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Differences in Public and Private ESG Investing with Simon O’Shea

Hey, everyone, thanks for joining. Today, I will be speaking with Simon O’Shea, the chief investment officer for Ballast Rock Ventures. We’re going to have a wide ranging discussion today about socially responsible investing (public and private ESG investing), the whole ESG moniker, and what it means. 

The thought for the day, ESG is probably not what you think. So over the next 20 to 25 minutes, take a listen and get an idea for what this actual moniker means and what your actual investments are doing if they are, “ESG,” and the action is to decide what you want to do as an investor having this extra knowledge because you can go broad based or specific in investing in defined projects like Louisiana Green Fuels.  You’ll be able to see how you can specifically invest and make a difference by cutting all the fat and going directly to the source. So take a listen and make some action.

Ballast Rock

Take me through Ballast Rock as a company, explain who they are and your role in the company.

Ballast Rock initially, it was started in 2018. Tom Carroll, you’ve obviously had on the show before, was the founder. He set up with a very specific focus on workforce multifamily investing in the Southeast that would provide both attractive risk-adjusted returns but also crucially have a positive social impact. They have now launched their second fund. Sunbelt one was completed soon after launching in 2018. They’re now launched their second fund. And Tom and I met socially, actually, and being two guys from the other side of the Atlantic with a background in finance, we kind of hit it off and kept in contact.

And really the Genesis for Ballast Rock Ventures, which is what I do, is looking at Tom’s investor base, which was reasonably atomized but also pretty sophisticated. And the conversations Tom was having was about alternative products to the sort of real estate. And we came up with Ventures as just a natural progression of that. How do we give our investors access to our unique nonreal station deal flow? And that really was the Genesis for Ventures, and that’s when I came on board to help Tom build it up. 

I like the social aspect. And I know when people think of social good, they tend to think of the lens of ESG, that’s kind of that moniker. And I want to get into Louisiana Green Fuels because it definitely has that social good aspect. But I want to just first and foremost explain ESG and then kind of how Louisiana Green Fuels, kind of folds into that line.

ESG

Yeah. It’s a great question. And I think my background in covering institutional investors for over a decade, we saw the increasing importance of ESG for our institutional investors, and that was because it was being driven by their underlying investors, the pension funds or even retail investors, where it’s really become a large focus for a lot of investors. However, ESG doesn’t mean the same thing to all people. I should take a setback. We’re talking to ESG which is environmental, social and governance, and it’s a framework for investing where you, as an investor, can be comfortable that your money is going to go where you’re comfortable with it going.

So you’re going to have a positive impact in an environmental way, in a social way and that the companies invest in will have good governance. With this project, this is one of the things that really resonated with us was this is a very direct way for investors to have a line of sight where their monies are being invested that will have this direct impact. So the project is massively, environmentally positive. Once it’s up and running, it’ll have the equivalent carbon dioxide impact of taking 110,000 cars off the road each year.

For every gallon of fuel that’s used that’s produced by this plant, it’s equivalent to taking two gallons of Petroleum based diesel off the road every year. And then on the social side, the Parish that’s been built in Louisiana, it’s called Caldwell Parish. It’s a rural Parish. There has been a huge amount of economic development there for decades. This is the first major economic development in that area for a long time, and it’s going to create a huge number of jobs. So about 500 total jobs, about 100 of those will be direct at the plant, and then about 400 indirect. 

And these are our jobs. They’re sustainable, they’re green and they’re paying twice the median income so we’ll be transformed for the local community. So those are just a couple of things where we realized this was direct impact investing, which can be quite different to what people think is happening when they’re investing in ESG funds.

I love the idea of directly seeing what is going to happen, because I know we talked a little before this podcast about the voting records on some of these funds and what may not actually reflect a true ESG focus. And I don’t want to necessarily get into that too much, I’d really like you to talk more about how you brought up 110,000 cars off the road. Like, how does that happen? Someone’s going to hear that, and they’re going to wait. Tell me more.

