Best stock to invest in – What the L.A. Methane Leak Tells Us About Investing



Best stock to invest in

by Garvin Jabusch

Sempra Energy’s leaking gas field in Porter Ranch, CA, near
Los Angeles, has been making national headlines recently, as it
now enters its third month of being the largest
methane leak in U.S. history
. How big is that? The LA
Times
says
that
, “by early January, state air quality regulators
estimate, the leak had released more than 77 million kilograms of
methane, the environmental equivalent of putting 1.9 million
metric tons of carbon dioxide in the air.”

1.9 million metric tons of carbon dioxide and counting. In
addition, methane isn’t only a powerful greenhouse gas, it can
have health consequences for those exposed. In reporting that
California Governor Jerry Brown has formally declared the leak an
emergency, the New York Times on January 6 wrote
that
, “already, more than 2,000 families have left this
affluent suburb because of the terrible smell and its side
effects, which include nosebleeds, headaches, dizziness and
vomiting.”

What does it all have to do with investing? It tells us more than
you might think, and it speaks volumes about how many investment
managers think about the idea of a sustainable economy, and also
about the limited tools they have to construct a portfolio that
reflects actual long-term viability of the global economic system.
As economist and sustainability expert Ken Coulsen tweeted
recently, “I thought the idea in #trading was to ask ALL the
[questions] – most investment groups refuse to go deep on the
intersection of #science [and] #economics.”

Coulsen’s right. Investment managers are supposed to be
assimilating all the risks, so why do some have a blind spot when
it comes to natural gas and other fossil fuels? Part of it is
inertia, a sense that doing things the way they’ve always been
done must be “right.” Part of it is ideological and a tribal
affiliation among some institutions and investors who resist the
idea of an economic switch to renewables as simply contrary to the
way they view the world.

The fact that Ted Cruz, a  leading  GOP candidate for
the U.S. presidency,  recently
described
 signatories to the COP12 agreement as,
“ideologues, they don’t focus on the facts, they won’t address the
facts, and what they’re interested [in] instead is more and more
government power” tells us all we need to know about both
the  politics involved and the power of Orwellian rhetoric in
claiming truth in the opposite of reality. 


Finally, the standard tool kit used by most portfolio managers,
collectively called modern portfolio theory, doesn’t particularly
allow one to attempt to look forward in assessing risk, basing
almost all such calculations on the way stocks and groups of
stocks have performed historically.

In any event, Sempra’s utility SoCalGas didn’t think too much
about the risks, and neither did a lot of energy investors.
SoCalGas/Sempra, as reported
by
Newsweek, had not installed a “subsurface
safety valve that was found faulty and removed in 1979—but never
replaced, because the well was not close enough to residential
areas to necessitate such a valve. [Rodger] Schwecke, the SoCalGas
vice president, says he does not know why the valve was removed
and never replaced, but he downplays the ability of a subsurface
valve to stop a powerful leak like this one. “It wasn’t a
requirement,” he says without much contrition.”

Zero Hedge reports
that
, “The Company Behind LA’s Methane Disaster Knew Its
Well Was Leaking 24 Years Ago,” and yet the firm was still
considered an upright corporate citizen, among the finest and
safest of our fossil fuels firms. Many money managers did not
perceive a risk. According
to
StreetInsider.com, on October 30th eight days after the
leak was detected, “Standard & Poor’s Ratings Services
affirmed its ‘BBB+’ issuer credit rating (ICR) on Sempra Energy
(NYSE: SRE)
and our ‘A’ ICRs on subsidiaries San Diego Gas & Electric Co.
(SDG&E) and Southern California Gas Co. (SoCal Gas). The
outlook remains stable.”

Then, on November 16, seven weeks after the world became aware
that the leak had begun, the company itself announced
that
, “Sempra Energy (NYSE: SRE)
has been selected for the S&P 500 Climate Disclosure
Leadership Index in 2015. The S&P 500 Climate Disclosure
Leadership Index lists the top 10 percent of companies within the
S&P 500 Index for the depth and quality of climate change data
disclosed to investors and the global marketplace.”

Obviously, there is a disconnect between real world,
scientifically verifiable risks and traditionally contemplated
investment risks, at least in the case of SoCalGas at Sempra.
Which is a danger when you get into the business of looking for
standouts in an inherently destructive business: even the very
best are still destructive. It’s like trying to decide which
cancer you would like to get. Maybe you’d select skin cancer
because it’s eminently curable if caught early, but the real
answer is you don’t want cancer at all.

