A Snowball’s Chance: “Re-Energizing Peabody” Bucks 20 Year Industry Decline

By Jonathan Naimon, Light Green Advisors:


Peabody sales of thermal coal to US utility were in a long term decline along with its stock price before President Obama announced a plan to reduce  US greenhouse gas emissions by 17% by 2020.  While Ms. Doherty is certainly  correct that US politicians including Obama are as unlikely to jeopardize a fuel supply that produces 50% of US power supply, however, the nation’s financially conservative electric utilities have no such qualms and have already reduced thermal coal’s role as fuel for US power consumption from close to 50% to under 40% in last 10 years – faster than the regulatory goals.  The reasons for the utility industry shift are not purely related to climate: natural gas is less expensive on an inflation adjusted basis, natural gas reduces the operational and capital expense uncertainty associated with upcoming EPA greenhouse gas regulations, natural gas does not require determining appropriate reserves for ash waste management, and as a fuel source,  natural gas generates no particulates and contains no toxic and increasingly regulated mercury.

Peabody management realizes the decline of its primary product, thermal coal for the US utility market, is inexorable.  The company’s defensive debt-producing acquisition of MacArthur coal was required to provide its investors with at least some growth in the increasingly Asian market for metallurgical coal used in steelmaking.  The company’s closure of US mines is a reflection of a structural shift away from coal among US utilities and a smaller future US market.

In contrast to coal, the natural gas industry has created billions of dollars of new shareholder wealth above and beyond the wealth destroyed by the coal industry. The natural gas industry has created literally millions of blue collar jobs in an era where few industries do. While technology associated with coal mining and burning has not advanced materially in recent years, the revolution in natural gas extraction technology has led to sizable investment in the US gas industry by many global energy firms from both Europe and Asia. Utility scale combined cycle natural gas turbines can now generate approximately 40% more energy per BTU than commercial coal systems.

Perhaps the most delicious “market-eats-politics-for-breakfast” irony is that according to the International Energy Agency, the US, not Germany, is the sole developed economy that has  reduced its greenhouse gas intensity as a result of a combination of more fuel efficient vehicles, and the substitution of natural gas for coal by electric utilities — in the five years preceding Obama’s recent proposal!

Beyond Copenhagen : Emissions Rate

By Jonathan Naimon, Light Green Advisors:

China president Hu’s recent commitment to reduce the emissions intensity of its growing economy by 40-45% by 2020 holds the key to a new global agreement that will have greater positive impact than efforts to revive the stalled Kyoto Protocol.

Simply put, reducing emissions rates and increasing energy efficiency is the only thing on which all the parties, regardless of their energy base, can agree in Copenhagen.

What’s wrong with a framework based on the inextricable link between energy and greenhouse gas emissions? Energy efficiency and emissions intensity reduction is a goal that is compatible with the growth aspirations of companies and governments worldwide who aspire to the quality of life enjoyed in high energy use countries such as the US, Japan or Europe.

The only way for greenhouse gas emissions to be reduced in any country is for the emissions intensity as measured in CO2/€, CO2/$ or GHG/RMB to be decreased. Therefore progressive reduction of emission intensity of the global economy is a necessary requirement for GHG emissions stabilization.

While critics of emission rate protocols and commitments by governments such as Canada have argued that such reductions not sufficient to guarantee that total emissions go down to a specific level, reductions in emissions rates are required for total emissions to go down on a sustainable basis worldwide.

However, the current Kyoto protocol model, featuring what externally looks like a “tough” absolute emission target – has not in fact resulted in significantly lower emissions in the EU, joint implementation (JI) or Clean Development Mechanism (CDM) economies once economic growth has been factored in. The bulk of the emission reductions that have been achieved have been due to economic recessions as in Russia.

A breakthrough from the right to development/limits to growth stalemate

Why is emissions rate reduction – or its inverse- increasing energy efficiency- a conceptual breakthrough? The short answer is that emission rates provide a practical indicator not only for sovereign states, but for companies whose supply chain and global impacts often span multiple countries.

Increasing energy efficiency and reducing GHG/revenue ratios is a measurable goal that can be incorporated into objectives of both large and small companies that are the global engine for economic activity and job creation. An absolute atmospheric target may be a consensus result, but even advocates would be hard pressed to claim it is related to measurable objectives at the corporate level.

Even in state-dominated economies such as China, specific technology and production choices with GHG intensity impacts are made by companies, and thus it is vital that any metrics for measuring success in climate change be relevant to companies, whatever their capital structure. Emission rates have several advantages over alternative measures.

Emissions rates are a key indicator used by some of the best corporate eco efficiency programs. Back in 1992, the Business Council for Sustainable Development (now WBCSD) coined the term Eco Efficiency to describe programs at companies that serve to decrease the emissions associated with economically productive activities. While companies develop their own eco efficiency programs, tracking energy and reducing the GHG emissions by increasing energy efficiency is a common denominator of many programs that span the vendor supply chain or an integrated service cycle as well as the production cycle in energy-intensive industries. Further information on corporate eco efficiency programs, including a toolkit for companies, is available through the WBCSD.