 

Environmental Impact

The plant takes in this wood material, which is essentially waste from managed fires nearby. It converts it through a process called the FischerTropsch process into liquid diesel and liquid naphtha, but it also releases carbon dioxide through that process. Now they’re partnering the process with a carbon sequestration well, so they’re going to be able to capture the carbon dioxide generated in the plant and then various underground about a mile underground, and it would be there indefinitely captured. So the CO2, which is taken in from the atmosphere just to go back to high school biology, the process of photosynthesis trees take in carbon dioxide through the process of photosynthesis that carbon gets trapped within the trees. It stays there unless the trees decompose or are burnt, which is actually what most of this waste product would happen to it, it would be burnt. So that carbon gets released back into the atmosphere, however, because they’re taking it, putting it into the plant and capturing the carbon dioxide within the plant and then burying it underground. They’re taking about half a million tons of carbon dioxide out of the atmosphere every year, which is equivalent to about 110,000 cars off the road. So this is a significant environmental impact and one of the things that really attracted us to the project.

Take me through the most polluted to least polluted ways of generating energy, because I think a lot of times people are like, where does this fit on the spectrum of coal or solar or because you hear about all these different ways or whatever. If you can, maybe pick five and say, this may be the most polluted, and this may be the least polluted, because I think, if I’m not mistaken, you’re negatively polluted since you’re taking cars off the road.

Yeah, exactly. And like I said, it’s a gallon of fuel used here, it’s actually two gallons taken off the road. Again, it’s a great question. So I can certainly talk within it might be helpful to start the conversation just within liquid fuels themselves. So regular fuels, fossil fuels, fossil fuel based gasoline and diesel have a measure called carbon intensity. And the carbon intensity is a lifecycle measure of essentially the carbon footprint of that fuel. So it’s not just when it’s burnt in your engine, when you turn on the ignition, this is how much energy was expended to get the fuel out of the ground.

So oil, for example, how much drill for the oil, how much energy was expended, sending it to the refinery, how much energy was expended, refining it, then getting it to the distribution center and so on and so forth. So it’s truly a lifecycle measure. So the carbon intensity benchmark that the state of California uses is about plus 93, like between plus 90 to plus 100 renewable diesel, which is what this is, what this plant will produce is slightly different to biodiesel, which are generally made from fat, oils and greases and things like ethanol.

This renewable diesel has a carbon intensity of plus 20.

If you were to compare that to the rebel diesel with the sequestration well, because remember, now we’re taking that carbon dioxide and burying it underground, that plus 20 turned into negative 90 to negative 100. So you’ve got regular fuel, which is up here, plus 90, plus 100, and this fuel, which is negative 90 to negative 100. So it’s actually a net negative fuel type. So if you have to use this fuel in all sorts of diesel trucks and machinery in the US, you’d reduce emissions by about 80 percent just because it is so clean burning, no contaminants, et cetera. But it also has this massive net negative carbon intensity figure as well.

 

Renewable Options

So is there anything like this in the world right now?

There are renewable diesel plants. There’s some using wood waste, but a lot of them are using other feedstock materials. So things like liquid natural gas or municipal solid waste, and those are really good or well intentioned projects as well. I mean, municipal waste is a great point. You’re taking true waste, your trash, and you’re turning it into energy. They’re running into some issues, though, because the feedstock, the waste is so heterogeneous. It makes the process a bit more difficult for your trash.

Some of it is left over food and cardboard and glass or whatever you throw in the trash. So it’s a bit more difficult to get into a homogenous state to feed the plant. But there aren’t any that have combined the process of converting into the fuel with the sequestration. This will be the first of that type, and that’s what takes it from that positive 20 down to that negative 90 to negative 100. So we do have an impact. And I think we should maybe talk a little bit about you mentioned wind and solar because I think people have an idea of what coal is or what the dirty energy sources are: coal and oil, and those are obvious, but I think there’s an interesting conversation to be had around, “What does solar and wind actually, what’s the carbon intensity or the lifetime measure for things like wind and solar?

