Hamilton Capital Partners | Atlanta, GA — Hamilton Capital Partners

Carbon Capture: The Future of ESG

By Kelvin Lee, Alonso Munoz

“To green, or not to green, that is the question” – William Atmospeare

We’ve talked a lot about ESG in a past commentary. In financial markets, it’s a label worn by mostly underperforming, high fee funds as a marketing pitch to attract investors. In corporate America, it has been a politically correct approach to appease customers, shareholders, and governments.

Our skeptical approach to “ESG” driven investing doesn’t mean we’re against the movement, but rather we look for a modern blueprint to integrate ESG metrics in a practical and scalable way. Regulation, proper enforcement, and global adoption of realistic ESG mandates could help set us on a sustainable path for both corporations and its investors.

Focusing on the Environmental aspect of “ESG”: It’s difficult for anyone to argue that we should immediately ban oil (although Greta Thunberg has tried), cease global agricultural operations, or even stop planes from flying. The negative externality of these operations is greenhouse gas emissions, and although the allure of a “clean” world is far from reality, it doesn’t mean a cleaner future is unattainable.

We should encourage innovation, reward investment in clean energy, and allow the private sector to lead the charge in optimizing technology and delivery methods for a more sustainable growth. New companies and technologies that aim to actually solve climate problems are growing under the category of “Clean Tech”.

How are these startups racing to find solutions to problems like carbon emissions?

Carbon capture: This concept involves taking and reducing carbon dioxide (a greenhouse gas) from the atmosphere. There are many ways to do it; scrubbing the air with a filter, increasing biomass, pumping it into the soil, and not to mention the plenty of new methods being rolled out each year that capitalize on new methods. However, for all pro-environment technologies, the incentives need to be economically rewarding. While scientists have forecasted the doomsday effects of a 1.5 C increase in world temperatures if carbon emissions aren’t tamed, the threat of catastrophic natural disasters isn’t enough to stop global emission (at least not for now). There needs to be monetization in the industry.

Here lies the genius of cap-and-trade programs. A cap-and-trade program puts a literal price on emissions, utilizing carbon credits as a medium (think of a structured solution like the mighty American mortgage-backed security). An agency sets an emissions cap on C02, and issues allowances consistent with the cap, which reduces each year. Emitters must have carbon credits in line for gas they emit. Companies can also buy and sell credits and therefore establish a market price for each ton of emissions. The incentives are clear, produce less emissions and sell your allowances for more money, or be forced to buy credits if you go over your allowance. Even further, companies can earn an offset carbon credit through projects that reduce CO2 emissions like reforestation, making it financially viable to have C02 sequestering projects. Overall, a cap-and-trade program places free market principles on a quantifiable environmental metric, and we do want to emphasize the quantifiable aspect of the program. Unlike misleading ESG metrics which don’t have broadly agreed upon standards or regulations, you can measure tons of carbon emissions. Of course, cap and trade isn’t a perfect system and offset programs can/have been abused extensively (which is why this isn’t a nationally adopted program), however, it’s a step in the right direction and showcases the need for clarity and regulation to make ESG work.

Have you seen any companies marketing that they will be “carbon-neutral by 20XX, or that “their” products or services are “carbon-neutral”? This concept of buying away your emissions has become a popular way to appease consumers that vote with their wallet in the world of consumer politics.

So cap-and-trade and carbon capture may sound great, but it’s a capital intensive endeavor. How do small and mid-size businesses participate in carbon capture that makes sense for their balance sheets as well? We asked this question to Eric Kenny at Recapture, a leading C02 forestation capture firm:

“It’s my position that (the) best way for small and middle sized firms to participate in the voluntary carbon market is twofold with an initial assessment of their overall emissions mix; that is to take opportunities to reduce their own carbon footprints where feasible while simultaneously making initial small-scale credit purchases that actually remove carbon from the atmosphere for a meaningful amount of time. It bears remembering that some of their larger counterparts have already had the experience of going out into the voluntary market and snapping up large swaths of low or no impact credits that they ultimately had to discount.

Companies should identify potential partners and vendors within their supply chains that can help reduce their value chain emissions (these Scope 3 emissions vastly outweigh operational emissions in a majority of sectors and in the economy as a whole). There will be a growing group of goods and services providers that aim to do so as a value addition or even core business proposition in the coming years. This initial step is more intelligent than going to the open voluntary market in its current state and purchasing the lowest cost credits on offer… These will end up costing companies both in terms of capital and reputation as the actual measured impact in terms of additionality and durability of many “avoidance” style credits has proven to be negligible.

**It should be stated that there are truly impactful “REDD+” style projects that help protect some of the world’s most important carbon sinks in the form of old-growth forests and rainforests across the globe but that numerous avoided deforestation-based credits have been proven very recently to vastly over inflate their impact over time.

While technological-based carbon sequestration in the form of industrial processes such as Direct Air Capture remain cost-prohibitive at scale even for the largest of companies, smaller or mid-sized firms should consider investing in what are commonly referred to as “Nature-Based” carbon removal projects or credits (In the form of ARR projects- Afforestation, Reforestation, and Revegetation activities) or other carbon removal projects based in the natural world that are developed using established program standards. While “avoided emissions” credits in the form of unverified avoided deforestation, renewable energy source credits, and “tech-based solutions” such as those that provide energy-efficient cookstoves to offset traditional cooking methods in the developing world far outnumber carbon removal credits in the market, smaller companies can focus on lower volume investments that demonstrate truly measurable impact by removing one tonne of carbon from the atmosphere for each credit they purchased and retired at a much lower cost than DAC and CCS technologies.

Importantly, nature-based removal solutions such as those that include regenerative timber production should be judged by the “durability” or long-term impact within their models. A forestry operation that harvests fast growing tree species without intercropping and planting permanent native species over time to then produce a consumer good such as surfboards or utensils is neither creating a long-term “carbon sink” in the rehabilitated deforested zones where operations are located nor a product class that will not return to the world’s landfills and therefore its carbon cycle within a very short time frame.

Specifically in terms of balance sheets, it will be beneficial for companies to consider investing in more innovative project models that create financial returns for investors in addition to demonstrable, lasting benefits for the planet. (To be transparent…this is what Recapture has been developing). What this means for “nature-based solutions” and the reforestation space is projects that create sustainably managed forests that function for both carbon sequestration and sustainable wood production.

From what we see in the contemporary Voluntary Carbon Markets, there is not nearly enough supply of high-quality carbon removal credits to satisfy the coming demand. As it is financially unfeasible for many small and mid-sized firms to participate in the decades-long scaling process that just begun with industrial processes such as DAC/CCS, these types of projects are the best way for firms to gain exposure and impact in the carbon sequestration and climate impact space.”- Eric Kenny

As in most cases, it comes down to economic viability. When financial and green interests align, the result is real environmental progress that can be tracked and measured. As ESG comes under investor and regulatory scrutiny, we could ideally turn to carbon capture and credits as a poster child for a functional metric that both environmentalists and tycoons can get behind.




To contact the author of this story:
Kelvin Lee at kelvin@hamiltoncapllc.com


To contact the editor responsible for this story:
Alonso Munoz at alonso@hamiltoncapllc.com