Green Methanol and Shift to Net Zero

China, the United States and India are amongst the largest greenhouse gas emitters and their efforts to mitigate climate change come under great scrutiny. India, for instance, plans to become carbon neutral by 2070 and projects carbon emission reduction by one billion tonnes by 2030. China has somewhat similar goals. However, newer technologies are required to wean away these countries from their dependence on coal and tackle the pollution pervading towns and cities.

While solar and other renewable technologies are expanding, the pace is not fast enough to tackle the crisis. These technologies have two problems: intermittency and many places not being connected to the grid. Hydrogen is seen as a possible substitute energy source. However, hydrogen tends to leak and can be a fire hazard. Many scientists believe the solution lies may like in “green methanol.” Green or renewable methanol is an ultra-low carbon chemical produced from sustainable biomass or carbon dioxide and hydrogen produced from renewable electricity.

Methanol is a highly versatile product that finds itself in many ubiquitous household products, essential components for cars, and the production of other valuable chemicals.

Green methanol can be used as an energy carrier for storing electricity generated from renewable sources or as a transportation fuel. Besides LNG and ammonia, green methanol is also considered a substitute fuel for maritime fuel applications. Additionally, it can be added to conventional liquid fuels or used to fuel 100% methanol-based drive systems.

Currently, methanol is the largest produced organic chemical, with an annual production of about 100 million tons. It is believed that with green methanol the market could triple.

The shift to net-zero requires the development of many such fossil fuel substitutes.

The Expiry Date Challenge for Sustainability

One of the things that we often do is check the expiry date before purchasing something. We ask ourselves, “Can I consume it within time?” So, what happens to expired products.

Expired products occur at three points – unsold expired products in company warehouses; unsold products at retail stores; and unused or partially used products at consumer homes. Expired products are a waste and mostly end up in landfills, a problem in the entire value chain.

Better demand assessment and inventory management should manage unsold inventory in company warehouses. Retail stores often sell near-expiry products at a discount to overcome the problem. Some stores implement electronic systems that will discount a near-expiry product at the time of billing. At the consumer end, behavioural issues often lead to increased waste. There is often a misunderstanding of what the label means. There are many terminologies – use by, best before, sell-by, purchase before, etc. The consumer takes them to mean the same, resulting in wastage. This can also be minimised by consumers being prudent and using smell and taste to deduce whether the food item is edible. In some product categories like medicines, it has been shown that the efficacy of the medicine does not reduce due to expiration – yet consumer resistance can be very strong. Or, take cosmetics where expiration dates are short, and there may be a genuine fear of something happening to the body.

Another issue is the legal requirement to label products. Take the case of honey. Pure honey doesn’t really go bad even after many years. Unfortunately there is a legal labelling requirement to label honey.

There is a genuine need to attack waste due to expiry dates. This requires consumer education as well as improved demand and inventory management. Waste also has implications for carbon emissions because the carbon emissions could be lower if there were less waste.

ESG Investing and the Long-Short Strategy

ESG investing has been growing exponentially. According to Bloomberg, ESG assets are likely to rise to $53trillion by 2025, comprising a third of the global AUM.

Most investment strategies are either exclusionary (do not buy “bad” stocks) or buy-and-hold. However, a relatively new strategy to ESG investing is the long-short strategy. This strategy involves buying stocks whose prices we expect to go up and simultaneously short sell stocks whose prices we hope to go down. This strategy is also called the 130-30 strategy. This approach involves buying 130% of the funds and short selling 30%.

Short selling is simply selling shares that you do not own. We do this by borrowing shares now to sell them at a future date. The short seller repays the borrowed shares when the trade is closed by buying the shares at lower prices. 

The idea of the long-short strategy is to make money on stocks that are likely to perform well and stocks expected to perform poorly, thus increasing the portfolio’s returns. This strategy also helps in hedging your bets.

This strategy is, now, increasingly being employed in ESG investing. The approach is to buy stocks with high ESG scores and short-sell stocks with low ESG scores. The idea is that companies with high ESG scores are likely to perform well in the market, while those with low scores perform poorly. 

Shorting or short selling low ESG score stocks have three benefits:

  1. It puts out portfolio managers’ investment views. Rather than not holding a stock (a neutral view), the portfolio manager makes a significant statement by shorting the stock.
  2. Shorting helps hedge ESG risks.
  3. The portfolio manager can provide a higher rate of return to the investors.  

Recycling Underwear

Photo: Esteban Bernal / Unsplash

There is luxe fashion, then fast fashion, and underwear that no one talks about. In my childhood, underwear came only in whites. Now they come in all colours and fancy, funky designs. The underwear has evolved but what has not evolved is its disposal. Usually, it is put in a bag and surreptitiously dumped in garbage from where it ends up in the landfill. Interestingly most underwear doesn’t get worn out or tear the elastic simply goes. That means that more underwear lands up in landfills than it should.

At first thought, the problem seems to be small. Think again. The industry turns out roughly 150 billion pairs of underwear each year. Underwear contains synthetic plastic-based fibres like nylon and polyester, which are not biodegradable. They lie in landfills for hundreds of years and break down into microfibres that end up in water systems poisoning humans and animals.

The problem with underwear is that, unlike other clothes, you cannot give them away due to hygiene issues. It’s for the same reason that stores don’t accept returns of undergarments. Thus, there is little reuse or resale.

Parade, a US-based company, has tied up with Terracycle for a programme that will recycle underwear. The company will send a biodegradable bag and a free shipping label at people’s request. One can fill in as many underwears as can fit in the bag and send it back. These bags will ten go to Terracycle where the pieces will be sorted, cleaned and processed into materials for use in housing insulation and bedding. Participants in the programme also receive a discount coupon on Parade’s products.

We need more such mechanisms for a sustainable and circular world.

ESG Investing and Disclosure Flow

The EU’s sustainable finance plans have four key elements. First is the taxonomy that defines which activities are sustainable. Then there is the Corporate Sustainability Reporting Directive (CSRD) requires companies to report on their sustainability activities. Asset managers then use this information to report on the sustainability of their products. As per the Sustainable Finance Disclosures Regulation (SFDR). In turn, financial advisors use this information for their discussions with their clients (end-investors). These discussions establish an investor’s sustainability preferences as per the MiFID (Markets in Financial Instruments Directive) suitability test.

The flow seems perfect and should be the order in which regulations roll out. . However, currently, there are wrinkles in the flow. The Taxonomy is delayed because there is a debate on whether nuclear and natural gas are sustainable. Company reporting will not become operational before 2023. And the technical details on how asset managers report on the sustainability of their products won’t apply before 2023. While all this is sorted out, asset managers are required to show how a number of their products are aligned to the EU taxonomy, and the alignment data is not available. From August 2022, advisors will have to assess their client’s preferences based on asset managers’ reports, which are likely to be incomplete or have missing data.

While all this gets sorted out in due course, companies, investment firms, and financial advisors will need to gear up to meet the requirements. You may wonder that all this is for the EU, so why should Indian companies bother. But, many of the investment firms that do business in India also do business in the EU. So, they will have to adopt the EU norms and, by extension, will implement them in other parts of the world too. And that includes India!