 

Wind and Solar

I’d love to know. I mean, I think people need to get the full spectrum because a lot of times there’s this green new deal. There’s all these things that keep coming up in the news. We should fly less. We should drive less, all these things. And you’re thinking, okay, so just from a project efficacy standpoint for where you’re at right now, take me through that. Wind, solar and where this project fits in on that game, too.

Wind and solar are definitely part of the solution and renewable sources of energy, but they’re not a panacea, or not the panacea that people believe they are. So at the point of power generation, they are generally carbon neutral. The wind blows turbine turns or the sunshines, and the cells absorb the energy. However, to create a solar farm or a wind farm actually requires a significant amount of concrete and plastics and steel. And all these things are actually significantly carbon positive. So over the lifetime of the wind farm or the solar farm, they are actually slightly carbon positive because there’s this big carbon footprint for building the plant in the first place.

So as it stacks up versus things like wind and solar, we believe this isn’t some sort of a transitory fuel or some step to the next thing. This stacks up very well against the other energy sources because as we just said, this has a net negative carbon footprint. Carbon intensity is negative 90 to negative and 100. However, as I said, I think renewable energy sources have to be part of the solution. We need to transition away from hydrocarbonbased or fossil fuel based energy sources like oil and towards more renewable sources like that.

But it’s important people appreciate the true cost of that. And we didn’t even get into the mining and rare earths required for things like the battery technology that we required for the EVs and for storing energy  from wind and solar, which also add to that overall sort of carbon footprint and environmental cost.

 

Environmentally Healthy

Yours on that gamut is the only one that’s truly negative? Or is there another one that may be potentially carbon negative as well?

I don’t want to say there aren’t any others, but when it’s up and running, this is going to be the or one of the most carbon negative transport fuels or energy sources available in the US market.

Okay. So a project like this, nothing like it exists, very carbon negative, very environmentally healthy. How does it make money? Because if you would think, why isn’t everybody doing it?

Yeah. And I think the reality is in a couple of years time, there will be more plants like this, but there are hurdles to entry. The reason it makes money is because it is so carbon negative. The reason it’s so carbon negative is because they’ve put these two pieces of technology together, the plant to make the diesel, which is its existing technology. The sizes are being proven commercially or by pilot scale by the technology providers. They have the sequestration well, which has proven technology, and the oil industry has been sequestering carbon dioxide since the 70s.

So both pieces of technology have been around for some time. The magic source, if you will, is that they’ve essentially stuck the two pieces together in one of those great ideas where you hear it, you kind of think, why hasn’t that been done before? And it really does massively improve the economics of the plant. The plant produces, as we said, liquid diesel and liquid naphtha. They will sell that. And in fact, they’ve signed an agreement with one customer who wants to buy all of the fuel the plant produces and all of the carbon credits the plant produces.

But the plant will produce the fuels, but it will also crucially generate a significant number of carbon credits because it’s so carbon negative, and they can monetize those carbon credits. And in fact, we view it as a carbon credit plant rather than a renewable diesel plant. And the reason we say that is because if you look at the unit economics, they’ll sell the diesel and the naphtha and the spot, and it may have moved around a little bit, but it’s around $2 a gallon that they can sell the diesel war.

When you add on the carbon credits and there are both federal and state carbon credits, and this plant generates both, they’re not mutually exclusive. When you monetize those carbon credits and work it back to what that means on a per gallon basis, instead of selling the fuel for $2 a gallon, you’re actually selling it for between $10 to $12 a gallon. So it’s a huge economic impact on the plant and really turns it into a very attractive investment from our perspective.