A second dividend for investors

Nation-states, corporations, and the environment are not the only beneficiaries of a move toward standards based upon a new protocol based upon the global reduction of GHG emission / unit of economic activity rates (what we call GHG/$ as a shorthand). While the investment universe has not developed the expertise of companies in energy efficiency, an increasing number of investors such as the California pension funds CalPERS and CalSTRS are now interested in energy efficiency as a new source of value for equity investors and as a key, along with renewable energy, to a greener economy.

Since 1998, our firm (LGA) has been analyzing corporate energy intensity and eco efficiency to gain insight into competitive advantage in many industries. We have confirmed that the success of corporate programs experience relative to industry peers is related to their financial performance over the past decade. With an increasing number of governments – from China to Canada – looking at emissions rate based analysis, we expect the financial advantage accruing to companies best able to drive down their emissions rates to increase. This corporate competitive advantage can provide both public and private sector investors with insight into how well companies in any market- developed or developing—is doing, as a new type of input, akin to ROE ratios, that change over time but that are common in different currencies and languages.

The future

Almost twenty years from the heady days of the Rio summit, it is certainly clear that energy efficiency is inextricably linked to environmental progress in addressing climate change. The tremendous surge in developing country (e.g. Brazil Russia India and China) stock markets makes it equally clear that any efforts to slow growth in developing markets are misguided.

Global adoption of GHG emissions rate based standards as a basis for gauging compliance with global climate change commitments will accelerate the implementation of energy efficiency and eco efficiency programs at companies, and the adoption of cleaner technologies.

The last 20 years have shown that increasing energy efficiency is compatible with sustained technology development in virtually every industry. It stands to reason that the financial value of these programs, on a global basis, will be magnified substantially by global adoption of energy efficiency and GHG emission rate reduction goals by nation-states signing a new successor to the Kyoto protocol.

Rather than bemoan the end of the Kyoto protocol, we should look forward to the new opportunities that will emerge from a new emissions rate protocol for controlling GHGs, and an even stronger, more global competition to reduce GHG emission rates and increase energy efficiency among countries and companies.

Re-thinking Eco-Friendly Investing


By Ellie Winninghoff, Seattle:

A new kind of fund sees green in some surprising sectors.


Cross a Wall Street quant, an investigative reporter and an environmental activist and what do you get? Light Green Advisors LLC (LGA), the sometimes politically incorrect but always common sense eco-investment firm co-founded and run by 47-year-old Jonathan Naimon.

Naimon’s hardly a household name. His approach to picking companies by looking in detail at a company’s environmental record has, for years, been available only to institutional investors. But among insiders Naimon is recognized as a pioneer in the rapidly growing field of environmental investing.

“Jonathan is the unrecognized and unsung godfather of the second stage of environmental investing,” says Richard House, who worked on a similar approach for the Center for Financial Innovation, a U.K.-based think tank. “He contributed the underlying intellectual equity and gravitas of the environmental investment movement and gave away the core ideas that other people have turned into an industry.”

Naimon’s approach may soon increase its popularity in the U.S. In December, LGA began offering, together with Chicago-based Claymore Securities, a fund aimed at consumers.

However, the approach is controversial. Included in Naimon’s “environmental” picks are defense companies like Boeing and oil companies like Exxon. These are companies that would most likely be excluded by many “socially responsible” funds. Naimon’s rationale is: instead of excluding an entire business sector, why not choose the most environmentally responsible companies in every sector based on concrete data? British Petroleum does not qualify, Naimon says, because, despite its superb advertisements about climate change, it has a poor environmental record. BP’s pipeline in Bellingham exploded in 1999, and the company has faced criminal penalties for violating environmental laws in Alaska. Picking the best of every sector, Naimon argues, gives companies an incentive to improve their behavior, rather than just do a better job of marketing.

“The reality is that we really use plastics and metals,” says Naimon. “Getting a 5-percent improvement in terms of material use efficiency in the metals industry has a bigger impact than all the windmills in the U.S.” Not only do such measures save energy, he explains, they also boost profits.

For the last five years, LGA’s Eco-Performance Portfolio of 80 stocks has beaten the S&P 500 benchmark by 1.62 percent, and has outperformed the Domini Social Index, an index that measures the performance of socially responsible funds, by nearly 27 percent.

“LGAs assessment tool is an indicator of good corporate management and good environmental stewardship,” says former Washington Treasurer Dan Grimm, an LGA investor and director at Doughty Hanson PLC, the U.K.-based private equity firm. He has a simple explanation. “It maximizes profitability and minimizes liabilities.”

Green practices boost finances 

To have an advantage in stock investing, you need information that others don’t have, says Glenn Anderson, senior vice president of Institutional Investments in Structured Products for the EFG Bank in Sweden. “That’s what (Naimon’s system) is.”

Almost every step of Naimon’s career has contributed to the development of his investment system. After graduating from MIT, Naimon worked for the House Energy & Power Subcommittee in Washington, D.C. His mentor there was Peter Hunt, who created the Corporate Auto Fuel Efficiency (CAFE) standards now widely used. Later, he obtained a master’s degree in environmental management at the University of North Carolina.

