Nuclear Energy: Now or Never

By Valerie Gardner, Managing Partner

UC Berkeley students' annual Energy Summit addresses the world's energy and resource challenges. This year's conference included a panel titled "Nuclear Energy: Now or Never." Valerie Gardner, Nucleation Capital's managing partner, participated on the panel, bringing her bullish outlook on the prospects for innovation in nuclear to have a significant impact on the world's ability to decarbonize.

BERC's Nuclear Energy: Now or Never

This year's Berkeley Energy & Resources Collaborative (BERC) Energy Summit included a panel called "Nuclear Energy: Now or Never." There to discuss this topic were UC Berkeley professors, Dan Kamen and Per Peterson, who is also Chief Nuclear Officer at Kairos Power; former Berkeley Ph.D. student, Jessica Lovering, currently the Executive Director of Good Energy Collective; and myself, founder and managing partner of Nucleation Capital. This was, as it turned out, a lively conversation about nuclear power and its prospects in front of a diverse audience of mostly undergrad, graduate students and young professionals.

I'm always happy to talk to students. They are generally well-informed about what's happening with climate change and the risks that it poses to their future. This makes them concerned, distressed but also particularly open-minded. As a climate investor, I spend quite a bit of time reading the science and evaluating a wide range of potential solutions. It is easy to get frustrated and even discouraged by how little progress we are making. I can only imagine how they may feel having to face this crisis.

We're less than six years from 2030, when we are supposed to have achieved a 50% reduction in global emissions. Some countries, including the U.S. have made progress, but we've been unable to move the needle on a global scale, largely because the demand for energy keeps growing, especially in places where they don't have enough even now. But, as it turns out, demand for electricity is growing in the U.S., propelled by the growth of online services, vehicle electrification and technologies like AI and cryptocurrencies.

Unfortunately, even in the U.S. the majority of our power comes from coal and gas, which we cannot afford to continue using they way we have. According to the latest reporting from Dr. James Hansen, we are already exceeding the "safe" limits of global warming, which was to limit heating to less than 1.5° Celsius of warming (equivalent to an increase of 2.7° Fahrenheit). Because of the scale of the "global warming in the pipeline," we've committed the planet to exceeding those limits and face an exceptionally difficult time securing a "propitious climate" for future generations. This should be a big wake up moment for everyone. It certainly makes me want to shake people out of complacency.

Places like California and Germany, which have leaned in to decarbonization and invested billions into wind and solar, are struggling to keep their grids reliable. While they should have focused on shutting down coal and gas, for mostly political reasons, nuclear was already in the crosshairs. This was a big mistake. Germany, against all climate reason, went ahead with a scheduled shut down of its nuclear power and is paying a huge price, having had to re-open coal plants after Russia invaded Ukraine, a far worse climate, health and energy outcome. California was also planning to shut down its remaining nuclear power plant. Fortunately, it became clear that the state needed its nuclear plant to avoid blackouts—and, in doing so, could save $21 billion in decarbonization costs while helping it with its climate goals.

Increasingly, results like these establish that nuclear is a central part of a more effective clean energy solution set. Nuclear power, which uses the smallest land footprint, the least amount of material per kilowatt and which has the highest capacity factor, has an "energy return on energy invested" (EROEI) more than 3X that of fossil fuels and more 20X that of wind or solar. It stands alone with the greatest potential to leverage 21st century innovation to produce a new set of truly paradigm-shifting energy solutions.

Which is what makes nuclear, despite all of its idiosyncratic risks, a compelling investment proposition. The threat to our societies by our continued use of fossil fuels vastly outweigh the risks of expanding the use of nuclear—especially when an advanced generation of designs promise enhanced capabilities, improved safety, boosted fuel efficiency and manufacturing cost-economies.

So, sharing my excitement for the potential of innovative nuclear energy solutions together with some those who are also working on bringing these advanced solutions to market, like Dr. Peterson and his team at Kairos and Dr. Lovering and her team at Good Energy Collective—was a way to help point students towards a future that may well include dozens of new types of energy—spanning fission, fusion and other technologies.

After the panel, a number of students thanked me for my comments, expressed both renewed optimism and an interest in learning more about nuclear. Hopefully, a few of those attending will be inspired to further explore opportunities in the industry.

