Alternative energy *|* Resource efficiency *|* Resource stewardship
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GHG EMISSIONS: Energy generation accounts for 27% of the annual 51 billion tonnes of GHG emissions.1
LOW-CARBON ELECTRICITY: Renewables are projected to generate 45% of the world’s electricity by 2040.2
During 2021, the pace of climate-related policy responses accelerated, culminating in the remarkable number of government commitments announced at the November 2021 UN Climate Change Conference in Glasgow (COP 26). Decarbonizing the energy sector is a critical step in reaching net-zero carbon emissions, which many governments and companies — including Wellington — have pledged to do by 2050. Alternative-energy companies play a pivotal role in working toward a low-carbon future.
Billions of people still breathe air heavily polluted by fossil-fuel emissions.
Generating more energy from renewable sources like solar, wind, and hydropower helps reduce GHG emissions, slow the global temperature rise, and gradually clear polluted air.
Billions of people still breathe air heavily polluted by fossil-fuel emissions or rely on dirty, often dangerous, home heating and cooking fuels. The social and health benefits and related cost savings of shifting to clean energy include declines in premature deaths.3
In 2021, you helped to provide capital to companies and issuers generating renewable energy, mostly through wind power and solar energy. The portfolios also invested in innovative solutions for power storage and distribution.
In our equity portfolio, we had exposure to a Danish developer of wind turbines and power plants. A Spanish company in which we held shares invests in utility-scale renewable energy projects. And we continued to hold a renewable power producer with hydroelectric, wind, and solar assets across North America, Latin America, Europe, and Asia.
In the fixed income markets, an increasingly diverse set of issuers is turning to green bonds and sustainability bonds to fund alternative-energy projects. As a result, the opportunity set is expanding beyond developed market companies and into to sovereigns and emerging market issuers.
This year, we purchased a European government’s inaugural green bonds, with the bonds’ proceeds allocated to eligible green expenditures including renewable and efficient-energy initiatives, pollution prevention, and environmental protection. Following COP26, many governments and companies have committed to curbing their carbon footprints, which we believe will drive additional labeled green issuance as well as generic issuance by emerging alternative-energy providers.
Europe’s energy crisis and the high fuel costs experienced worldwide in 2021 are likely to provide a further impetus for the transition to alternative-energy solutions. Governments around the world increasingly recognize the need to enhance energy security and independence.
1 Breakthrough Energy, 2020. 2 World Energy Outlook 2002, International Energy Agency. 3 Emil Dimanchev, et al., “Health co-benefits of sub-national renewable energy policy in the US,” Environmental Research Letters, vol. 14, August 2019.
PORTFOLIO INVESTMENT SPOTLIGHT EQUITY
IMPACT THEORY OF CHANGE
Investments in utility-scale renewable energy projects are core components to solving the decarbonization challenge with speed and efficiency.
FIVE DIMENSIONS OF IMPACT
WHAT
Climate-change mitigation through the provision of renewable power
Aspirational
WHO
Consumers
40 countries
HOW MUCH
Renewable energy capacity Renewable energy generated through wind, solar, thermal, hydraulic, and biomass
11,245 MW 24, 541 GWh
CONTRIBUTION
CO2 emissions avoided through renewable energy generation
14.77 million tonnes
RISK
Exogenous factors: Renewable energy production is determined or undermined by weather conditions
Moderate significance/ low probability
UN SDG ALIGNMENT Affordable and Clean Energy
TARGET 7.2 By 2030, increase substantially the share of renewable energy in the global energy mix
NEGATIVE IMPACTS Environmental impact of operations and supply chain
SCALE Moderate
MITIGATION EFFORTS Sufficient WILLINGNESS TO ENGAGE Moderate
QUALITATIVE ASSESSMENT
Acciona has impressed our team with its ability to anticipate and adapt to evolving trends and to leverage its unique asset base for innovation. Acciona was among the first companies to report on the alignment of its own activities with the EU Taxonomy criteria. We continue to believe the company's potential to innovate and drive value and sustainability outcomes may be underappreciated. Meets expectations
ENGAGEMENT PRIORITIES
We have been pleased to hear of the strong operating environment in renewable infrastructure construction. Going forward, management has highlighted the positive long-term growth prospects associated with offshore wind, green hydrogen, and electric mobility, underpinning the opportunities in the clean energy space, which we will continue to monitor.
