Wednesday, October 2, 2013

Energy: Clean, Renewable & Efficient

The insatiable demand for energy is testament to human progress and development and with the rise of emerging markets the trend will not abate. The IPCC (2011) estimates a global energy demand increase of 40 % by 2030 and we shall not forget that 1.3 billion people still lack access to electricity. Given the fact that energy causes 26 % of global GHG emissions (IPCC, 2007) there is an obvious need to decarbonize our energy mix. Renewables and energy efficiency measures hold great promise but capacity adding investments need to be smarter and bigger. How big? The World Economic Forum says around 750 billion USD/year through 2050 to deliver energy security for all in a sustainable fashion (Green Growth Investment Report, 2013).

Renewables and energy efficiency
Public acceptance for renewables is key to realizing any plan, especially when consumers start seeing new power lines, biomass facilities and wind farms close to home. Coupled with higher energy prices the appetite for new investments might falter as recent developments in Germany indicate. One possible way out of this dilemma is to turn consumers into prosumers, i.e. letting them produce energy, for example via solar power, and selling surplus production into the grid. Smart grids need another round of massive investments however. Catch-22 anyone?
Nonetheless, renewable energy like solar and wind is the fastest-growing source of energy generation, estimated to make up 25 % of the global power mix by 2018. Already in 2016, renewables will surpass natural gas, taking second place after coal as an energy source (IEA, 2013). Growing energy demand from fast growth nations where coal is still in heavy use means that the average unit of produced energy today has the same carbon intensity as 25 years ago (IEA, 2013). To turn the tables a global price on carbon is a must. It has to cost to pollute and harmful subsidies for the fossil industry should be phased out or at least be on par with those for renewables. All together, this will make renewables an even better business case.  

While the case for renewables remain contentious in some circles due to long financial payback time, effects on the landscape and remaining technological hurdles, the other side of emissions reductions represents a more straightforward case. Energy efficiency efforts seemingly provide rather predictable and often large financial returns while mitigating climate change. According to the IEA (2013) improving energy efficiency in building, transportation and industrial processes can reduce global energy needs by one third in 2050, saving money and reducing emissions. IEA also estimates that a global efficiency investment just under 12 trillion USD through 2035 would produce 18 trillion USD in higher economic output.

A word of caution regarding these and other widely circulated figures, they require much faster reduction of energy intensity than has ever been achieved in the past. Further obstacles include split incentives, i.e. not always the same people who pay for efficiency that receive the benefit and the so called rebound effect where lowered cost leads to increased demand, eroding expected savings and positive environmental impact. Hidden costs, for example rebates and use of consultants can also cut into the cost saving quite dramatically.

Nexus and Impact Investing

Smart energy investments need to consider effects on water and food, as they are closely interlinked and together impact the environment in a myriad ways. Using a Nexus approach, as we have stressed in previous blog posts, gives a deeper understanding of these linkages and how to best structure an investment to avoid negative effects in the adjoining sectors. It’s time to move away from the silo perspective.

To illustrate; the full food production and supply chain is responsible for around 30% of global energy demand. Energy is required for pumping, storing, distributing and treating water. Water for energy production currently amounts to about 8% of global water withdrawals (up to 45 % in industrialized countries). Biofuel demands could grow 100% by 2030 (IEA 2009); biofuels being highly water intensive, as is reclaimed wastewater and desalinated seawater. Renewables can cause other negative nexus externalities, for example high water demand per unit of energy for hydropower and large quantities of water for cooling solar installations. However, excluding large-scale hydro power plants, renewables consume much less water than fossil fuels and nuclear power. More than 40 % of freshwater used in the US can be attributed to the cooling of power plants, as a reminder. This complex picture teaches us to go deeper in our investment analysis – forego easy and superficial methods.

In particular, water and energy are deeply intertwined; energy and water producers will need to cooperate on an unprecedented scale, both in terms of on the ground projects and as co-investors. Consider the effects on the energy sectors in cases of water shortages; operations can shut down, causing blackouts and consequent economic damages to society. In water stressed regions the future financial viability of some energy plants can be questioned, not to mention its impact on water supplies, often competing with the agricultural sector for withdrawal rights.

Using a Nexus approach to identify possible negative externalities from an energy investment can be a crucial tool in the process of balancing and boosting financial and environmental returns. Healthy returns, either in the form of profits or cost savings are essential to future investments without having to resort to ruinous and lopsided subsidies. Structuring energy investments as impact investments offer the best of both worlds. Financial returns and positive environmental impact are not mutually exclusive as the old investment philosophy goes but in fact they are mutually reinforcing in a world where natural capital will have an increasing relevance on the balance sheet.

