Our investment strategy combines data and ESG factors for alpha (generating returns). Here, we will outline how we use our framework to distinguish the “winners” from the “losers” in the energy transition. We focus on the largest CO2 emitting sector, utilities, and on the direct impact on each company’s valuation.

 

The winners will be those companies which decarbonise the fastest and hence minimize the impact of carbon emissions pricing schemes. The losers will be those that decarbonise the slowest and hence will be most exposed to these costs. To distinguish between the latter and the former, we forecast carbon emissions and carbon costs, and use the results to attribute an ESG score to these companies, which is used in our valuation process alongside our discounted cash flow models.

 

How does this work? Using the US Energy Information Administration (EIA) overview of all US power generation facilities (via S&P Capital IQ) we compiled a schedule of announced coal and gas plant decommissions, coal to gas conversions, and gas plants being built in the US over the coming three decades. This data set covers 479 facilities across the US.

 

We updated the collected dataset with any new announcements by the companies to obtain the most recent records available. We also estimate the future GHG (greenhouse gas) emissions of planned power plants by applying tCO₂/MW factors (by fuel type) on existing power plants. Next, using the closure/ conversion/opening schedules, we forecast the change in GHG emissions from each facility, and aggregate this to company level.

 

Download the whitepaper to read more.