Portfolio spotlight examples are based on non-performance-based criteria. For information on how we selected the portfolio spotlight examples, please see the important disclosures section. Portfolio spotlight examples are for illustrative purposes only, are not representative of all investments made by the portfolio, and should not be interpreted as specific security recommendations or advice. It should not be assumed that an investment in the examples have been or will be profitable. Actual holdings vary for each client, and there is no guarantee that a particular client's account will hold the examples presented. Key Performance Indicator data is based on issuer or company reporting, press releases and websites, proxy data, and Wellington analysis. While data is believed to be reliable, no assurance is being provided as to its accuracy or completeness. Wellington determines the UN SDG goals and targets that, in our view, each portfolio company or issuer is aligned with. Language for the goals and targets has been abbreviated, but not otherwise altered, from UN.org.
PORTFOLIO INVESTMENT SPOTLIGHT FIXED INCOME
Zorlu Yenilenebilir, a subsidiary of Zorlu Enerji Elektrik Üretim AS, operates 12 renewable power plants in Turkey, with a combined installed capacity of 643 MW derived from geothermal, wind, and hydroelectric power.
Reducing global CO2 emissions
Number of electricity customers
1.89 million
Installed renewable capacity
559 MW
2.1 million tonnes
Exogenous factors: Renewable energy production is determined or undermined by outside factors (weather conditions)
Moderate risk/ low probability
SCALE Broad
MITIGATION EFFORTS Sufficient
We believe Zorlu continues to play an important role in Turkey's energy transition by providing power from renewable resources. Meets expectations
ENGAGEMENT PRIORITIES Long-term engagement priorities include, but are not limited to, the regulatory outlook for renewable energy in Turkey.
Next theme: Resource efficiency >
ENERGY CONSUMPTION: The world is expected to consume nearly 50% more energy by 2050.1
GHG EMISSIONS: The production of just three materials — cement, steel, and plastic — accounts for 31% of GHG emissions.2
To ensure a sustainable, equitable future, we must use natural resources more efficiently. The UN estimates that more efficient production and consumption of materials could help cut CO2 emissions by approximately 25 gigatonnes.3 The twin trends of rising consumption and dwindling supply of nonrenewable, finite resources like fossil fuels, metals, minerals, arable land, water, timber, and clean air are putting enormous pressure on the planet.
The resource challenge is not just environmental. For many people, the more difficult resources are to obtain, the harder it is to maintain living standards and economic stability. Innovating and modernizing existing resource extraction, production, and distribution methods can help reduce waste, mitigate pollution, save money, and safeguard human health. More companies are aiming to decarbonize manufacturing by sourcing renewable energy, investing in carbon capture and storage, and developing more efficient systems for water and energy use. Your investments can help advance these vital efforts.
In 2021, we focused on companies and issuers encouraging energy conservation, mitigating air, water, and soil pollution; alleviating water scarcity; and enabling greater efficiency in utility infrastructure and building systems.
In our equity portfolio, we invested in a leading North American multinational heating, ventilation, and air conditioning (HVAC) company with a portfolio of high-efficiency products based on next-generation refrigerants to reduce energy use and GHG emissions.
We took a position in a US manufacturer of electrical products and utility solutions that enhance grid safety and efficiency. We continued to own shares in a Dutch company offering innovative smart-lighting technologies that enhance energy efficiency.
We maintained a position in a Chinese manufacturer of lithium-ion battery-powered two-wheelers, addressing the need for low-carbon transport alternatives. And we have exposure to a real estate investment trust (REIT) that owns, operates, and develops life sciences and agricultural technology campuses in the US and is committed to reducing its environmental footprint.
Aligned with the continued electrification of transportation, in the fixed income portfolio we invested in a Chinese developer and manufacturer of smart electric vehicles. Selling into one of the highest-emitting markets globally, in which emissions from transportation are a significant contributor, we believe the issuer can have a major impact in reducing transportation-based emissions.
We also invested in a developer of renewables and technology solutions aimed at improving energy efficiency and reducing CO2 emissions. In addition, we purchased the inaugural green bond of a European property investment and development company. The bond’s proceeds that are earmarked to finance or refinance eligible projects align with the issuer’s commitment to reduce the carbon intensity of its operated property and new developments.
