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Electrification of Transportation – definitely not your father’s Buick

9 May 2012, 5:30 pm

Our April 24 Boston Security Analysts Society lunch session on the Electrification of Transportation explored the potentially disruptive impact to multiple industries of the electrification of transportation.  The internal combustion engine was – literally – the economic engine for much of the 20th century, so the far-reaching impact of a change is hardly surprising.

Our panelists talked about the drivers (increasing fuel economy standards, oil independence), the size and scope of the transition (affecting as well as requiring the involvement of multiple industries, consumers and policymakers), the major challenges (battery life, consumer acceptance, existing and new infrastructure) and business models (using A Better Place’s battery-swapping  model as both an example and a counterpoint).  The framing presentations by Itay Michaeli of Citigroup and Ron Minsk of the Electrification Coalition provide a significant amount of information.  I’ve included Ron’s in this post and Itay’s is available here.

The discussion and Q&A opened up topics that could fill their own sessions.  I’ve selected just a few that demonstrate for me why the electrification of transportation should be getting a lot more attention from investors and investment professionals.

  • The natural tendency to assume that the auto companies have the most at risk and the most to lose.  Consider it from a different angle.  The century of the internal combustion engine spawned two mega-industries – autos and oil.  Looking at market cap and corporate health, one could argue that’s worked out a lot better for oil companies than it has for car companies.  Electrification may offer the automotive industry a chance to capture more value while being a significant threat to oil (72% of US petroleum consumption is for transportation).
  • Will buying a car become like buying an iPhone? A Better Place offers just one take on what might be very different business models for cars in the future.  Theirs is a subscription model.  Instead of buying minutes, the customer buys miles (by swapping batteries).  That revenue stream allows the customer to buy more car for the money, just as a smartphone buyer pays a discounted price for the hardware.  The company says that, in its initial market in Israel, this model allows the consumer to buy the equivalent of a Camry for the price of a Corolla.
  • Big Oil really isn’t Big Oil.  Exxon Mobil is the largest US corporation by sales and the second largest by market capitalization.  It wields significant political power.  But, measured by total oil & gas reserves, it’s puny (see Ron Minsk’s Chart #8).  90% of the world’s oil reserves are held by national oil companies partly or wholly controlled by their governments.
  • Building an auto industry isn’t easy.  China established an ambitious program to develop an automotive industry.  And like developing countries that skipped landlines to build cell networks, China looked to highly fuel-efficient and electric vehicles.  They’ve found that it’s very hard to build a quality car – the fit & finish that automakers worldwide have had to develop.  Electric vehicles are new and not easy.  They are not yet producing cars at the volume they expected.
  • Consumers want widespread availability of charging stations – but they may not actually use them.  Cars spend 90% of the time parked at home or work.  The addition of just one charging station in a Japanese EV pilot resulted in customers using more of the battery’s charge when driving.  They didn’t use the charging station, but they were comfortable driving more because they knew it was there.  What’s the business model for charging stations that people don’t use?
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Filed under China, Transportation, Uncategorized.
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Electrification of Transportation – a disruptive event?

16 April 2012, 10:25 am

Electrification of automobile transportation in the United States presents an economic opportunity that is both large in scope and potentially hugely disruptive to multiple industries that are mainstays in most investors’ portfolios.  How would our traditional view of the auto industry, its manufacturing supply chain, utilities and even petroleum change if electrification of transportation proceeded more quickly than anticipated? We’ve put together a panel to discuss these issues.

  •  Will a transition be slowed by consumer concerns like range anxiety or accelerated by the changing lifestyles of a younger generation of consumers?
  • What might this transition look like?
  • How fast could it happen?
  • What would it mean for the way we analyze and value companies in the auto, energy, and utility industries?

Please join our panel at a Boston Security Analysts Society lunch on April 24th for a discussion of the implications of this transition for investors.