Published by Valerie Gardner in Advanced Nuclear, Carbon emissions, Climate change, Energy abundance, EVENTS, Future of Energy, Investor activity, Macro Energy Systems, NEWS, Nuclear competitiveness, Nuclear financing, Nuclear innovation, Reduced ecosystem impacts, Solving climate

January 20, 2024

The A, B, and especially C’s of ESG

By Valerie Gardner, Managing Partner

ESG investing is the largest and most profound global trend happening in the capital markets. Its popularity points to the global recognition that investors should and do have an important role to play in helping to solve environmental, social and other issues that have put the planet on a bad trajectory. In fact, no business can survive without investor support so businesses do care to meet investors' demands. Yet, as structured, ESG is not working to fulfill investors' true underlying needs or produce measurable objectives. The good news: there is an easy fix, when we start with "C," assessing climate impacts.

Like many things today, an initiative based upon a meaningful and important purpose, has become mired in controversy. Like the Socially Responsible Investing (SRI) movement that preceded it, ESG (an acronym for rating and selecting companies based upon their environmental, social and governance performance) has emerged to enable investors to focus their investments on companies that are taking care to behave more morally and responsibly vis-a-vis the environment, their employees, their shareholders, their suppliers, their communities and the climate. Many of these types of good corporate behaviors previously went unreported. What's become clear to investors is that short-term profiteering by managers may appear to be beneficial for shareholders but often may not be. It can conflict with what we know are looming issues which need action. Thus, sometimes taking a longer-term view and making corresponding sacrifices or investments that actually reduce overall risks can vastly improve longer-term enterprise value.

ESG has emerged to identify, elevate and reward companies which invest in doing what is right, even if such actions reduce returns in the short-term. It is intended to broaden the metrics on which corporations report information, so investors can make better informed decisions and invest in companies taking ethical actions, treating employees, suppliers and their communities fairly and protecting the environment—much of which costs more but which can reduce risks and other future costs, including litigation, public opposition or climate impacts.

While collecting data to make this type of assessment might seem uncontroversial, traditionally company management was required to focus on meeting only one goal: maximizing shareholder value. Because actions that affect long term enterprise value are often difficult to quantify, management reports have traditionally focused on easier t omeasure financial metrics like Price/Earnings ratios and quarterly profit trends. Deviating from the objective of maximizing per share profits could and often did result in shareholder lawsuits, if management took even smart and common sense approaches which reflected a community value, but which did not clearly improve shareholder value.

Fortunately, in 2019, under the leadership of Jamie Dimon, the Business Roundtable officially changed their statement of purpose and so businesses now broadly recognize that they are also accountable to their employees, suppliers and communities — constituents whose needs and actions can also impact the bottom line — but there is no consensus as to exactly how much or how little is enough and companies employ widely diverging approaches. ESG is now a way that investors can better discern the differences and reward companies that are acting responsibly on environmental, social and governance issues. Unfortunately, it is not working very well.

What ESG Currently Is

The Harvard Law School Forum on Corporate Governance published an article entitled ESG Ratings: A Compass without Direction which aptly summarizes the main issues with ESG as it currently is. The authors describe their findings as follows: "We find that while ESG ratings providers may convey important insights into the nonfinancial impact of companies, significant shortcomings exist in their objectives, methodologies, and incentives which detract from the informativeness of their assessments."

Critically, there's a significant dichotomy between what people commonly think ESG is supposed to indicate and what it actually indicates. Most people believe that an ESG score reflects a company's positive impact on the environment and stakeholders beyond its shareholders, such as employees, customers, suppliers, and local communities as well as the environment—a type of "Doing Good" metric which would tend to produce more shareholder value in the long run. In actuality, most ESG raters are assessing a company for the existence or absence of risk factors that could impact the future value of the company, such as the risk of discrimination in hiring or the risk of climate change on the supply chain. This is more of a "Risk Reduction" approach to data collection.

From an investment manager point of view, any time you can get meaningful information about a company's actions and potential future value, you are generally willing to pay for that—especially when your clients are clamoring for more sustainable investment options and are willing to pay more. Thus, there are now a plethora of third-party ESG rating services working to provide ESG data for a fee and a very large majority of impact-focused investment professionals are using these services to provide more options for clients. But, sadly, the entire space, which is still in its infancy, is chaotic and incoherent.

