On March 1, 1936, the Hoover Dam opened as the world’s largest hydroelectric station and helped catapult the development of the Southwestern United States. The government-funded project’s objectives were to control flooding from the melting torrent of snow from the mountains in the spring, provide a steady source of irrigation to farmers, and generate and sell power to neighboring states to offset the project’s cost.
Our nation and the world has sought renewable energy for decades. The modern-day energy revolution includes the race for electric vehicles, development of biofuels and micro grids that operate autonomously.
President Joe Biden has proposed investing $400 billion into public clean energy solutions. His administration has established a new research agency, Advanced Research Projects Agency-Climate, which focuses on accelerating technologies that deal with the effects of climate change. He has vowed to install 500,000 new public vehicle charging outlets by the end of the decade. His plan aims to reduce the carbon footprint of the U.S. consumer by encouraging electrification of appliances and power generation.
Just as with the Hoover Dam, the government-backed vision of this new energy revolution is a future fueled by alternative sources. The long-term vision would propel the next generation toward a different power supply. But we’re not there yet.
Many renewable energy production methods generate greenhouse gas and come with heavy startup costs. Being at the mercy of rain, wind and the sun for energy generation poses its own set of challenges as they can be unreliable. It will take years to unlock the secret of replacing fossil fuels with dependable renewable energy at an affordable cost that can be accessed equitably around the globe.
The Valentine’s Day polar vortex left millions of people without power and pushed power plants well beyond production capacity; renewable energy was partially blamed for the blackouts. The extreme cold exacerbated the challenges with frozen gas lines and equipment, lack of sunlight, frozen windmill blades and difficulties restarting plants in the extreme conditions after being kicked off the grid when energy reserves were depleted.
In Texas, weather-dependent energy sources have been steadily replacing reliable sources over the years, creating a dependence on unreliable energy. Additionally, energy reserves that once stood at 20% were down to single digits. When the demand for power far outweighed the available output, the reserves were drained and renewable sources were incapable of powering the grid. The combination of overreliance on renewable energy coupled with low reserves led to blackouts, according to the Texas Public Policy Foundation.
Environmental, social and governance initiatives are behind many conservational objectives, particularly renewable energy initiatives. ESG is a subjective layer of risk analysis based on operational procedures, as opposed to data found on financial statements. ESG items may include the process in which a company handles its carbon emissions, equal pay initiatives, labor safety standards, boardroom diversity, anti-corruption practices, waste management and data breaches.
Companies unwilling to embrace ESG initiatives in their operations will find it difficult to secure funding from the new generation of investors and wealth managers. Failure to conform to ESG standards may even put a company’s long-term viability at risk.
ESG themes are not confined to the energy sector, and U.S. regulators do not require companies to disclose such processes. However, current trends indicate the United States is quickly moving that direction. In Europe, ESG reporting is mandatory for large publicly traded firms.
In 2020, the Morningstar Global Markets Sustainability Index ended the year up 16.3%, which was a respectable return against its non-ESG counterpart which returned 16.7%. The two have compared well against each other over the last several years. Some of the companies in the sustainability index may be familiar: Microsoft, Tencent, JP Morgan, Apple and PayPal.
The comparable returns provide further validation that a values-based portfolio can compete well in the modern world. ESG-focused portfolios should not be viewed as an enhancement to performance, but rather as an option for investors who wish to have their investments match their values while not sacrificing returns.
Although we are not ready to flip the switch to renewable energy, the global push for ESG investing will continue to fuel the quest for transformation of corporate practices. Companies that embrace ESG initiatives have a better chance of attracting capital from the next generation of investors.
Andy Drennen, certified financial planner, is a vice president and portfolio manager at Central Trust Co. He can be reached at firstname.lastname@example.org.
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