Panelists:

  • Michael Granoff has been head of oil independence policies for Better Place since its founding in 2007. Granoff is the founder of Maniv Energy Capital, a New York-based investment group and the first investor in Better Place. Previous to Maniv Energy, Mr. Granoff founded Maniv Bioventures, a $20 million fund that invested in 10 earlystage life science companESG Business Development, MSCI
  • Ron Minsk is the Senior Vice President of Policy for the Electrification Coalition. The Coalition is a nonpartisan, not-for-profit group of business leaders from across the value chain of transportation committed to promoting policies and actions that facilitate the deployment of electric vehicles on a mass scale.
  • Itay Michaeli is a Vice President at Citi Investment Research & Analysis covering the U.S. Autos & Auto Parts. He joined the firm in 2001. As a dual Equity and Fixed Income analyst, Mr. Itay’s research encompasses the entire capital structure focusing on the equity, corporate bonds and CDS contracts of covered issuers.

Register online here at the Boston Security Analysts Society web site.
Questions, please e-mail or call Michael Greis at 781 559-4623.

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Filed under ESG, Transportation.
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Sustainability disclosures can have a positive impact on stock price

7 February 2012, 3:32 pm

A just-published study by two University of California researchers concludes that there is a noticeable and statistically significant impact on stock price for companies who voluntarily disclose information on greenhouse gas emissions. This is an encouraging finding for investors who believe that such sustainability-related information is important and material in evaluating companies’ future prospects.

Despite the increasing participation in voluntary initiatives like the Carbon Disclosure Project and regulatory initiatives like the SEC’s Climate Change Disclosure guidelines, encouraging more companies to disclose sustainability-related information has been an uphill battle, especially among smaller and medium-sized companies. This study is doubly welcome in that regard because, consistent with underlying theories of voluntary information disclosure, the impact is substantially greater for smaller and medium size companies that have less coverage and visibility in the marketplace.

The study, by authors Paul Griffin of UC Davis and Yuan Sun of UC Berkeley, is an event study. Event studies are an indispensable tool in academic finance. A typical study is a statistical analysis of the change in a company’s stock price (and hence the value of the company) following a single event or type of event, such as the announcement of a merger or acquisition or a release of information. When the study results are statistically significant, it suggests that companies taking such actions are enhancing (or reducing) shareholder value.

The authors examined company news about greenhouse gas emissions released through the Corporate Social Responsibility Newswire (CSRWire) a leading provider of sustainability information from companies and organizations. The disclosures covered the ten-year period between 2000 and 2010; not surprisingly the bulk of the GHG news releases occurred in the more recent past (2007-10). 172 disclosures from 84 companies were able to be analyzed for stock price impact.

The results showed a small, but statistically significant increase in stock price for the companies between the day before and the day after their GHG-related information releases. The authors made the study more robust by also comparing the results against those for a matched set of similar companies over those same days. They found no evidence of an increase among those companies, strengthening the case that it was the GHG information release that was responsible for the stock price increase.

The results for smaller companies with less visibility and less available public information making GHG-related disclosures were more significant, literally and figuratively. Those companies outperformed matched peers in their industry by 2.3% in the days following their announcement (and the outperformance persisted over a 10-day period). This can be a helpful result in working with smaller companies where there may be a greater concern about the relative cost of providing sustainability information.

This is just a single study. But it does provide some statistical evidence that responding to investor demand for greater sustainability disclosure can benefit companies and their shareholders. We can hope that will encourage more companies to provide sustainability disclosures and more researchers to apply the tools of academic finance to this question.

Going Green: Market Reaction to CSR Newswire Releases is available for download from SSRN, the Social Science Research Network.

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Filed under ESG, Industry.
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The split incentive problem in commercial energy efficiency upgrades

25 January 2012, 11:48 pm

Buildings consume 40% of the energy used in the United States, with commercial buildings accounting for just under half (18%) of that total. 2/3 of the energy is used in the building systems (HVAC, lighting, water).

Energy efficiency improvement projects in existing buildings generally show very favorable return on investment, often with shorter payback periods and higher certainty than other uses of capital. But they aren’t happening in commercial buildings at anywhere near the pace these favorable financials would indicate.

One of the primary obstacles is the so-called split-incentive. The owner of the property has to make the investment, but the tenant gets the savings, because under many commercial leases, the tenants pay for the utilities.