We believe companies and issuers across our resource efficiency theme are supporting electrification initiatives and promoting efficient use of resources.
1 International Energy Outlook 2019, US Energy Information Administration, 2019. 2 Breakthrough Energy, 2020. 3 “Materials used to build cars and homes key to tackling global warming,” UN Environment Programme, December 2019.
Wabtec continues to play an important role in reducing emissions and fuel usage associated with the rail industry, driven by its focus on alternative energy and efficiency-related innovation. Meets expectations
ENGAGEMENT PRIORITIES We have spoken to management about the changing nature of Wabtec’s conversations with its customers as corporate carbon-reduction goals become more ambitious. Wabtec is well positioned to help its customers save costs on fuel while simultaneously meeting its environmental targets.
Instituto Costarricense de Electricidad (ICE) is an electricity and telecommunications service provider in Costa Rica. The proceeds of this bond will increase national coverage of smart meters to promote the transition of the country’s grid to a smart grid, providing benefits to customers in terms of better energy usage as well as network resilience and efficiency.
Increased resiliency and efficiency of Costa Rica's electricity network
Number of households reached*
0.96 million
Number of smart meters in operation
ICE’s market share in smart meter installation
513,245
77%
Estimated energy savings from smart meter usage
1% – 8%
Execution: Effective management of land and maintaining relationships with local communities
*Data as of December 2019
UN SDG ALIGNMENT Industry, Innovation, and Infrastructure
TARGET 9.4 By 2030, upgrade infrastructure and retrofit industries to make them sustainable, with increased resource-use efficiency and greater adoption of clean and environmentally sound technologies and industrial processes, with all countries taking action in accordance with their respective capabilities
Transportation specialist Wabtec's existing and future and investments will help drive more autonomous trains and incremental technological improvements, leading to more fuel efficiency and reduced emissions, greater rail capacity, and improved safety in the train fleet for both freight and passenger transit.
Facilitating a lower-carbon, fuel-efficient rail network
Customers across multiple countries
50 countries
Number of locomotives modernized
1,000
Fuel-efficiency benefits of locomotives modernized to date since 2015
1.40 million tonnes of CO2e avoided
Execution: Safety risks on new locomotives
WILLINGNESS TO ENGAGE High
ICE has led the deployment of smart metering infrastructure in Costa Rica since 2012. We are encouraged by its progress to date and its continued focus on serving harder-to-reach customers in rural and coastal areas. Meets expectations
ENGAGEMENT PRIORITIES ICE has committed to publishing sustainability-linked-bond updates as part of its annual reporting. We will seek to engage with the company on disclosure of the positive impact related to the rollout of smart meters in Costa Rica.
Next theme: Resource stewardship >
GLOBAL WARMING: Methane, a common landfill emission, has 28 times the global warming potential of CO2.1
MATERIALS USE: Materials use is projected to reach 167 gigatonnes by 2060, up from 79 gigatonnes in 2011.2
We believe better stewardship of the earth’s finite resources can help ensure long-term social and economic stability. As population growth and urbanization accelerate, the strain on resources intensifies as does the need for solutions to mitigate the effects of climate change. Water scarcity is projected to challenge cities and agricultural regions alike. Solid waste generation could grow to 3.4 billion tonnes per year by 2050.3 Decomposing landfills release harmful GHGs, while solid landfill waste creates myriad problems, including harmful runoff that contaminates surface and groundwater and can create breeding grounds for water- and vector-borne diseases.
In our view, solutions enhancing resource stewardship and promoting circular, sustainable economies will be widely adopted as the harmful effects of linear, disposable economies become more apparent. Self-sustaining, regenerative systems of production and consumption, where waste is minimized or avoided altogether, could become an economic necessity. Companies, industries, and governments will need to upgrade infrastructure and implement technologies necessary for safe, effective resource management.
In 2021, in our equity portfolio, we initiated a position in a leading producer and supplier of low-cost renewable diesel feedstock and other fuels that can help reduce transportation emissions, which account for 14% of global GHG emissions.
We believe better stewardship of the earth’s finite resources can help ensure long-term social and economic stability.
The company produces renewable energy by repurposing animal by-products that would otherwise be wasted. Other opportunities in this theme include sustainable waste-processing and recycling companies, metal-recycling companies, and producers of recyclable packaging solutions.
