Bloomberg New Energy Finance - Week In Review

This Week In Review was sent on Tuesday 30 September.

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UPBEAT MOOD MUSIC ON CLIMATE ACTION AT UN SUMMIT

Climate financing, fossil-fuel divestment and other initiatives aimed at stemming the effects of global warming were discussed in New York City during ‘Climate Week’ over 22-26 September. 

The official programme, organised by UN Secretary General Ban Ki-moon, brought together political and business leaders including US President Barack Obama and Unilever chief executive Paul Polman. Hollywood actor Leonardo DiCaprio was also among the who’s who of attendees. 

The week kicked off on 21 September by hundreds of thousands of marchers through Manhattan cities around the world demanding government action on climate change. The People’s Climate March drew more than 310,000 people to New York, organisers said, tripling the original forecast.  

‘We need to demonstrate there are an awful lot of people that care about climate change and demonstrate that this is a huge issue for all kinds of people,’ Bill McKibben, the head of 350.org, the organising group, told Bloomberg News. ‘Since the fossil fuel companies have money, we have to have something on our side, and that’s people.’ 

As part of the event, nations pledged money for climate finance.  France led the discussion by offering $1bn to the Green Climate Fund (GCF), while other countries put forward smaller sums. Outside the official proceedings, discussions focused on action being taken by companies, cities and municipalities – rather than at the national or international level.

The fossil fuel industry came under particular scrutiny last week. A foundation tied to the Rockefeller family, heirs to the Standard Oil fortune, announced that it is joining other groups in exiting coal and tar sands investments. Mars and 11 other companies unveiled plans to phase out fossil-fuel use. 

‘We are immediately divesting from coal and tar sands, the most carbon-intensive fuels,’ Stephen Heintz, president of the Rockefeller Brothers Fund, said. Given the source of the fortune, ‘it’s a very important signal to the market’. 

Fossil fuels have traditionally been a favourite investment. The combination of scale, liquidity, value growth and yield provided by fossil fuel holdings is not easily matched by another asset class. A White Paper by Bloomberg New Energy Finance estimated that oil, gas and coal accounted for nearly $5 trillion of current stock market values. 

The Rockefeller Brothers Fund, which has assets of $860m and is separate from the larger Rockefeller Foundation, will assess how to cut other fossil fuel investments while boosting renewable energy companies, he said. 

While the conversations that took place at Climate Week were largely positive, Bloomberg New Energy Finance does not see it changing the direction for international negotiations on a climate treaty. 

According to last week’s Analyst Reaction, What happened at Climate Week NYC?, Bloomberg New Energy Finance expects some form of ‘deal’ to be signed at COP21 in Paris, but it will not be a top-down grand bargain on long-term emission reductions, nor will it create a global framework to price carbon. Instead, the Paris deal will likely resemble the hotchpotch of Nationally Appropriate Mitigation Actions put forward by each country under the Cancun Agreements.   

In other news last week, sub-Saharan Africa looked as if it may be on its way to realising its renewable energy potential.  

Global Business Resources USA, a US-based infrastructure-finance company, plans to develop two 50MW photovoltaic plants in Nigeria. The company has submitted a proposal to the country’s power ministry to build the parks for $106m at Kumbotso in Kano State and Karu near Abuja, Nigeria’s ministry of information said on its website. The plants would provide electricity for $0.02/kWh, it said. 

Despite being sub-Saharan Africa’s biggest economy, Nigeria is fairly new to renewable energy development, with only 62MW of small hydro capacity and 138mLpa of biofuels commissioned to date. However, interest is ramping up, particularly in solar thanks to its plentiful resources and comparatively generous feed-in tariff: Nigeria is on course to see its first PV plants come online in 2015, with two under construction amounting to an aggregate 31MW of capacity. The country has even loftier ambitions for solar, aiming to build 300MW of PV plants and 300MW of solar thermal by the end of next year.  

There are similar renewable ambitions across sub-Saharan Africa’s 48 countries. As Bloomberg New Energy Finance’s H2 2014 Sub-Saharan Africa Market Outlook finds, this year is set to see more renewable energy capacity come online in the region than was commissioned over 2000-13.

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By 2017, there could be an additional 3bn litres of renewable diesel capacity on line globally

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Q&A of the week

MSCI minus fossil 'shows higher returns'

What would the performance of the MSCI World Index look like if fossil fuels were excluded from the Index? That exercise was carried out by Impax Asset Management, a firm that focuses on opportunities in the resource efficiency and environmental markets. 

The fossil-fuel-free portfolio – arrived at by excluding the MSCI World Energy Sector which comprised 118 stocks on 30 April 2014 – yielded higher returns over a six year period from April 2008 to April 2014. 

“What we are trying to say is that investors shouldn’t automatically assume that reducing fossil fuel holdings raises the risk of underperformance,” said CEO Ian Simm. 

Divesting completely from fossil fuels is not practical. A white paper by Bloomberg New Energy Finance estimated that oil, gas and coal accounted for nearly $5 trillion of current stock market values. 

Simm makes a case for a reduction in some holdings in favour of high growth opportunities in the efficiency and renewables space. Impax has $4.7bn under management. 

Q: What is the genesis of the chart showing the superior performance of MSCI World Index minus fossil fuels?
A: We wanted to investigate whether the absence of fossil fuel stocks had a material impact on the performance of the equity stock market index. The reason we chose six years is because that ties perfectly to the date when FTSE established the Environmental Opportunities Index series. We are not concluding that taking fossil fuels out always leads to outperformance. Over that six-year period it does, and, over some other time periods, it also does, but we can find longer time periods when it doesn’t. What we are trying to say is that investors shouldn’t automatically assume that reducing fossil fuel holdings raises the risk of underperformance.

Q: If the larger swathe of investors were to agree to reduce fossil fuel holdings, would the same results hold true? 
A: If there is material selling pressure on…

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