In some cases, the owner can pass through the cost of capital improvements, but the amount that can be passed through to the tenants is typically based on amortizing the cost of the improvement over the useful life of the improvement. The useful life of such improvements (for example, a replacement boiler, new windows, upgraded light fixtures) is typically very long. Extending the payback period well beyond what it would be based on the energy savings is a significant disincentive to making the investments.

A solution takes shape – the “green lease”

A solution to the problem is conceptually quite simple – align the incentives. Here’s how it works:

  • An independent engineer certifies that a specified energy efficiency improvement project will reduce utility consumption and provides an estimate of the yearly savings.
  • The owner (lessor) finances and carries out the project.
  • The tenant (lessee) passes the energy savings back to the owner (lessor) during the payback period, until the cost of the project is paid back. From that point forward, the tenant reaps 100% of the savings for the rest of the term of the lease.

Building science and energy efficiency engineering can now predict energy savings fairly reliably, but there are still uncertainties. Creating mutually-acceptable, legally binding language tying required payments from lessees to lessors based on those estimates required time and some compromises.

Three years after the National Resources Defense Council convened a forum in New York on this problem, the New York Mayor’s Office announced the signing of the first “green lease” on April 5th, 2011.

Here’s how the New York “energy aligned” model lease dealt with the uncertainties:

  • The payments from the tenant to the landlord are based on the estimated savings, not measured savings.
    • This simplifies the language and reduces complexity, but it reduces the incentive to measure costs accurately and to follow operational procedures that may be required to get the full benefit of the energy reductions.
  • The payback period is extended by having the tenant pay 80% of the estimated savings over 125% of the payback period
    • Extending the payback period slows the return to the owner and slightly increases costs (because the cost of financing is not passed through).
    • The tenant still pays 100% of the cost, but does see a cash flow benefit immediately (20% of the savings) rather than having to wait for payback to be completed. The tenant is also shielded from any impact if the actual savings are lower than expected, even temporarily.

Even with these compromises, the green lease is a powerful tool to increase the rate of energy efficiency improvements in existing commercial buildings. New York City has embraced it as an important tool in the city’s sustainability strategy. Others should follow.

Resources

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Filed under Buildings, energy efficiency, Finance.
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SBIR Reauthorization – a rare piece of good sustainability news from Congress

22 December 2011, 10:58 pm

It’s a fair bet that few people would include “US Congress” in the same sentence as “accomplishment” and “good news” these days. Adding the word “sustainability” would probably cause even Google to come up empty. So it’s worth noting last week’s reauthorization of the SBIR (Small Business Innovation Research) program.

In fiscal 2010, this program provided companies $2.3 billion to support often hard-to-fund early stage research and development – evaluating the technical merit, feasibiltiy and commercial potential of innovative technology. Massachusetts companies are particularly successful – since 1982, Massachusetts has garnered 14% of all the funds awarded (over $4 billion), second only to California’s 21%.

The good news is not the reauthorization itself, as Congress usually does get around to reauthorizing programs eventually. The good news is in several changes to the program:

  • six-year reauthorization – over its thirty year history, the SBIR program has regularly been subject to short-term (1 or 2 year) reauthorizations, often at the last hour. Ensuring that the program will be in place through 2017 allows companies and investors to focus on the task at hand.
  • increased allocation – from 2.5% to 3.2% of agency budgets over six years – the authorizing legislation stipulates that the 14 federal agencies funding R&D allocate a guaranteed minimum of their external R&D budgets to small businesses through the SBIR program. By 2017, this could add over $600 million to the program each year.
  • larger grants – the maximum size of individual project grants increases:
    • Phase I – from $100,000 to $150,000
    • Phase II – from $750,000 to $1,000,000
  • funding for majority venture-owned companies – a 2002 interpretation of the statute, affirmed in court rulings in 2005, meant that many venture-funded companies were not eligible to receive funding through the SBIR program. This reauthorization fixes that problem, specifically authorizing federal agencies to provide a percentage of their funding to venture-funded firms as follows:
    • Health & Human Services (HHS), National Science Foundation (NSF) and Department of Energy (DoE) – up to 25% of SBIR funding
    • All other agencies – up to 15% of their SBIR funding

    This reduces a significant barrier to involving more companies and leveraging private funding to accelerate innovation and commercialization.