We are also looking into manufacturers of bioplastics and other sustainable materials with potentially long-term positive effects on marine and land ecosystems by minimizing microplastics in soil, sediment, and fresh water.
In the fixed income portfolio, we purchased a North American car manufacturer’s inaugural green bond, with the bond’s proceeds allocated to financing or refinancing eligible projects including the research and development of zero-emission vehicles and manufacturing facilities. A sizable portion of the proceeds are expected to support the design, development, and manufacture of better electric vehicles, as the issuer has set a target for electric vehicles to contribute around half of its global vehicle sales by 2030. As one of the world’s largest automobile producers, the issuer can potentially play a critical role in developing and increasing penetration of more efficient alternatives to traditional automobiles, thereby helping to reduce the impact of transport on the environment.
Protecting and conserving our natural resources through sound management and new technologies is at a critical point. Global sustainability and economic growth for future generations may depend on today’s stewardship activities.
1 Fifth Assessment Report, Intergovernmental Panel on Climate Change (IPCC), 2014. 2 Global Material Resources Outlook to 2060, OECD, 2018. 3 "What a Waste 2.0: A Global Snapshot of Solid Waste Management to 2050", September 2018.
The company has accelerated the pace of new capacity additions for its renewable diesel operations and remains among the largest global producers of renewable diesel. Meets expectations
ENGAGEMENT PRIORITIES We have engaged with Darling on the total market opportunity in renewable diesel, with a focus on how Darling's scale, technology, and expertise in navigating the agricultural and fuel industries amounts to a durable competitive advantage. Going forward, we intend to engage further on the company’s sustainability and process as well as the growth prospects for the Diamond Green Diesel partnership with Valero.
We believe Lenzing continues to make a positive impact through technological innovation in plant-based fibers, which helps to reduce CO2 emissions, lower water use, and shift consumption away from petroleum-based synthetic fabrics. Meets expectations
We spoke with management about the sustainability of wood-based specialty fibers, including lowering its water usage and increasing the biodegradability of its products. We discussed allegations of fraud regarding the production of face masks through a new joint venture and we think management will be more cautious when setting up joint ventures in the future. Lenzing expects the market for sustainable fibers to continue to expand as fashion retailers adopt more stringent attitudes toward sourcing. We look forward to discussing this further.
Investments in Darling Ingredients can help reduce GHG emissions from transportation. The company is a leading, low-cost producer and supplier of renewable diesel feedstock at scale. Through its partnership with Valero, it offers fuels that can help reduce emissions from transportation by up to 85%. In addition, producing food and feed products from inputs that would otherwise be wasted helps to lower the resource intensity of the agriculture industry.
Lower global GHG emissions and societal benefit of healthier environment
Customers
Volume of renewable diesel produced Rendered and recycled materials converted by its Diamond Green Diesel joint venture
21.3 billion liters 1.04 million tonnes
GHG emissions avoided through use of renewables diesel (millions of tonnes)
2.27
Exogenous factors: Enabling high-GHG-intensity animal production and fossil-fuel-intensive transport Execution: Failing to keep pace with innovation and most sustainable practices
High significance/ low probability
NEGATIVE IMPACTS Environmental impact of operations and supply chain. Rendering operations are water intensive, and production of end products and renewable diesel are energy intensive.
MITIGATION EFFORTS Moderation
WILLIGNESS TO ENGAGE High
Lenzing produces botanic cellulose fibers made with wood from sustainably managed forests. Its products can significantly reduce the environmental cost of clothing and textile production by shifting to less petroleum-based materials. Lenzing’s specialty fibers have 50% less GHG emissions and water impact than standard viscose.
Preserve and reuse the earth's natural resources
Planet
Aspriational
Fiber sold Specialty fibers as % of revenue
909,000 tonnes 62%
Proportion of wood source certified or controlled by forest certification Reduction in water intensity (m3 per tonne of product), from 2014 baseline
>99%
10%
Endurance: Company fails to keep pace with innovation
UN SDG ALIGNMENT Responsible Consumption and Production
TARGET 12.5 By 2030, substantially reduce waste generation through prevention, reduction, recycling and reuse
NEGATIVE IMPACTS Energy intensity of production and end-of-life waste