Insights

When is hydrogen not green?

Supply chain scrutiny. Vilifying index giants. Plus, hydrogen investments come in every shade of grey.

In the world

🇪🇺 Though the EU may be struggling to develop parameters for sustainable investing (as reports Bloomberg), its position on investors themselves is coming into sharper focus. On Tuesday, the European Parliament voted to include the financial sector under ambitious amendments to its Corporate Sustainability Due Diligence Directive (CSDDD) proposal, which will require companies to identify and address environmental and human-rights violations across their value chains.  

🇺🇸 Per a new study by non-profit group Urgewald, 6,500 of the world’s major institutional investors own a combined $3.07trn stake in oil, gas, and coal companies. Representing 17% of the pie, Vanguard and BlackRock are taking a good amount of the heat. Justified criticism or a misunderstanding of how index investing works? Writing about Vanguard’s defection from NZAM in the Harvard Business Review, Ken Pucker suggests it’s more of the latter.

🗺️ The number of ETFs carrying an ESG label more than doubled in the two years to end-2022. Coupled with ongoing variability in approach, their explosive growth has regulators worried about greenwashing, according to the Financial Times. In its latest quarterly review of sustainable fund flows, Morningstar notes that fund launches slowed in Q1 — though not enough to put a dampener on assets, which grew faster than the broader fund market.

In the spotlight: When is hydrogen not green?

If there’s one hue that sustainable investors have a hard time processing, it’s grey. Green? Brown? Blue? Fine, great, love them. For an investment style predicated on the idea that there exists an objective ‘good’ and ‘bad’, however, shades of grey can be frustrating. Unfortunately, the world is full of them.  

As was suggested by the findings of our 2021 case study, there’s a consistent trade-off between economic growth and environmental impact. The backbone of the economy is energy, and the backbone of energy is extraction, be it of metals or fuels. In absolute terms, extraction is almost never ‘green’ or ‘good’. Still, relative goodness is worth striving for, and it’s a straightforward metric against which to categorise the big contenders: renewables (good) and fossil fuels (bad).

But not all contenders.  

Nuclear, for instance, hit headlines in 2022 when the European Commission opted to label it ‘green’ — the first of many dilemmas with which the EU has since struggled in seeking to establish a definition of ‘sustainable’. In 2023, it’s hydrogen polarising the ESG community. 

Sold as a clean, safe, and affordable alternative to fossil fuels, hydrogen has benefitted from a major political and PR push. In the US, nearly $26bn has been unlocked for hydrogen projects, with similar incentives emerging from Canada, the EU, the UK, and India. Earlier this week, the EU and Norway announced an alliance aimed at massively scaling up hydrogen infrastructure. 

But hydrogen needs to be made, and not all hydrogen is made equal or equally. Green hydrogen is produced using renewable electricity to split water molecules, which avoids CO2 emissions from beginning to end. Brown and blue hydrogen, however,  depend on polluting coal and natural gas, respectively. And it’s from those processes that 98% of US and 96% of global hydrogen fuel derives. 

Naturally, oil and gas companies are fuelling the hydrogen hype. Climate denial may not be the tactic of choice anymore, but (as we’ve long argued) the industry has no intention of retiring fossil fuels. Hydrogen is a smart rebrand of an existing product. Of the nearly 150 projects that applied to receive priority status and subsidies from the EU, the vast majority are backed by the fossil fuel industry. 

 Theoretically, blue hydrogen can be clean if methane emissions are restricted and carbon emissions captured. The industry claims to capture 80-90% of CO2 emitted, but a seminal Cornell University study put the real figure closer to 12%. Due to the amount of energy required, coupled with upstream leakage, methane emissions may be higher than if no carbon capture had been used at all. In aggregate, the carbon footprint of blue hydrogen is over 20% greater than simply burning gas or coal. 

Notably, the Guardian reports that the term ‘clean hydrogen’ was coined by the fossil fuel industry a few months after the study made waves.

In the case of something as nuanced as relative impact, binary labels — green vs. brown, good vs. bad, AAA vs. CCC — are more than reductive. They can be co-opted and used against you, which makes them dangerous. Blue sounds like green implies clean, but blue hydrogen is nothing of the sort. Though hydrogen has potential, the market is hugely variable, making it a multi-layered, many-shaded ‘grey’ investment. 

Climate change and, by extension, environmental investing exist precisely because so many decades were given to soundbites over science. Let’s not make the same mistake again.

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