With the Glasgow climate talks concluding on 13 November 2021, Pella reflects on the transition to green energy and what it means for investors. Pella’s unshakable conclusion is there has never been a better or more crucial time to consider environmental factors in investment decisions.

The meeting in Glasgow is referred to as ‘COP26’, which is an acronym for the 26^th annual Conference of the Parties (COP) to the United Nations Framework on Convention on Climate Change (UNFCCC). There are more than 190 countries participating in these meetings and they have taken place every year since 1995, with 2020 being the exception due to Covid.

The 2015 meeting in Paris (COP21) was special because the participants agreed to a plan to limit climate change (Paris Agreement). This included targeting limiting global warming by the end of the 21^st Century to well below 2^oC compared to the pre-industrial era (1850-1900), achieve net zero global emissions during the second half of the 21^st Century, and establishing a framework for countries to make their pledges of how they intend to address climate change.

There is a wide body of scientific studies that calculate that under current national plans the Paris Agreement goal of limiting global warming to well below 2^oC by 2100, will not be achieved. It was hoped that in the Glasgow meeting (COP26) countries would accelerate their emissions reduction targets to satisfy the Paris Agreement goals. The meeting did not achieve that goal, with a key impediment being agreeing on how wealthy nations would help finance developing nations’ energy transition. However, the meeting was not a total failure, and there were several meaningful outcomes, including:

1. Governments agreed to strengthen their emissions reduction targets by the end of 2022, making COP27 (Egypt) another important meeting.
2. Negotiators concluded how the Paris Agreement “rule book” will work, which is a set of technical decisions that govern how countries report their emission reduction progress and how an international carbon credit market would work. Pella considers the international carbon credit market as particularly important because it allows countries to achieve their emissions goals by funding greenhouse gas (‘GHG’) reduction projects in another country, which expands the scope of potential projects.
3. For the first time, the final communique included direct reference to fossil fuel – while the final terminology was watered down from “phase out” coal to “phase down” coal, it does send a signal that the era of coal is ending.

The epitaph to COP26 has generally been broad howls that it was a failure, and the President of the meeting even made an emotional apology at its closing. Pella has a more pragmatic perspective on the meeting and its outcomes.

Pella never anticipated significant agreements at COP26. This is not because we doubt the intentions of the participants but, rather, reflects the structure of the talks. Firstly, the final agreement requires unanimous consent across 197 participants, which is a high barrier to achieve meaningful outcomes. Secondly, the COP26 agreements do not have an enforcement mechanism, meaning even if meaningful GHG reductions goals were set, Pella questions if they would be adhered to. This does not mean they certainly will not be adhered to, and the level of haggling during the talks point to some intention to comply with an agreement. It just points to that fact that, even if revolutionary agreements were reached, the delivery of those commitments is not a fait accompli.

If Pella believes that talks structured like COP26 are unlikely to deliver the concrete solutions for the transition towards green energy, why do we believe there has never been a better time to invest in green energy? The answers are simple. Firstly, the broad national and societal commitments to make the transition towards green energy. Secondly, COP talks are just one part of a wider zeitgeist, and as hinted to above, are arguably not the most important part.

Despite COP26 failing to produce stronger wording regarding the global shift to green energy, there are unmistakable commitments by most countries to make that shift, as demonstrated by:

• Several countries establishing net zero targets including: USA (2050), China (2060), India (2070), European Union (2050), Japan (2050), Australia (2050), Canada (2050) and Brazil (2050).
• The US has proposed legislation that establishes a carbon tariff on energy intensive imports (e.g. steel) that are manufactured in countries lacking adequate emissions controls – Pella anticipates the introduction of legislation such as this would function as a GHG-reduction enforcement mechanism.
• Global Methane Pledge – more than one hundred countries agreed to cut their methane emissions by 30% by 2030, and more than twenty philanthropies agreed to provide US$328m to help fund a decline in methane emissions globally. This is a meaningful initiative as methane traps eighty-five times more heat than carbon dioxide.
• Deforestation Pledge – over one hundred countries, representing 85% of the world’s forests, made a new commitment to reduce and halt forest loss and degradation by 2030, supported by $12Bn of public finance and $7Bn of private investment. While Pella has observed similar prior pledges that were unfulfilled the most recent ones differ by the breadth of support and size of funding supporting it.

For the reasons outlined above, Pella did not expect a structure such as COP meetings to result in meaningful outcomes. Pella expects that countries developing their own policies or agreeing in smaller groups to COP (i.e. groups of 100, rather than 190 under COP), and introducing tariffs/punishments for others that do not comply will be the path to meaningful climate success. Excitingly, the world is well on that path.

As a fund manager and global citizen, Pella is deeply committed to reducing climate change and is demonstrating this commitment through its actions, including:

• Pella’s exclusion policies
  • Pella does not invest in companies that generate any revenue from fossil fuel mining.
  • Pella excludes all companies generating power from thermal coal sources except when the thermal coal power generation is less than 5% of the total generation AND they have firm commitments to exit that activity entirely. These thresholds reflect Pella’s commitment to support (rather than punish) power generators that are actively seeking to reduce GHG emissions.
  • Pella does not invest in power generators that generate >15% of their revenue from gas turbine generation. The 15% threshold reflects the current use of standby gas generation for peak load scenarios, which often cannot be provided by renewable energy. This threshold will decline as batteries become a viable alternative to gas for peak load generation.
• Pella’s commitment to the Paris Agreement goals
  • Pella refers to the carbon intensity targets calculated by the IEA under its Net Zero Emissions scenario by 2050, which are illustrated in the table below, and will not invest in companies that exceed these targets.
  • Pella Funds Management strives to be carbon neutral today and only purchases green electricity and purchases carbon offsets when its employees fly.

Selected indicators in the IEA’s Net Zero Emissions by 2050 Scenario

Source – IEA, World Energy Outlook – 2021, pg. 38

• Contribution to global CO2 emissions (Mt CO₂) in 2020; IEA, Annex A, World_CO2 table,
• Pella’s carbon intensity goals – Pella commits to the carbon intensity of the Pella Global Generations Fund (PGG), measured as both carbon emissions to revenue and carbon emissions to Enterprise Value, to be at least 30% lower than its Benchmark. As at 14-Nov-21, PGG’s carbon intensity was 77% below the Benchmark when measured on an enterprise value basis and 67% below the Benchmark when measured on a sales basis.
• Pella actively seeks to invest in green energy companies that have attractive economics and valuations, including:
  • Orsted – Danish power generator that specializes in the provision of renewable energy solutions.
  • Sunrun – US company that installs residential solar energy systems using an innovative business model, which is discussed in Pella’s blog “A less obvious way to invest in solar”.
  • Pella has a database of other companies with strong green credentials and will invest in them when their valuations warrant it.
• Pella’s initiatives are group-wide and none of Pella’s funds will ever invest in activities that are contrary to GHG-reduction goals. This is a critical distinction to a fund manager that offers sustainability-focused funds as part of a suite of products that includes investments in heavy carbon emitters.

In summary, the move to renewables is an unstoppable theme. While the annual COP talks might, at times, distort the strength of this movement, one should not lose faith. The structure of the COP talks is not conducive to meaningful outcomes and the solutions will, and are, coming from elsewhere. Pella is well positioned for this movement in both the way the firm is structured and the way we invest.