Studies show very low correlations across ESG ratings providers in total scores as well as across the three distinct components of "E," "S," and "G." Not only isn't there agreement about what an ESG score reflects, there is no standardization in the types of data collected or used and no consistency to the methodologies of collecting, assessing or prioritizing within or across categories. Thus, not only are ESG ratings badly correlated with environmental and social outcomes, the relationship between ESG ratings and financial performance is also uncertain. Those investing in ESG-type funds will typically pay more in fees for having accessed ESG data but they will generally get just equivalent or worse performance.

High and rising demand for ESG information has caused ESG-type rating services and funds to become profit centers, even as the quality, consistency and efficacy of the ratings has failed to provide meaningful results. At the moment, in addition to all of the inherent confusion as to what data matters, how to collect it, how to assess it and then how combine it with many other data points into a meaningful score, there is also the problem of greenwashing. Greenwashing is the deliberate efforts by some companies to game the system and try to obtain better ratings and scores than they probably deserve.

Which points to a growing problem in the ESG space. Companies control what data they will share with which rating groups, creating an inherent ability for companies to influence their scores by refusing to give their data to groups that don't rate them highly. This has rendered the existing ESG industry scores almost meaningless, since many of these raters are dependent upon the good will with the companies they are rating to get the data they need.

There is no better example how badly ESG is doing for guiding investors to more ethical and sustainable companies than when the S&P Sustainability Index did its rebalancing in May 2022. At that juncture, the S&P ESG team ejected Tesla (the largest EV car maker and one of the most successful climate companies on the planet) from the Index but welcomed ExxonMobil (a renowned climate villain), prompting Elon Musk to call the S&P Sustainability Index a "scam."

This decision caused a broader uproar within the sector and forced Senior Director and Head of ESG Indices Margaret Dorn to publish an explanation. Not only was this shift a climate and ESG travesty but, in fact, the S&P's "delicate balancing act" revealed that ESG raters and ratings are meaningless for a whole host of reasons, predominantly because there is just too much data, too much manipulation, and not enough understanding of what really matters. ESG raters appear to be so lost in the trees, they have effectively lost sight of the forest, namely the critical issue that matters the most to investors: climate change.

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What ESG Isn't

Investors are looking to ESG ratings to enable them to invest in companies that are doing better on a wide range of areas but, most critically, are environmentally responsible, especially around reducing carbon emissions. For many, this means working to provide solutions along the lines outlined by the United Nationa's Sustainable Development Goals. ESG investors care to invest in companies which improve global sustainability and solve climate change.

There are plenty of dire human, environmental and governance problems—you could name dozens—but none that threaten to seriously and even permanently disrupt the planet, human society and economic order as much climate change, the forced heating of our climate caused by burning fossil fuels. This crisis dwarfs everything.

So, while it may be troubling that there are reports of a toxic "bro" culture at Tesla, every single day, Tesla ships electric vehicles that enable people to stop purchasing and burning fossil fuels, which is the primary driver of climate change. In stark contrast, every single day ExxonMobil strives to greenwash their aspiration to keep selling more and more fossil fuels for as long as they possibly can—threatening not just human survival but that of all species and potentially our well-functioning societies, which could effectively wipe out the concept of wealth as we know it.

Shockingly, ESG as it is currently designed doesn't enable either the experts or investors to clearly assess companies on the single most important metric of sustainable performance—whether the company contributes to climate change or if they provide solutions to climate change. The average ESG investor, however, thinks that this is primarily what ESG does. Clearly, if ExxonMobil is rated highly but Tesla is not, ESG is not just meaningless, it is actually misleading for the average impact investor.

Fortunately, in order to fix this problem, ESG doesn't need to change that much, it just needs to make a small, relatively easy modification, which will then substantially improve its effectiveness and performance and begin to have a truly beneficial impact on humanity's ability to invest "sustainability." I propose a very basic approach for doing that below.

ESG Can Easily Be Fixed: Start all ratings with a "C" assessment

(Click to enlarge.)

As those concerned about what's happening with our climate saw, 2023 experienced a succession of seven record-shattering and "gobsmackingly bananas" (in the words of two climate scientists) hottest months on record. Not surprisingly, 2023 was also a record-breaker for climate disasters in the U.S. and around the globe, which have cost humanity billions annually. The bill for extreme climate disasters in the U.S. since 1980 now totals over $2 trillion and growing. Hundreds of millions of people are already being affected and/or displaced by the extreme weather events resulting from burning fossil fuels and allowing the CO2 pollution to escape into the atmosphere. These climate events are impacting the global economy, national security, geopolitics, businesses and politics in a range of ways but especially by increasing over systems risk.

