Arvella Investments. Iceberg Data Lab is a Paris based provider of data and analytics (named after the idea that, as with icebergs so with data, the big and important stuff is hidden beneath the surface) with sustainability-transition expertise. Iceberg Datalab. The collaboration with Arvella, a wealth manager based in Paris and London, came about because Arvella had observed that most global benchmarks are on a 3-degree path. 

In the words of Benoit Mercereau, the CIO of Arvella, that manager is “pleased to have been ankle to work with Fulcrum to design a fund that is not only providing us with access to the global equity markets but doing so in a way that is in-line with a below 2 0 trajectory.” 

The fund generates “a lot of internal interest [at Fulcrum]” -- beyond that, it looks to institutional investors, “we’ve had a lot of conversations with pension funds and other institutional clients.”              

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Climate Change is underway, but is it priced in? 

April 5, 2021 

In a recent interview, PGIM’s head of thematic research expanded on some of the aspects of that company’s recent report on climate change. The report emphasized that climate change is a fact, not a hypothesis, and that since the associated risks are only imperfectly reflected in the price of assets, this fact creates investment opportunities. 

The research head Shehriyar Antia, spoke specifically of the value (and mispricing) of real assets: land, homes, water, and infrastructure, and the resulting opportunities. 

“Real estate offers opportunities for capital investment in climate resilience: investments that can harden properties in the face of extreme weather events,” he said. 

The hardening can be straightforward: a landlord or the lessor of a commercial property can simply elevate electrical wiring a foot off the ground. This can allow the properties to survive and continue functioning through weather events that would otherwise knock them out, and in the process preserve the steady stream of rental income. 

Unfortunately, such simple hardening measures don’t yet produce benefits for the property owner in the context of insurance. But that is likely to change in the years to come: perhaps gradually, perhaps in one big leap (a “Minsky moment.”) 

The phrase “Minsky moment” is named for Hyman Minsky (1919-1996), an economist who wrote in the Reagan era about how an accumulation of private debt can push an economy toward crisis, the build-up to the crisis will be gradual but its onset will seem sudden. Minsky’s thinking has been applied in recent years to our understanding of the events of 2007-09. Antia uses the term, not to suggest that there is going to be one single global Minsky moment on climate, but simply to outline some scenarios in which certain prices will shift drastically. 

Residential Mortgages 

With that thought in mind, consider residential mortgages. Real estate prices along the coasts, where storm surges, and even more broadly a global threat of higher ocean levels, threaten livability do seem to reflect the climate risks. But it doesn’t follow that the mortgages do. The report tells us that “[c]oastal states such as Florida, Virginia, and Maryland -- with some of the highest climate risk -- also have among the lowest average mortgage rates.” 

Do flood insurance premiums reflect the increased risk efficiently? No. The PGIM report says that outdated flood maps have helped keep the re-pricing inefficient. For example: the number of homes in the US that are now at risk from a 100-year flood are roughly twice what the maps suggest.” 

Although as noted government policies get credit for helping with the obsolescence of coal, they get the blame for the over-valuation of shoreline residential debt. Fannie Mae and Freddie Mac help preserve inefficiencies. Banks can offload their mortgage risk to these GSEs . That means that they don’t have to hang on to the 30 year mortgages they underwrite. This means in turn that the originating banks don’t have to account for flood risk in mortgage pricing or push for better maps. An inefficiency continues, and anyone in a position to look past short-term fluctuations can take an investing position on the side of the underlying realities. 

From such facts, PGIM infers that “climate change is a slow-burning issue with indiscernible impacts on a year-to-year basis but potential for exponential growth once tipping points are reached.” 

When the tipping point does come, even realty hardenings that seem modest now could pay off handsomely. 

Information and Intelligence 

Relatedly, Antia said, “A revolution is underway: a data revolution that, together with AI, creates real opportunities.” Typically, analysis of threats from, say, storm surges would proceed at the postal code level. But in this situation "all properties can get painted by the same brush," he said, and this undervalues some. The new tech can allow for analysis "block by block and even property by property." 

