Summer ESG Review: Is the ESG marathon about to speed up?

In this periodic review of ESG-related activity, inspiratia outlines significant ESG-related themes, investments, acquisitions and initiatives by governments and key industry players and what these activities mean for the renewable energy industry.

This month, inspiratia discusses the main ESG themes, not just in the past month, but throughout the summer months, and their impact on the renewable energy industry. The summer saw significant capital inflow into ESG-related funds and technology enablers, including software-as-a-service (SaaS) and solutions providers for tracking, managing, and reporting ESG-related metrics. Specifically, carbon management software and energy efficiency technologies have seen massive growth.

Carbon data management and carbon capture are all the rage

June 2022 saw continued developments in established ESG narratives like ESG compliance and green financing, and growing momentum in decarbonising the built environment via carbon data management, energy management analytics and the circular economy (June ESG Review: decarbonising the built environment).

Additionally, large firms such as Equinor, SSE and many venture capital firms allocated significant capital to carbon capture and storage technologies and processes, prompting inspiratia to discuss whether it is becoming a growth industry (Is carbon capture technology a feasible decarbonisation pathway, or just hot air?).

Though there are a few projects involved in direct air capture (DAC) of CO2, including the US Department of Energy (DOE) and its US$3.5 billion (£2.79bn €3.27bn) programme for large-scale DAC projects, firms are targeting industrial emissions sources like steel mills and cement factories. The carbon from these emission sources will likely bring revenue if the carbon-as-a-commodity subsector takes off, depending on the presence of carbon off-takers from industry verticals such as the food manufacturing industry. Carbon sequestering from such sources and DAC technologies will likely yield carbon credits rather than direct revenue.

CO2 finds an ally in hydrogen and synthetic fuels

May 2022 saw exciting developments in nascent industries that can become significant growth areas with new opportunities. An example is the synthetic fuels industry. The increasing push towards sustainable fuels in the aviation industry can drive costs down and foster healthy competition, accelerating the aviation industry's decarbonisation plans. This development could also be advantageous to legacy fossil fuel producers who need to transition to cleaner business models. It means they have a lifeline to prevent the potential stranding of their assets in a new green paradigm, albeit with some capital expenditure to convert their existing assets to produce greener fuels via carbon capture (May ESG Review: The Carbon Offensive, Which way to low-carbon aviation?).

Other firms outside the legacy energy sector are also bringing innovative decarbonisation solutions, leveraging captured CO2 to produce synthetic fuels. An emerging approach involves creating fuel by directly combining green hydrogen with carbon monoxide derived from captured CO2. Though the raw ingredients are abundant, the processes involved are energy intensive. So, finding a way to reduce the energy requirements could open the door to a plentiful new source of sustainable fuels.

For instance, German power-to-liquid developer P2X-Europe and Portuguese paper giant The Navigator Company have embarked on a joint venture (JV) called 'P2X-Portugal'. The JV aims to produce 80,000 tonnes of synthetic aviation fuel from green hydrogen and captured carbon dioxide to fill about 5,000 single-aisle Airbus A320 planes. The CO2 will come from Navigator's biorefineries that use wood from sustainable forests for its paper operations. If the JV can demonstrate a net positive energy output from its processes, producing jet fuel from captured CO2 could become a viable decarbonisation pathway.

Venture capital firms and fund managers want a piece of the decarbonisation pie

According to McKinsey, capital inflow into sustainable funds rose from US$5 billion (£4.14b, €4.9b) in 2018 to more than $50 billion (£41.4b, €49.0b) in 2020 — and then to nearly $70 billion (£57.9b, €68.6b) in 2021. These funds gained $87 billion (£72.0b, €85.3b) of net new money in the first quarter of 2022, followed by $33 billion (£27.3b, €32.3b) in the second quarter. Midway through 2022, global sustainable assets are about $2.5 trillion (£2.10t, €2.45t).

Though these numbers represent a 13.3 per cent fall from the end of Q1 2022, it is less than the 14.6 per cent decline over the same period for the broader market. The decline is due to the current adverse macroeconomic landscape, including supply chain issues, high inflation, interest rate hikes, and geopolitical tensions in Eastern Europe.

Despite the apparent overall decline due to the macroeconomic conditions, funds and venture capital firms are allocating significant capital to sustainability-related investments.

For instance, E.ON, one of Europe's largest energy utilities, announced on 16 August [2022] that its venture capital team has launched a new independent climate tech fund to focus on Series A and B investments in digital and scalable models across the key themes of future energy, future cities, and future technologies in Europe, North America and Israel.

On 26 July [2022], Clean energy investor Octopus Energy Group announced a $550 million (£413.7m, €490.0m) raise to support its global expansion and renewables strategy. The financing round includes $325 million (£268.9m, €318.5m) from existing shareholders to support Octopus' U.K. tech and international businesses, while the remaining $225 million (£186.2m, €220.5) from the Canada Pension Plan Investment Board (CPP Investments) backs the firm's efforts to accelerate and enhance the integration of renewables in the power system.

Investment giant BlackRock acquired Vanguard Renewables, a U.S.-based food and dairy waste-to-renewable energy project developer. At the time of the deal, 20 July [2022], Vanguard Renewables had a value of US$700 million (£579m, €686m), and BlackRock will invest another US$1 billion (£0.83b, €0.98b) to finance the developer's expansion plans.

Microsoft, Alphabet (Google's parent company), and advisory firm Boston Consulting Group (BCG) made several carbon removal commitments on 25 May [2022]. Microsoft and Alphabet are pledging to invest US$400 million (£318.7m, €373.5m) in carbon removal programs, and BCG is targeting the removal of 100,000 tonnes of carbon by 2030.

The above are a few investments from industry heavyweights signalling significant capital allocation towards sustainability throughout the summer months. Please read our previous months' ESG reviews to see more funding rounds, partnerships and acquisitions.

Should we be cautiously optimistic?

Though ESG growth was originally a consequence of responses to climate change and environmental deterioration, social dimensions now heavily drive the narrative. The social capital from ESG investing compounds the physical benefits, showing that firms with ESG strategies desire positive societal change. As a result, the current demographic of customers, investors and regulators are more likely to favour firms they deem to have such positive strategies.

For instance, the United States Securities and Exchange Commission (SEC) is considering new rules requiring more detailed disclosure of climate-related risks and greenhouse gas (GHG) emissions, with additional SEC regulations on other facets of ESG pending.

According to PWC, ESG performance could also increase the prospects for follow-on funding rounds or achieving value at exit, whether by trade sale, PE acquisition, buyout, or IPO. This dynamic shows that reputation (social capital) has become a significant factor for firms to scale and attract investors within the tech space from an ESG perspective.

As a result of this shift driven by consumer expectations, we could experience increasing momentum in the race to decarbonise. Once central banks have eased off on quantitative tightening in response to rising inflation, we could experience exponential capital inflow into decarbonisation technologies such as carbon capture, alternative fuels and data Legos for the renewable energy industry.

As a 'risk-on' attitude returns to the markets, we will see capital inflow into novel and niche climate and renewable energy technologies that can have an impact in the long term.