(Click to enlarge)

Not surprisingly, at COP 28 in December, 198 nations gathered in the United Arab Emirates and finally agreed that we need to "transition away from fossil fuels." Though fossil fuel exporting nations like the UAE, Saudi Arabia, Russia and Iraq fought hard against adopting the specific words "phasing out fossil fuels," this is a pointless distinction, since it is abundantly clear that humanity needs to stop using fossil fuels as fast as humanly possible, whether transitioned or phased out. The climate is so bad, even Middle Eastern countries, whose primary source of revenue is fossil fuels, finally acknowledged what we've known for a very long time: only by eliminating the use of fossil fuels will we start to turn the tide against our worsening climate change and the dire ecologic and economic crisis that it threatens.

Against this backdrop and in light of the fact that ESG analyses and ratings are clearly still in "beta," we believe that ESG raters could make a very minor modification and start to have a much more significant impact. Simply by commencing vetting with one very simple sorting action, they would improve the coherence of ESG ratings by a lot. Prior to applying the rankings from hundreds of data points amassed regarding a plethora of corporate actions, ESG needs to divvy up the universe of companies into three distinct buckets: Climate Villains, Climate Neutral companies and Climate Heroes. This is a very easy distinction to make. Climate villains are those that are actively extracting, refining or selling virgin fossil fuel products or related services. Climate neutral companies are those that doing other business and are merely energy customers. Climate heroes are those companies which are actively developing and/or delivering key solutions to climate change (unrelated to ongoing fossil fuels operations), like low-carbon and carbon-free energy such as nuclear power, hydropower, wind, solar, geothermal and wave power; providing electrification support, such as with electric vehicles, heat pumps, charging stations and energy efficiency; and lastly carbon management, including carbon capture, carbon utilization and carbon sequestration (so long as unrelated to fossil fuel operations).

Once this vetting process has been done, then all of the current ESG metrics can then be assessed for more comparative performance relative to a company's other environmental, social and governance risks. But the top line assessment will easily enable every ESG-rated fund to exclude all Climate Villains. ESG funds will then be able to select their choices of best-performing companies from the other two categories for a mix of risk and return characteristics and use whatever type of analyses they wish. Investors will then have a very clear sense of what the composition of the fund is, across these three categories. Companies whose business is actively extracting, refining, distributing or selling fossil fuel products or services that cause climate change will likely still be included in standard, non-ESG funds, of course, but even these funds would easily be assessed for their climate impacts. Such funds could also be assessed for their ESG conformance, relative to other similar funds. But with this big bucket approach, no company or fund would be able to manipulate their "S" or "G" ratings in such a way as to feign that they are environmentally sustainable or acting responsibly relative to climate risk or sustainable development goals, when they are not, which is what impact investors mostly care about.

Summary

Despite inconsistencies in and controversy over ESG, we believe that demand for ESG research and investment vehicles remains strong largely because of concerns about climate change. Investors demand greater clarity about which businesses have more sustainable and ethical business approaches and want to own those and not companies shirking their responsibilities to future generations. Although ESG is in a nascent and chaotic state and not currently delivering the data ESG investors really need, a simple modification will be enough to ensure that more investor capital is directed into sustainable ventures.

Here's how we think it can work.

Prior to running the current slate of ESG assessments, each company should be given a climate score: "C Minus" is given to "Climate Villains," companies whose products and services are contributing to climate change, namely the fossil fuel extraction, refinement, distribution and sales companies that are responsible for contributing millions of tons of carbon emissions. Companies that not involved with climate-impacting businesses (such as those in healthcare, education, textiles, manufacturing, etc.) would be deemed "Climate Neutral" and get a straight "C" since their business is not directly causing climate change other than through their energy usages (or idiosyncratic emissions). Lastly, the final category are the Climate Heroes who get rated "C+" as they are actively working to solve humanity's need for clean energy and/or carbon services, which seek to restore the natural carbon balance in the atmosphere.

Once these very broad but clear buckets are determined, ESG ratings can be applied to provide more nuanced distinctions between the companies in each of the three buckets, based upon their treatment of employees, governance policies, whether or not they take care of their toxic emissions or waste products, whether they protect water sheds or try to use clean energy for their operations, etc. In this way, Tesla will be in the C+ bucket with other climate heroes and rated in comparison to other electric car companies but will never be in the same climate bucket as disgraced Climate Villain, ExxonMobil, which must try to out-maneuver other fossil fuels purveyors stuck in the C- bucket.