 

Carbon Credit

So the carbon credit is really the sweet sauce. So when explaining to me what a carbon credit is, because I know, is it a tax credit? How is it constructing? Because there’s so many ways that people think about it.

Yeah. And it’s one of the most frequent questions we get asked by investors. And, in fact, one of the most common sort of feedback we get. Well, isn’t this just another government tax credit? And if the administration changes, they might pull the tax credit or they don’t want to fund it anymore. And I understand how people sort of get that view, but it’s important to note that these are not tax credits. So these are carbon credits, obviously, but they are created by law, both federal and state laws.

And the laws say they specify what’s known as obligated parties. And these are companies, big companies. Exactly who you think they were with big emissions. So it could be in California. It will be anyone that imports, refines or distributes Petroleum based products. But you’re looking at power generators, well, utility companies, etcetera, who all have these positive emissions that have been identified by either local or state governments. And the laws say you are an obligated party. You have a specific target that you, as an obligated party, have to meet, which is to reduce your emissions. 

You can either do that yourself by investing in new plant and machinery and equipment and training. But the price tag associated with that is huge. Matter of fact, it’s very interesting. If you’re to do it across the States, it’s in the trillions of dollars. Instead, what they can do is they can go into the market, and it is a marketplace where these obligated parties can buy these carbon credits from projects like this. So it’s very much a market based approach. Supply and demand will set the pricing.

The carbon credits are essentially securities, just like any other security that can be traded. The differentiator, though, is that these obligated parties are required by law to buy these carbon credits.

 

Project Overview

I want to talk about the project itself, because you’ve gone through kind of the social good. You’ve gone through the plant, you’ve gone through the benefits, and not just the fact that it’s making biodiesel, but there’s these carbon credits, all those things attached to it. First of its kind, these are all awesome. What does the time frame for something like this look like? You have to obviously construct it. And I’m going to ask a follow up just so there’s a seed kind of planted.

How does that project and risk line up for somebody who’s thinking, like, how does this compare to an investment in the stock market, a blue chip company, say you have Exxon Oil company, LGF, Louisiana, Green Fuels. You know, this kind of socially good biodiesel company is doing similar types of things. Can you take me through that?

Yeah. Again, it’s a great question. And it speaks to the heart of what people should be thinking about when they look at the project. So if you’re investing in the stock market, obviously, there’s well, number one, there’s a track record of the history. There’s a lot of information that’s out there with a project like this. We have done a significant amount of due diligence on the project. However, this is still predevelopment capital. The stage we’re raising for is it’s predevelopment capital. So they have secured a site right now it’s 170 acre site in northeastern Louisiana. They are going through various stages of derisking the project. The big one they just completed a month or so ago was they drilled a test well to test the geology for this sequestration, the one we talked about. That came back very, very favorably. So they moved on to the next stage, which is what we’re raising money for, which is essentially designing the plant itself. And that’s a twelve and a half million raise, which will take place for the next six months or so.

They’ll have one further stage of predevelopment capital, which is a 35 million raise, which is essentially to pay the technology providers for the plant their licensing fees just to sign them up for doing that. Once they get to that stage, they are then ready to go to their EPC Guarantor, whose Coke Project Solutions. So that’s basically a project development speak for Coke is going to guarantee that they will build a plant for a fixed price. That’s anticipated to happen in early 2023. So Q1 2023.

So we’re talking between now and Q1 2023 to do all the pre development work. Once they have that EPC guarantee from Coke, with all the very stages of pre development done, they will go to permanent equity, I Institutional Investors, and they’re going to raise about $400 million in equity and about a billion dollars in des. This is like a billion and a half type project to build a plant. And then it’s going to take about two years to build a plant. So it’ll be up and running in 2025.

So it won’t be generating income until that time. However, once it is up and running, it will be generating cash flow almost as usual, and significant cash flow as well.

 

Cash Flow Projection

What do you project?