This brought us back to the issue of property and casualty insurance mentioned above. Many of the weaker players have exited in recent years. The fittest have survived, and as changes in the climate become more obvious, it stands to reason demand for their service will increase. Further, the fittest are those in the best position to make good use of Big Data. Chubb, Liberty Mutual, and other strong players will leverage innovations in risk-sharing and in high tech, which will allow for more effective weather modeling and will capture new opportunities. 

What the insurers can leverage, realty investors can likewise leverage. The PGIM report includes an “illustrative” dashboard of a sort that may become typical for the screens in such investors’ office. An investment manager could call up a property, say “11 Fillmore Street” and discover in a glance not only that 11 Fillmore, somewhere in the southwestern US, is an office building, and has produced a steady rental stream, but that it is not at risk from sea level rise or hurricane/typhons, that it is only somewhat at risk from heat stress, and that it is at high risk from earthquakes or water stress. 

For agricultural properties, likewise, sensors, GPS, and variable rate technology can enable the managers of land to adjust the supply of water, fertilizers, and pesticides to adjust for weather variability and its impact on soil, pest populations, and so forth. 

“And Not a Drop to Drink” 

The question for much of the PGIM paper then is: are markets factoring climate risks into the price of assets? If the answer is, “generally, yes,” then the next question is “are they doing so efficiently or inefficiently?” Inefficient pricing always spells someone’s investment, or at least someone’s trading, opportunity. 

In this connection, in our interview Antia spoke of water infrastructure as an investment. “Water filtration facilities or storage at the municipal level are underappreciated opportunities for a debt investor," he said. In global terms, “investors need to be on the ball” because “markets without a straightforward regulatory landscape or strong property rights” can be a trap here. Projects in the southwestern United States or in Australia, where those protections are present, are promising. 

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An alliance for decarbonization: Riverstone and Blackhorn 

February 21, 2022 

Riverstone Holdings LLC has acquired a minority interest and entered into a strategic partnership with Blackhorn Ventures. Each firm is prominent in the world of private fund support for decarbonizing and recycling technologies. 

Together, Riverstone and Blackhorn will work to deploy capital into high-growth opportunities across the investment cycle. Each is a thesis driven investment specialist. In both cases, the meta-thesis is that there are massive market commercialization opportunities in the use of science and engineering-based innovation toward a low-emissions world. The financial specifics of the deal have not been disclosed. 

Riverstone, a New York based private equity firm founded in 2000 by two former Goldman Sachs executives, David Leuschen and Pierre Lapayre, has raised $43 billion since inception. It focuses on opportunities within energy, power, and infrastructure, with a special interest in low-carbon investments. 

Blackhorn is a Denver based early-stage VC firm founded in 2017, with an AUM of approximately $200 million. It looks to advance resource efficiency and decarbonization. The two firms will share industry insights, relationships, and existing platforms. 

“We have already realized industrial platform benefits between our two franchises and see this investment in and partnership with Blackhorn as a significant differentiator for both of us going forward,” said Riverstone co-founder Lapayre in a statement. “We look forward to working closely with Phil, [Philip O’Connor], Melissa [Cheong], and the Blackhorn team to generate uniquely attractive investment opportunities that contribute to a healthier but profitable environmental solution.” 

Riverstone has invested more than $6 billion in the renewable infrastructure and decarbonization categories since it was established. Just since the outbreak of the pandemic, it has invested $3 billion on over one dozen transactions with companies across its priority decarbonization investment families and continues to expand its team and footprint. 

Philip O’Connor co-founded Blackhorn with Trevor Zimmerman and Jack Fuchs. Cheong is managing partner. In the statement, Cheong said, “All of us at Blackhorn have great appreciation for Riverstone’s long and successful history of advancing technologies targeting the hardest to decarbonize industrial sectors. While we target investments at different stages, our two organizations have complementary areas of expertise and are very much aligned in our broader market objectives