The next stop was ICF Consulting Group, Inc., where Naimon conducted economic analyses of environmental regulations in the metals, wood preserving and biotech industries. The analyses were used by the Environmental Protection Agency. “Somebody has to do an analysis, so you don’t bankrupt the country,” Naimon says.

Naimon discovered something odd. Everybody assumed there was a trade-off between doing the right thing for the environment and doing what was best for the economy. The assumption was that environmental regulation would stunt growth. But Naimon saw no such correlation.

His next job was with Asea Brown Baveri Environmental Services, where he studied ways to prevent oil spills. It was here that Naimon realized the entire notion of cost-benefit analysis was flawed. “A lot of technologies – like secondary containment around ground storage tanks –were actually saving companies money,” he says.

When the Exxon Valdez oil spill exposed Exxon to billions of dollars in liabilities, institutional investors clamored for a way to avoid such environmental risks, recalls Scott Fenn, formerly of the Washington, D.C.-based Investor Research Responsibility Center (IRRC) and now managing director of policy at Proxy Governance Inc., based in Vienna, Va. Fenn hired Naimon to find a way to quantify the risk and turn it into IRRC could sell.

“Nobody had pulled together the available data and assembled it so it could be useful,” says Fenn. “Jon was familiar with where the EPA had its data hidden away and how to get access to it.”

It took three years, a team of analysts and $1 million. The group collected government data, such as the volume of toxic releases and the number of oil spills for each company. Like an investigative journalist, Naimon had to request the information under the Freedom of Information Act. “They don’t just give it to you,” he explains.

Teaming up with Mark Cohen, a conservative economist from Vanderbilt University, Fenn and Naimon conducted a five-year study to determine the relationship between environmental compliance and 12 measures of financial performance, including returns on assets and equities. Their conclusion was that, over time, companies with a demonstrable environmental advantage performed better financially.

The analysis became the basis for the notion of “best of class investing.” The idea is that companies should be judged based on how environmentally responsible they are relative to the other companies in their sector. For example, rather than ban all power companies that use nuclear power, you would choose the ones whose facilities are managed in the most environmentally responsible way.

“It’s a risk management idea,” Naimon says. “It’s similar to the type of analysis insurance underwriters routinely do.”

The approach appeals to institutional investors, who prefer a diversified portfolio to help balance risk. But Naimon argues that his approach is also more effective at inducing change. “If you have a standard like no clear-cutting,” he says, “you cut out all the commercial forestry products in the world.”

industry are not asked to compete with somebody in banking,” he says. “You are not asking them to do impossible things – only things their competitors are doing who are in business to make a profit in that industry.” That approach, he argues, isn’t going to persuade forestry companies to become more responsible. Former Sierra Club Chairman Michael McCloskey, an original LGA board member and investor, favors the “positive” approach for another reason. “People in the chemical

Naimon also considers his approach more holistic. “The idea that there’s a clean sector and dirty sector is fundamentally naive,” he says. “You think electricity is clean? Look behind the switch. It’s a coal mine.”

But Pierre Trevet, managing director at Innovest, an environmental research firm based in Toronto, complains that Naimon’s focus is too compliance-driven. Looking at how well a company has complied with various regulations isn’t necessarily a good determinant of the company’s overall impact on the environment.

But Naimon defends the approach, insisting that his research shows compliance is highly correlated to financial performance. He says he supplements that research by looking at a firm’s ecological footprint – including more than over 300 types of chemical emissions as well as nontoxic waste generation. What’s important, says Naimon, is not just the total amount of a company’s emissions, but also whether it is taking effective measures to reduce those emissions.

Europe says “yes” U.S. “maybe”

In 1992, Naimon hit the conference circuit to evangelize his approach to investing. The United States was not receptive, but Europe was another story. Naimon moved to Oslo to teach at the Norwegian School of Management and to consult. Two of the companies he worked with – Storebrand (the Norwegian insurer) and Union Bank of Switzerland (now UBS AG) – subsequently used his approach to launch “best of class” funds. Today, more than $10 billion is invested in a variety of European sustainability funds that define “best of class” in different ways.

 Not so in the U.S., where such a strategy is exceedingly rare. In December l997, Naimon moved to Seattle to start LGA with Mark Sten, co-founder of The Hartman Group, the health and wellness market research firm. LGA was committed to providing U.S. investors with true “best in class” investment products that tapped the competitive advantages of environmental leadership.

The firm’s first institutional product, the Global Eco Index, was composed of a global set of firms that LGA selected for the way they addressed the top sustainability challenges for their industry (e.g., Anglo-Dutch Unilever was selected for taking on sustainability of its fish supply). LGA developed an 80-stock 500-based product called the Eco Performance Portfolio for U.S. investors seeking best-in-class opportunities. Maine, the first state in the country to move from green grandstanding to green investing, selected LGA to help it invest in green companies. California’s pension funds have launched their own, larger “green” investment initiative. During the last six months, over $1 billion has been invested by individual investors in alternative energy ETFs, a popular type of fund. In December an ETF based on LGA’s Eco Index will be launched. Perhaps the green investment wave in the United States is finally beginning to break.

 December 28, 2006