The risks are real. The Los Angeles Daily News says
that
“Since Oct. 23, Southern California Gas Co. has spent
$50 million to try to stem the flow from the nation’s fifth
largest natural gas field, while relocating two schools and some
12,000 residents, many of them sickened by gas detection fumes. A
fix may not be in the works until March.”

That means SoCalGas may still be in for more expenses than they
thought. Maybe a lot more. Again, from the Los
Angeles Daily News
, “the researchers recorded
elevated levels of the main ingredient in natural gas—10 miles
away from the nation’s largest gas leak.” A recent
essay
from the Union of Concerned Scientists adds, “while
this is just the most recent in a long history of oil and gas
industry disasters, the particulars of this circumstance are
unprecedented (sadly not unheard of). Legal experts predict that
SoCal Gas will be on the hook for billions over a long period of
time,” and “3,000 more [families] are waiting to be relocated…As
these houses sit empty, they become vulnerable to crime and
decline in value. And beyond paying to fix the leak, cover medical
costs, and relocate families, SoCal Gas is already fielding 25
lawsuits with more expected in the coming weeks, months and
perhaps years.”

The traditional way of thinking about investment risks excludes
hugely important ones that should have been incorporated into the
fiduciary standard a long time ago, begging the question: what is
the fiduciary standard for if not to assess these risks? We allow
extremely risky activities from a regulatory point of view and
then ignore these risks in investment management. But if you don’t
include these risks, you’re exposing yourself and your clients to
them, and the minute these risks are recognized for what they
really are, you could see your value in certain companies, such as
SoCal Gas, evaporate before you can get your next statement.
 So why build a portfolio with only the ‘good cancers’ in it?
Why not build one with no disease at all?

As Newsweek points
out
, “The methane leak in Porter Ranch, though, is an apt
demonstration of our complex affair with carbon fuels. The natural
gas stored in Aliso Canyon flows to the homes of about 20 million
customers in the greater Los Angeles area. So while we contemplate
wind farms and solar arrays, we remain married to an antiquated
infrastructure that lets us do what we have done for centuries:
extracting energy by burning carbon.” And so, sometimes ignoring
all seemingly non-financial risks, do fund managers.

But, increasingly, someone has to answer for those risks. Fossil
fuels companies don’t think it will be them. EDF.org says
it all
when they report that, “none of the 65 oil and gas
companies reviewed in a just-released study by
Environmental Defense Fund disclose targets to reduce methane
emissions, the main ingredient in natural gas.”

You don’t manage a risk you don’t think you’re going to have to
pay for, and therefore most oil and gas companies don’t manage
them adequately. For portfolio managers it’s different though, we
can and should be thinking about risks even when companies
themselves don’t. Our clients’ financial well-being is at stake.

Yet portfolio management, populated with professionals who try to
leave no stone unturned in rooting out risks and dangers
associated with every stock, has a blind spot when it comes to
fossil fuels. In a time when it is clear that the beginning of the
end of the fossil fuels era has begun, when we know fossil fuels
contribute massive risks to the global economy from all the
outcomes of warming to failing health to destruction of land and
biodiversity, when we can say with certainty that for many
purposes renewable energies are now more economically competitive,
most investment professionals still continue to hold coal, oil and
gas stocks. They have their stated reasons: diversification,
historical performance, modern portfolio theory and fiduciary
standard requirements. But backward-looking diversification
methodology (again, the standard in present day investment
management) has allowed construction of portfolios fraught with
systemic risks.

What the LA methane leak tells us about investing today is as
much about inertia as it is about research and new ideas. This is
probably inevitable and to be expected, but it’s a shame, because
where capital is invested in this world is where change happens,
and it’s time professional investors realized they need to stop
investing in the world’s greatest systemic risk.

Given the tools provided by modern portfolio theory, mainstream
investment management only seems to be able to think as far as:
“we need to be sustainable, so which fossil fuels firms are
greenest?” This is shortsighted. The world economic forum at Davos
now sees
climate as the world’s number one economic risk
; why don’t
most portfolio managers and other
fiduciaries
?

Garvin Jabusch is cofounder and chief investment officer
of 
Green
Alpha® Advisors
, LLC. He is co-manager of the Shelton

Green Alpha Fund (NEXTX),
of the 
Green Alpha Next Economy Index, the Green
Alpha Growth & Income Portfolio, and of the 
Sierra Club Green Alpha Portfolio. He
also authors the Sierra Club’s green economics blog, 
Green Alpha’s Next
Economy
.”

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