If this simple change were implemented, ESG funds could showcase their percentage of holdings that are C+ versus C, and ESG would finally become a highly effective tool for enabling investors to invest towards increasing the sustainability of our planet.

References

Columbia University, Climate Science & Solutions, Groundhog Day. Another Gobsmackingly Bananas Month. What's Up?, by James Hansen, Makiko Sato, Pushker Kharecha, January 4, 2023, the title is taken from a tweet by Zeke Hausfather.

NOAA National Centers for Environmental Information (NCEI) U.S. Billion-Dollar Weather and Climate Disasters (2023). DOI: 10.25921/stkw-7w73.

Fortune, Musk claims S&P ‘lost their integrity’ after Tesla gets booted from sustainability index while Exxon is included, by Christiaan Hetzner, May 18, 2022.

New York TImes, Sustainability Index Drops Tesla, Prompting Insult from Musk, By Jack Ewing and Stephen Gandel, May 18, 2022.

4. The (Re)Balancing Act of the S&P 500 ESG Index, by Margaret Dorn, Senior Director, Head of ESG Indices, North America, S&P Dow Jones Indices, May 17, 2022.

5. Harvard Law School Forum on Corporate Governance, ESG Ratings: A Compass without Direction, by Brian Tayan, a researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business, David Larcker, Professor of Accounting at Stanford Graduate School of Business; Edward Watts, Assistant Professor of Accounting at Yale School of Management; and Lukasz Pomorski, Lecturer at Yale School of Management, August 24, 2022.

Published by Valerie Gardner in Advanced Nuclear, Carbon emissions, Carbon markets, Carbon negative, Climate change, Climate innovation fund, Climate mayhem, Climate policy, Energy abundance, Future of Energy, Investor activity, Macro Energy Systems, NEWS, Reduced ecosystem impacts, Solving climate

October 22, 2023

Parnassus Versus Green Century: A Contrast in Styles

By Valerie Gardner, Managing Partner

June, July and August of 2023 were the three hottest months the Earth has ever seen by such a large margin, it left climate scientists agog. Climate disasters are abounding apace, with the U.S. hit by 23 large-scale disasters, a record-breaking year already. In Pakistan, extreme rainfall and flooding affected 33 million people, killing more than 1,700, displacing more than 8 million and causing damage estimated at over $30 billion, not counting the estimated 2.2% loss to the country's gross domestic product. North America and even Hawaii were ravaged by intense forest fires, with record acreage subsumed, scorching towns like Hahaina, killing hundreds, and forcing evacuations in areas of the northeast, northwest and Hawaiian islands once seen as refuges from the expected heat. Decades of increasingly severe drought, now complicated by shortages and war, have displaced millions in Iraq and other regions of the Middle East and the bad climate news is just getting worse, adding to the cacophony of alarm bells being rung by scientists in almost every field. In this context, when it is clear that we humans are not coming close to winning this fight, it's illuminating to contrast how two competing sustainable investment groups have chosen to address their obligation to invest "sustainably."

As we reported back in May, Parnassus Investments, a leading sustainable investment fund, issued a stunning press release in which they announced the removal of their negative investment screen on nuclear power along with a positive outlook for its role in reducing emissions.

In a succinct six paragraphs, Parnassus explained the basis for this momentous decision that reversed a policy in place for the entire 39 years of their existence. While it is not issuing an absolute commitment to invest in nuclear equity, the statement showed that Parnassus’s Sustainability team had thoroughly researched the issue of nuclear power and were sufficiently convinced that nuclear could be an important contributor to helping the world decarbonize to change their minds and finally include nuclear in the universe of investment prospects.

We regard this milestone decision as an impressive example of science and fact-based ESG leadership, reflecting actual changes in the nuclear industry over the last few decades as well as the utter catastrophe we are facing, if we don't find better ways to reduce emissions from our energy usage. Similarly, around that same time, Bank of America Securities analysts released their first "BUY" recommendation for nuclear power in nearly four decades. In BofAS's highly detailed report, titled "The Nuclear Necessity,” a team of five analysts explained why they were "bullish on nuclear power" and laid out both the case for and the methods by which investors should start increasing their exposure to nuclear equities and uranium. This event, we noted was yet another milestone.