Including negative externalities in investment decisions can make the difference between going ahead with a non-renewable energy investment or using the same capital for a renewable energy project. Leave the coal in the ground or not? The intersection of the Nexus and Impact Investing can be just the right formula for business and governments making multi-billion investments in the above areas, especially in an ever more complex energy sector. 

Wednesday, July 3, 2013

Water: A looming crisis

The case for a higher price on water – CongressEA continues to explore the Water-Energy-Food Nexus and Impact Investing

Water – the word evokes symbolisms of life. Its importance to the human race needs no further introduction. Intellectually we fathom that freshwater is not an infinite resource but our actions point to the contrary, with potentially disastrous consequences. The specter of water wars abound. The UN predicts that by 2025 two thirds of the global population will live in water stressed regions and the Water Resources Group points to an average 40 % gap between demand and supply of freshwater. With an estimated population of 9 billion in 2050 the problem will persist without dramatic change and extensive efforts to reverse the situation. Current practices will generate social cost, environmental collapse and direct economic losses in water stressed regions. Water scarcity is today adversely influencing businesses wishing to expand operations in these regions and sustainability executives rank water as a top concern. The “business as usual” scenario will negatively impact the global economy and not be restricted to specific areas. Unsurprisingly the World Economic Forum places water scarcity in the top four global risks in its Global Risk Report from 2013. Ahead of terrorism and climate change in terms of likeliness and impact.

What or how much will it take to ensure sustainable water use and global water security? Arriving at an accurate number is notoriously difficult but the World Economic Forum’s 2013 Green Growth Investment Report floated a figure of 1.2 trillion USD/year until 2020. Undoubtedly large investments, especially in times of austerity, but as the WHO has pointed out, every $1 invested in water and sanitation results in an average of $4 in increased productivity. As with investments to combat climate change it’s a matter of investing now rather than later, which would imply far larger sums. Not to mention the moral imperative of ending water poverty as soon as possible.

The true value of water

Investments of aforesaid magnitude will go far but must be coupled with setting the “right” price on water. Addressing this deep rooted and controversial issue should not be postponed for political considerations but enacted due to environmental urgency. Given the current rate of usage and estimated future demand and supply freshwater is economically undervalued. Water is charged based on extraction, collection, purification and distribution costs – an administrative price. What other vital, limited commodity has no real price for itself? As a joint resource with historical rights, governments have to invest in the necessary infrastructure and guarantee access to all its citizens. The biggest consuming sectors are agriculture, using 70 % of freshwater resources while industry uses 20 %. The remaining 10 % is from residential use. With long standing subsidies, water is in many regions considered a political good rather than an economic good. Raising its price will be tough and require bold political leadership. The low price is encouraging bad water management, with drained aquifers and chronic underinvestment in infrastructure as unfortunate outcomes. 

Shall prices be raised across the board? If not, why? Squeezing the residential sector alone would make little impact overall and in some instances cause unwarranted financial burdens. The agricultural and industrial sectors insist on a low price as they contribute to society in terms of jobs and tax revenue and many actors have legacy arrangements to fall back on. However, governments need a return on investment in order to continuously reinvest in new and greener water infrastructure. It is therefore imperative that water be valued correctly to both regulate its use and give governments much needed economic resources to ensure future water access. A level playing field must be encouraged, to ensure growth of new sectors that don’t have the same long standing beneficial agreements as the agricultural sector.

A conceivable way forward combines politics and economics. By allocating water entitlements to all sectors and more specifically to organizations and residents, access to water is ensured, an inalienable human right, as declared by the UN. The entitlements guarantee a quota of water, at cost, to all users. Furthermore, caps are put in place so overall extraction is in line with sustainable use for each water source. For users like big industry or large scale farms more water can be purchased from other sources at a market price, just like any other commodity. If individuals or organizations don’t intend to use their share they can decide to sell parts of it at a price determined by the market. A system that uses this type of trading scheme and caps to limit overuse can satisfy both environmental demands and ensure that all individuals are guaranteed access through entitlements, at cost. The value of water will be easier to grasp and efficient use encouraged, especially for the agricultural sector that will need to plan its use of water more diligently. Similar systems have already been implemented in water scarce regions in Australia.