So they are currently modeling that they’ll generate between $300 to $350,000,000 of EBIT a year. They’ll have a payout ratio, dividend payouts of about 60% on that. So they’re going to be paying out significant cash flow. And they’re also anticipating that they will exit because the company doing this is a project development company, so the plan is to build not just this, but actually a series of projects, but to build them and to sell to a strategic buyer or institutional buyer. So exited between 2030 and 2035 at a sort of 10X multiple.

So to put that into context, if you were to invest a hundred thousand dollars right now over the lifetime of the project, it would return something like $1.1 to $1.5 million in cash depending whether it’s 2030 exit or 2035 exit, depending on the sale of the plant. So that puts the IRS and the sort of mid 30%, which we think is an extremely attractive risk adjusted return, given how significantly do risk that the project is.

Alright, I think 35% is  great too. I think it’s great too. So since you start talking about these numbers, a billion and a half and all that. And I feel like I do need to say for compliance purposes, it’s not a solicitation. I’m just trying to get numbers for people to understand. But if someone were to want to invest in this, like, those are big numbers, what’s the minimum for somebody to say I want to participate? And to be clear when I hear this, correct me if I’m wrong.

You know, this is for accredited investors, right? That means you have to have a million dollars. They’ll let people look up accredited. I don’t want to have to sell. That is for accredited investors. I would also say it is for people that want to have a more finger on the pulse view of their ESG investment, or they like how this sounds and they’re like, I want to invest in something that is going to have that kind of social good. And then on top of that, somebody that may say, you know, 35% is nice.

Now I get it’s a pro forma, up or down from there.

Exactly. I should have added that these are all assumptions and a model. A few returns aren’t guaranteed, etcetera.

 

Investment

However, I do think there is a benefit to directly investing in something. You get the illiquidity bonus because you’re a managing a member of a group and you have direct ownership in something which is great. So all that said for someone that has kind of that idea of interest, like, how much are they going to have to start at investing to get access to something like this?

 Yeah. So in line with what we did in the real estate, our goal, we’re socially focused and return focus, but we’re also all about democratizing access. So although you have to be an accredited investor, we set our minimum denims on all our funds at a low level. So for this Louisiana Greenfields project, it’s $25,000, which is significantly lower than most typical private equity funds would require and then increments of 5K after that. So you can invest as little as $25,000. You do have to be an accredited investor, but you do have the flexibility to invest quite a small initial sum.

And you touched on a very interesting point as well about that sort of direct ESG investing. And I know we’re running along, but it may be worth highlighting, cause some of your interns may not be aware. There was a Sloan School of Management report, Sloan School of Management at MIT, where they looked at the voting records for the big ESG ETFs in the States. So these are like the Vanguards, the Black Rocks, the State Streets, who between them control like 35% of the US equity market.

But they looked specifically for the ESG ETF. So for Vanguard, it’s the Vanguard Social Index Fund, which is the oldest and biggest ESG ETF in America. And when they looked at their voting record between 2006 to 2019, it was really interesting. Vanguard, the ESG funded, essentially voted against every environmental sort of proposal at the AGM, the proxy votes. So there’s definitely a disconnect. I think people want to invest in these ESG investments, but there’s a disconnect between what they want to do and where their money is going and what those managers ultimately do with that.

So where we really like this project is, as I said, it’s a direct line of sight investment where you know where your money is going, you know, the impact it’s going to have. There’s no question about the dilution of your investment into a broader portfolio or confusion over what will actually happen with that money.

There’s a very direct line to what’s gonna happen with it. I it love that it’s not a marketing ploy. This is what you are going to do. Well, I know there’s a lot more detail, but I do think we had a very good conversation. I like highlighting key points. I know if people want to get more information, they can contact me. They can contact you, Simon, at Ballast Rock Ventures. But I love what you guys do over there from a social standpoint. I love that it’s cutting edge, first of its kind. There’s risks, but there’s obviously handsome rewards, and these are all proven technologies, too.  

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