Nevertheless, on August 30th, writing in a publication called ESG Clarity, Leslie Samuelrich, the CEO of Green Century Funds, another investment fund which considers itself a leader in sustainable investing, issued her pushback in the form of doubts. Ms Samuelrich wrote: "Even though I knew for months that an ESG firm was thinking about removing its exclusion on nuclear power producers, I was taken aback when I read their press release. Why would they revert their position and turn to nuclear when investing in renewable energy has grown so dramatically?"

Ms. Samuelrich then proceeds to trot out five dog-eared paragraphs containing the standard litany of antinuclear arguments (Safety, Cost, Timing, Emissions and Waste) which, like figures in a wax museum, reflected views so frozen in time, no amount of new data or climate rationale could have had any effect. She makes no reference to nuclear's improved safety performance, nor any mention of new designs nor the accelerating customer interest in them. The stark contrast between the perspectives laid out by these competing sustainability-focused investment firms offers an excellent opportunity to compare the styles and seriousness of their approaches to their ESG investment missions.

Parnassus Investments

Parnassus Investments was founded in 1984 to provide socially-responsible investments. Headquartered in San Francisco, they now have 70 employees and about $42 billion in assets under management (as of Sept. 30, 2023). This is a serious investment firm with an impressive $600 million in AUM per employee.

Reflecting Parnassus’s seriousness is the Climate Action Plan that the firm adopted in December 2022. This Plan established a goal of net-zero emissions in all their funds by 2050, in alignment with the Paris Agreement. This document and commitment demonstrate that Parnassus understands this key point: it is not enough to avoid fossil fuels; society also has to figure out where all the future clean power that we need will come from. It's the long-term "rubber meets the road" reality check. Parnassus's statement that they will now include nuclear in their investment universe to support the transition to a low-carbon economy reflects their deep thinking about this urgent reality.

We imagine that it must have been a difficult decision for the Parnassus team. But they displayed the intellectual honesty to take a deep, critical look at the landscape for where we will produce our clean energy and, like many of us, found the calculations around deployment of renewables did not add up. It is never easy to have to change one's mind. Never easy to reverse course. With respect to nuclear—which evokes so much knee-jerk prejudice and emotion—even being open to an objective evaluation is difficult. Many members of the antinuclear community see it as such a betrayal, they'll question your motives. What ultimately forces objective people to look more closely at nuclear is the fact and increasing certainty that we cannot meet our climate and energy goals without it. Parnassus demonstrated both analytical clarity and courage in their decision to abandon their negative screen and allow nuclear back into the universe of possible equities—without a thought of abandoning their commitment to rigorously evaluate each prospective candidate for its adherence to high ESG performance metrics.

Although in 1984, Parnassus was also concerned about the safety and cost issues involved with nuclear power, they have since learned that nuclear is a critical source of low-carbon power whose benefits include both safety and a stability. They've also recognized that, over the years, tighter regulations have led to improved designs and operating performance. Additionally, they were pleased to find that the new generation of nuclear technology being developed now offers both higher safety and lower costs. The Parnassus investment team, led by Marian Macindoe, Head of ESG Stewardship, has clearly done a deep dive into today's more diverse nuclear industry, where a broader menu of options are being developed, and believes that "nuclear energy will be an essential source of fuel in the transition to the renewable sources required to support a low-carbon economy . . . and a reasonable choice." This reflects considerable research and learning. We applaud the extremely professional work this team has done.

Green Century Funds

Green Century Funds, founded in 1991 by a "group of environmental and public health nonprofits," has nearly $1 billion in assets under management as of June 30, 2023. Green Century’s Registered Investment Advisor, Green Century Capital Management (GCCM), has 13 employees, six of whom provide investment advisory or research work (as of GCCM's most recent ADV) about $86 million in AUM per employee. Any profits from their investment advisory operations go to Paradigm Partners, a holding company owned by the founding entities, predominantly NGOs affiliated with Ralph Nader's Public Interest Research Group — Mass PIRG, NJ PIRG Citizen Lobby, Conn PIRG, CA PIRG, Washington State PIRG, Missouri PIRG Citizen Org, Colorado PIRG, PIRGIM Public Interest Lobby, and Fund for the Public Interest. These are all advocacy groups. None are scientific or investment experts.