The Water Nexus and Impact Investing

Sustainable water use comes not only from introducing a viable market but also from understanding its role and interconnectedness to other key areas like energy and food. The Water-Energy-Food Nexus provides a new, holistic approach where investments in either sector are not seen in isolation but consider effects across the Nexus. For example, vast amounts of water are needed to produce energy and immense energy inputs are needed in processes like desalination. Before rushing into big investments that from the onset seem like a great idea, for example first generation biofuels, factor in water use and loss of food producing land. The final analysis might show a considerable deficit from an environmental and or social perspective, translating into long-term economic losses.

As the Nexus implies, water investments also need to be a force for positive environmental impact. Investments that need to return economic profit and environmental/social benefits are best served by Impact Investing, a new investment philosophy that emphasizes both. The traditional investment industry is out of sync with realities on the ground. Treating environmental and social benefits as an afterthought will lead to continued underinvestment in critical areas and an unceasing string of negative impact investments. The following pivotal areas represent both needs and opportunities in the water sector over the short and long term:

Efficiency measures:
It is imperative to reduce water footprint across the board. Energy production uses up about 15 percent of the world’s total water withdrawal, estimated to grow by about 20 percent between 2010 and 2035 (IEA 2012). Renewable energy sources, excluding large-scale hydroelectric dams, use much less water than fossil fuels or nuclear power and are more positive to the climate and the environment in general.

Infrastructure improvements:
A combination of investments in new and old infrastructure (in need of upgrades) is needed to reduce emissions and conserve water throughout the water life cycle. Drinking water infrastructure in the US is an illustrative example, there are an estimated 240 000 water main breaks per year. The cost to replace pipes over the coming decades could spiral to more than 1 trillion dollars, according to the American Water Works Association.

Smarter agriculture for resilience and water security:
Investing in less water intensive crops and irrigation processes can help reduce deforestation to lessen the loss of sediments, halt soil erosion and land degradation. It also increases water quality, availability and capacity for energy production. Improving agricultural productivity is crucial in the pursuit for water security and better drainage, drip irrigation and crop enhancements are a few examples to increase the yield. Combined with a higher price of water, consumption rates can be reduced considerably, without reducing agricultural output, as studies have shown.

As CongressEA has argued before there is a perfect match between the Nexus, including water, and Impact Investing. They both require a long-term perspective, a holistic approach, demand quantifiable results and strive for positive environmental impact. Our collective efforts must now be directed at government and business all over the world to steer their financial resources via this new investment paradigm. The water challenge demands nothing less. 

Thursday, May 2, 2013

The Water-Energy-Food Nexus and Impact Investing – a perfect match?

Undeniably water, food and energy are vital resources that most of us take for granted. Sadly this is not the case for all, roughly 800 million people lack access to clean water (UN, 2012), around 900 million are undernourished (FAO, 2010) and 1.5 billion lack access to electricity (IEA, 2010). Substantial progress has been made the last few decades but to ensure water, food and energy security for every citizen we still have a mountain to climb. Factor in an estimated population of 9 billion in 2050 coupled with rising affluence and the challenge becomes even greater. The fact that global water demand is set to rise by 30 %, energy by 40 % and food by 50 % in 2030 (UNESCO, 2010), while we simultaneously have to reduce the global footprint, implies herculean efforts. Then, the behemoth – climate change, which increases pressure on vital ecosystems and has the potential to adversely upend all scenarios if we are unable to get it under control.

The Nexus

Water, energy and food are fundamental to “get right” given their capacity for knock on effects in other areas, for example Millennium Development Goals like poverty eradication, improving health and ensuring environmental sustainability. They are highly interdependent in relation to extraction, production, delivery and consumption vis-à-vis resulting carbon emissions and implications for the wider ecosystem. Hence, we must look at the entire planet as a system and not risk damaging the whole by trying to address one specific problem.

This very message is championed by the Water-Energy-Food Nexus, which represents a more inclusive and integrated approach, not shying away from the complexity and interconnectedness across the sectors. Investments in either sector can’t be seen in insolation, for example innovative solutions in food production must equally consider effects on water and energy demand and new technologies enhancing water access have to account for the energy source. The Nexus calls for breaking the “silo” perspective, allowing for more accurate policy influence in connected areas such as climate change and biodiversity. Learn more about the Nexus on the Water, Energy and Food Security Nexus Resources Platform.