The SBIR web site is a useful and well designed source of information about the program. Each of the 11 federal agencies that participate in the SBIR program design their own programs and solicitations. Contacts for each agency are listed on this SBIR web page.

The SBIR reauthorization is included in HR 1540, National Defense Authorization Act for Fiscal Year 2012, which was sent to President Obama on December 21st. The President is expected to sign this legislation.

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Filed under Federal Policy, Finance, Industry.
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SEC Climate Change Disclosure Guidelines – a second bite in the apple

8 December 2011, 11:01 am

I appreciated the opportunity to bring our panel on SEC Climate Change Disclosure Guidelines to a New York audience last week. When we first presented the topic at the Boston Security Analysts Society last December, several people recommended repeating the session in New York. It took some time to arrange, but the engaged audience made the effort well worthwhile.

The intervening year has, if anything, highlighted the importance of the panel’s central message. These guidelines offer investors, investment managers and analysts a rare opportunity for new insights into the companies they follow, but they have to be prepared and willing to ask the right questions.

Selected takeaways from the panel:

  • The guidelines are not “new” – they simply reflect a recognition that climate change may be a material issue and therefore should be evaluated and considered for appropriate disclosure.
  • Companies are asked to consider:
    • legislative and regulatory risks, including international agreements
    • business risks as well as opportunities arising from climate change – increased/decreased demand for products, opportunities for new products
    • physical risks to operations and supply chains
    • reputational risk
  • Climate changes risks and opportunities reach deeply into a company’s operations and supply chains and future profitability. Through and thoughtful disclosure is evidence of the depth of management’s understanding. Boilerplate disclosure should raise questions to management.
  • Multiple public frameworks for disclosure exist and provide a wealth of information outside the SEC disclosure process. Investor disclosure should be evaluated with reference to company and industry information provided through these frameworks.
  • Early results on disclosure are mixed – more companies are reporting, but the depth of information is limited, with many companies reporting only on legislative & regulatory risks
    • Guidelines as well as examples of good disclosure are available – use them as leverage with peer and competitor companies..
  • SEC enforcement is all domains is limited and has never been the primary driver of increased disclosure and transparency. Investor and analyst demand is the most effective driver. This is even more true as the agency is fully occupied with Dodd-Frank implementation and a target of political pressure in the current environment.
  • More investment firms are incorporating ESG information and disclosure into their investment process.
  • If you don’t ask, they won’t tell – Far too few analysts and investment managers ask companies these questions.

My thanks go to the New York Society of Security Analysts and the Robert Zicklin Center for Corporate Integrity for co-sponsoring the session, to the Zicklin Center for hosting us and to our outstanding panelists Adam Kanzer of Domini Social Investments, Jim Coburn from CERES and Karoline Barwinski of Clearbridge Advisors.

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Filed under ESG, Investments.
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Climate change disclosure – exposing contradicting claims

28 November 2011, 3:15 pm

The SEC’s Guidelines on Climate Change disclosure that took effect in February, 2010 were an important first step in prompting public companies to assess the potential impacts – positive as well as negative – of climate change on their business and future prospects. Transparency and honest disclosure of material information to investors are, after all, bedrock requirements of a functioning investment market and, ultimately, our market economy.

Getting mainstream investment professionals – let alone investors and the public – to take advantage of this rare opportunity to extract a new source of insights into corporate prospects has not been easy. But a recent article that exposes contradictions between what some companies are saying to Congress and what they are saying to investors may help change that.

Larry Margasek of the Associated Press reported in an article published on November 25th that several companies, and industry associations that represent them, are telling Congress that proposed air and water pollution reduction regulations will cause great economic hardship and harm. Yet in their SEC disclosure filings to investors, these same companies “consistently said the impact of environmental proposals is unknown or would not cause serious financial harm to a firm’s finances”.

This is a profoundly disturbing finding that should cause investment professionals – as well as Congress, regulators and the public – to demand an honest and straightforward explanation from these companies.

Investment professionals, at least, should also ask probing questions of other companies in the industries involved. They have much to gain, because whatever they learn will be new and can be compared across companies – two of the most important criteria for information that provides a competitive advantage.