Green Century's stated mission conforms to an advocacy model: to help people save for their future without compromising their values and to help investors "keep their money out of the most irresponsible industries." In other words, Green Century Fund applies a simplified, reductive view that merely screens out investments that don't meet their "values" — i.e. no fossil fuel, tobacco, nuclear and conventional weapons, nuclear energy, genetically modified organisms (GMOs) and other industries "whose core business threatens the environment and public health." Green Century specifically does not aspire to invest into companies that will enable a sustainable future. They also have not published a "Climate Action Plan," from what we could see, so they have made no specific commitment to decarbonizing their fund. We were curious as to what they do invest in.

A cursory overview of Green Century's Equity Fund, the largest of its four mutual funds boasting $544 million in AUM, reveals the following Investment Categories and percentages of investments:

Software & Service 23% (52% of which is Microsoft)
Semiconductors 10% (52% of which was NVIDIA)
Media & Entertainment 8.2% (83% is Alphabet)
Pharmaceuticals & Biotech 7.3%
Financial Services 6.4% (26% is Mastercard)
Capital Goods 6.2% (20% is Caterpillar or Deere & Co.)
Food & Beverage 4.5% (57% is Coke and Pepsi)
Renewable Energy & Energy Efficiency 4.1% (90% is Tesla)
Healthcare 4.0%
Consumer Discretionary 3.7%
Equity REITs 3.0%
Insurance 2.9%
Household/Personal Products 2.7%
Consumer Services 2.5% (43% McDonald's)
Materials 2.5%
Tech Hardware & Equipment 2.5% (43% Cisco)
Transportation 2.0% (31% Union Pacific Corp)
Consumer Durables & Apparel 1.2% (58% Nike)
Banks 0.9%
Telecom .8% (98% Verizon)
Commercial & Prof. Services .5%
Consumer Staples .3% (54% Sysco Corp)
Automobiles .3% (Rivian is here at 17%)
Utilities .2%
Healthy Living 0.0%

There are several interesting things that pop out from our review. Of the top 9 listed investment categories, containing 70% of the total assets, five have a majority of capital concentrated in just one or two companies. Thus, by dollars, this fund is dominated by its investments in Microsoft, NVIDIA, Alphabet, Mastercard, and Tesla. While these are great companies, it is notable that all of them, without exception, require massive amounts of electricity for their success. Which means from a sustainability perspective, that they will need reliable, affordable and growing sources of clean electricity to remain profitable over time. Where will that come from?

In her written response to the Parnassus shift, Ms. Samuelrich pointedly asks "Why would [Parnassus] revert their position and turn to nuclear when investing in renewable energy has grown so dramatically?" Well, Ms. Samuelrich can easily find the answer to her question in her own firm's largest portfolio. It lacks meaningful investment in clean energy. Green Century claims to have put 4% of its assets into "Renewable Energy & Energy Efficiency." If that were true, one could imagine justifying that level, as the traditional Energy sector represents 4.7% of the market capitalization of the S&P 500 index [S&P 500 9/30/23 FactSheet]. A closer look, however, paints a different picture.

Of the 4% of assets designated as Renewable Energy & Energy Efficiency, 90% was actually invested in Tesla. Tesla is an electric car company, as everyone knows. Cars, even when electric, are neither a source of "renewable energy" nor do they produce "energy efficiency." But Green Century knows this because it has properly categorized Rivian, another electric car manufacturer, in the "Automobile" category. Yet, Green Century chose to put Tesla into the "Renewable Energy" category. Perhaps this is because Tesla acquired Solar City, and so has a small division that sells solar panels and battery walls. But Tesla’s 6/30/23 10-Q reports that “Energy Generation and Storage” produced less than 7% of Tesla's total revenue ($3.038 billion of total revenue of $48.256 billion) for the first six months of 2023.

Aside from Tesla, the amount of capital that Green Century has invested in Renewable Energy & Energy Efficiency is just 0.4%. These investments include five companies, of which Johnson Controls represents 60%. Johnson Controls provides HVAC systems, fire protection, and automated data information about energy use for many types of commercial buildings. They also service "90% of the world's top marine and oil and gas companies for all types of assets and facilities." In other words, a sizeable portion of their business derives from the oil and gas industry, conveniently ignored by Green Century. For argument's sake, we'll assume that Johnson is credibly working towards "energy efficiency" wherever they are but they are definitely not creating renewable energy.