Adopting a holistic business view opens up for collaborative efforts across sectors including business, government and civil society, identifying synergies, trade-offs and investment opportunities. Forward thinking multinationals are taking this to heart. Using an integrated reporting framework to capture a more all-inclusive view of their operations they are entering strategic alliances and properly pricing externalities. Calculating the true cost of mining for example would include effects on natural capital like damaged water streams, degraded forests etc. It’s a safe bet that these intrepid companies will have a significant edge compared to competitors mired in dated and incomplete valuations methods and strategies.

Wanted: Investments

The scale of the needed investments are staggering. The World Economic Forum’s Green Investment Report from 2013 estimates 5.7 trillion USD/year until 2020 for a green growth scenario in which the temperature rise will be kept to 2 degrees (C°) by 2100. 2.2 trillion USD out of the 5.7 trillion would be earmarked for the water, food and energy sectors. Regardless of the exact figure it’s safe to say that success will require nothing short of massive global cooperation for a sustained period of time. A daunting task in today’s fragmented and tense negotiation climate. Interesting to note is that scenarios for a 4-6 degree rise indicate drastically higher costs according to a 2012 World Bank report. A 4-6 degree rise could also mean that adaptation might be beyond reach, given the risk of crossing planetary boundaries. i.e. critical climatic, geophysical, atmospheric and ecological processes. Crossing certain thresholds and entering an unstable state could mean that the Earth systems stop functioning in the manner in which human civilization have come to expect. Among the 9 identified boundaries are freshwater use and land use change. Learn more about the planetary boundaries concept from the Stockholm Resilience Centre.

To effectively combat climate change, protect natural capital and create resilient ecosystems, using the Nexus approach, investments need to happen now and not in a loosely defined future. One major reason for the slow progress can be linked to the way we view and conduct investments.

The sustainable investment (green, social, ethical, ESG) sector is a step in the right direction but it is still based on the old investment paradigm where focus is on minimizing the negative rather than on maximizing the positive. More to the point, sustainable investing, irrespective of using positive or negative screening methods, still places financial returns over all else. We need to arrive at the insight that protecting and improving natural capital is as important as a healthy financial bottom line. In fact, financial returns will eventually decrease as natural capital is destroyed and over exploited. At the same time we must be vigilant to avoid the pendulum swinging too far, i.e. disregarding the importance of financial capital and attractive returns. Economic growth fuels human development and prosperity and is central to any green growth scenario ahead. 

Impact Investing

Navigating the Nexus successfully for positive environmental impact requires an investment perspective that embraces the same paradigm shift, key aspects being:

Balanced – explicit intent to boost natural and financial capital as well as increasing social capital in the process (planet, profit and people)
Short & Long term - satisfy both current and future generations through investments with different time horizons
Holistic – consider effects of investment in interconnected sectors
Collaborative – push for strategic alliances across stakeholders with shared value and broad positive societal effects
Quantifiable – use verifiable metrics to measure impact of investment in relation to stated goals along the natural and social capital dimension

Answering the call for this shift is the Impact Investing scene, a growing phenomenon, both at the investor and entrepreneur level. The Global Impact Investing Network (GIIN) defines the concept accordingly:

“Impact investments are investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.”

GIIN values the market at 9 billion USD in 2013 and Monitor Group estimates 500 billion USD in assets within the decade. Not to be confused with venture philanthropy, impact investors expect market rate returns and according to a 2013 study by GIIN 89 % of investors say returns are as expected or exceeding initial estimates. A full 60 % of impacts investors see no need for a trade off between finance and impact, designated as “yin yang” investors (JP Morgan, 2011). Read more about the nascent sector on the GIIN.

As a burgeoning field impact Investing holds a lot of promise but must ramp up fast in order to really live up to its name and create lasting impact on a large scale. In addition to individual investments in small startups it needs to target 100 million USD + investments involving multinationals, governmental entities, civil society, academia and other relevant stakeholders. The Water-Energy-Food Nexus represents the large scale, interconnected undertakings necessary for Impact Investing to find its forte. The two concepts could, if properly adopted, constitute a perfect match and help provide water, energy and food security for every citizen in a way that keeps us safely within planetary boundaries. The next ten years will reveal if this holds true.

CongressEA will do its part by dedicating itself fully to the mission of catalyzing positive environmental impact investments around the world. We hope you stay tuned for upcoming posts that will further explore the complementing concepts of the Water-Energy-Food Nexus and Impact Investing, applied in a real world context.