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Filed under ESG, Federal Policy.
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SEC Climate Change Disclosure Guidelines Panel – New York

28 November 2011, 12:40 pm

SEC requirements for disclosure of material climate change impacts became effective in the early part of 2010 upon the publication of clarifying guidance by the agency. Virtually all public companies will now be reporting based on their assessments of how climate change will affect their business and many questions remain as to what constitutes best practice in this emerging area of climate change risk disclosure.

Our December, 2010 panel at the Boston Security Analysts Society reviewed the guidelines and discussed opportunities presented for analysts and investment managers. The interest the panel generated suggested a wider audience for this topic. The upcoming annual filing season for many companies – the second since disclosure guidelines took effect – is an appropriate time to revisit the topic.

Please join us in New York on November 29th to learn what the disclosure requirements are (and aren’t), what good disclosure practices are and what you can learn from companies who practice them, what you can expect to see and what opportunities these guidelines offer for analysts and asset managers to shape more informative disclosure going forward.

This session is co-sponsored by the New York Society of Security Analysts and the Robert Zicklin Center for Corporate Integrity.

Panelists:

  • Adam Kanzer, JD – Managing Director and General Counsel of Domini Social Investments and Vice President and Chief Legal Officer of the Domini Funds.
  • Jim Coburn, JD – Senior Manager, Investment Programs, Ceres.
  • Karoline Barwinski – Research Associate, Assistant Vice President with the ESG Investment Program at ClearBridge Advisors.

Moderator: Michael Greis – Principal, Riverbend Advisors

The session will from 6:00 pm to 8:00 pm in Room 14-220 at the Zicklin Center at 55 Lexington Ave (enter on 24th or 25th street). Details and complimentary registration available here.

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Filed under ESG.
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Needham Summit on Energy and the Environment

22 November 2011, 7:16 pm

On October 24th, Needham residents and town community gathered at Olin College for a community conversation on energy and the environment.

Anthony Brooks, veteran NPR reporter and co-host of WBUR’s Radio Boston, opened the session by leading a discussion with Massachusetts Department of Energy Resources Commissioner Mark Sylvia and Green Needham Chair Michael Greis on the role of the state, communities and households in creating our energy and economic future.

That future is outlined in the Massachusetts 2020 Clean Energy and Climate Plan, with its goals of reducing energy costs, creating energy independence, accelerating the development of a clean energy economy for Massachusetts and addressing global climate change.

The conversation covered how we get there. The Legislature and the Administration have together implemented legislation – the Green Communities Act, the Global Warming Solutions Act, the Green Jobs act and the Regional Greenhouse Gas Initiative – that provide tools to achieve those goals. The conversation ranged over the how those tools are being used by state agencies, communities, businesses and households across Massachusetts as well as some of the challenges we face going forward.

With the stage having been set, the evening was turned over to the audience as they moved to break-out sessions prepared and guided by local college and high school students. In those sessions, community members and leaders generated and discussed ideas on what Needham could be in 2020 and how we might get there. The break-out sessions covered: Water, Food, Transportation, Energy Sources & Choices, Development: the Built Environment, Energy Efficiency & Conservation and Green Economy: Opportunities & Skills.

Following the break-out sessions, the audience re-assembled and Anthony Brooks took the student leaders and the audience through the ideas generated by the groups.

Find out more about the session:

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Filed under Local, Massachusetts, Massachusetts Policy.
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WBUR’s Radio Boston on the Green Economy and the Needham Summit

26 October 2011, 3:35 pm

This past Thursday, October 20th, Anthony Brooks and Meghna Chakrabarti talked with Green Needham Chair Michael Greis and Massachusetts Energy Undersecretary Barbara Kates-Garnick about the green economy, the 2020 clean energy plan, energy efficiency & “green living” at the local level and the upcoming Needham Summit on Energy and the Environment.

With the backdrop of that morning’s announcement that Massachusetts had taken the top spot from California in 2011 ACEEE state rankings for energy efficiency, our extended discussion was an opportunity to talk about the interplay of state policies and community-level action in creating the clean energy economy.

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Filed under energy efficiency, Local, Massachusetts, Massachusetts Policy.
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