The remaining .16% portion of Green Century's “Renewable Energy & Energy Efficiency” holdings is comprised of four investments: Acuity Brands, Itron, Ormat Technologies and First Solar. Acuity Brands markets smart lighting and building management solutions. Itron provides smart networks, software, services, meters and sensors to help manage energy and water. Acuity and Itron may contribute to energy efficiency, but neither produces renewable energy. Ormat Technologies claims to be a leader in providing "Green Power Plants" spanning geothermal power, solar power and "recovered" energy (i.e. storage). First Solar, the only US-based solar manufacturing company, claims to offer next-generation solar technologies, a high-performance, low-carbon alternative to conventional photovoltaic panels. At last, two companies that actually contribute to the creation of renewable energy! Yet the Green Century fund invests less than 0.12% of its total assets into these two companies. In contrast, Green Century has invested over 2.5% in Coke and Pepsi — more than twenty times the amount invested in renewable energy companies that Ms. Samuelrich claims are growing so quickly.

We are a bit "taken aback" by the choices made by Green Century, not only their degree of concentration in a few large cap companies but the misleading industry categorizations and failure to invest meaningfully in the lauded renewable energy companies working to clean our energy system. Ms. Samuelson argues that sustainable investors should support the renewable energy sector, so why isn't she, if she truly believes that "the world is set to add as much renewable power in the next five years as it did in the past 20?"

Samuelrich asks, "Why gamble with the environmental and public health risks of [nuclear], especially when renewable energy is cleaner and cost competitive?" The answer is clear to those who actually do the research and care about facts: because neither solar nor wind actually provide the reliable or climate resilient power that societies demand and need. Geothermal remains highly limited by geography. So, as we've witnessed, without a truly reliable source of clean energy, humanity will continue to demand reliable but dirty fossil fuels and emissions will keep growing—as they have continued to do, despite big increases in renewables. The only clean and firm source of power that can scale up with the speed we need it to, is nuclear. It's gotten a whole lot better over the last 40 years—in part due to the public's concerns about it's safety and increased regulatory scrutiny—and now a new slate of advanced designs with different sizes and features is emerging and buyers like Dow Chemical and Microsoft are leaning in.

We would urge all sustainable-minded investment groups not to take shortcuts and pander to aged ideologic tropes like Green Century, but instead examine today's facts and data carefully and think critically, as Parnassus did, about the real challenges around how we will produce the enormous and growing amounts of clean grid-scale, distributed and industrial-process heat power on which we all depend. Simply saying “no” to technologies you don't like may have been a justified approach three decades ago but it has not helped solve our true climate dilemma—meeting humanity's growing energy needs without impacting the climate. Until we make this transition, nothing is "sustainable." Nor will it enable one's investors to participate in the growth of a sector—like next-gen nuclear—that is increasingly being recognized by climate and energy experts as critical to our survival.

We are extremely glad that serious, research-focused investors, like Parnassus Investments and Bank of America Securities, are figuring this out and are willing to do the hard work, risk the bruises that may result from following the facts to where they sometimes inconveniently reside, and build the necessary technical capacity to both analyze and potentially invest in the advanced technologies and companies working hard to actually deliver a more sustainable future.

References

New York TImes, Record Number of Billion-Dollar Disasters Shows the Limits of America's Defenses, by Christopher Flavelle, Sept. 12, 2023.
World Bank: Pakistan: Flood Damages and Economic Losses Over USD 30 Billion and Reconstruction Needs Over USD 16 Billion - New Assessment, October 28, 2022
Parnassus Investments: Parnassus Investments Removes Investment Screen for Nuclear Power in Support of Our Transition to Low-Carbon Economy, May 1, 2023
ESG Clarity: Should we embrace nuclear energy to solve the climate crisis? By Leslie Samuelrich, CEO of Green Century Funds, August 30, 2023
Bank of America Securities, RIC Report, "The Nuclear Necessity," by Jared Woodard, published May 11, 2023.
Parnassus' Annual Stewardship Report, Principals and Performance in Action 2023
Green Century's Equity Fund Holdings, as of June 30, 2023, with assets of $544,380,517.
Parnassus Funds, totalling over $42 billion as of 9/30/23.

Published by Valerie Gardner in Advanced Nuclear, Asset manager support, Brilliant thinkers, Carbon emissions, Climate change, Climate innovation fund, Climate mayhem, Energy abundance, Future of Energy, Investor activity, NEWS, Public companies, Reduced ecosystem impacts, Solving climate, US competitiveness, US technological leadership