Losing the Plot: Finance, Natural Gas, and ESG
National Review Online, August 31, 2022
It’s a crowded field, but as an example of the destructive uselessness of ESG (an investment “discipline” based on analyzing how companies measure up against somewhat vague environmental, social, and governance standards), this story from Bloomberg takes some beating.
Europe has botched an historic opportunity to create a global benchmark for sustainable investing after agreeing to treat gas as a green asset, according to bankers, investors, climate activists and their lawyers.
The background to this supposed botch is that, faced with growing evidence of how tricky the EU’s participation in the lemming-like race to net zero was going to be, the EU Commission (the union’s administrative arm) did some redefinition. It decided that green-energy sources for financing purposes (as set out in Brussels’ “green taxonomy”) would include (subject to certain conditions) both natural gas and nuclear power as “bridge fuels” designed to smooth the EU’s transition to a (net) greenhouse-gas-free future. The European Parliament’s approval of the acceptance of gas and nuclear into the taxonomy’s designation of the virtuous (which has now become enshrined in EU law) was what prompted the Bloomberg article.
I don’t normally have much good to say about the way that the EU is run, but if it is to have any chance of reaching net-zero by the (absurd) 2050 target date without destroying large swaths of the economy, a great deal more realism is required than we have seen to date. This move is a small step in that direction, even if trying to hit that target date will still prove immensely damaging.
However, even this was, as noted above, too much for some. That “activists” disapproved was to be expected, but the appearance of bankers and investors in the list of naysayers might have startled those with more traditional ideas of what banking and investing are meant to be about.
And yet:
Stephanie Pfeifer, chief executive of the Institutional Investors Group on Climate Change, whose members oversee more than $50 trillion in combined assets, described Wednesday’s decision by the EU Parliament to include gas in Europe’s green investing rulebook as “disappointing.” Stephan Kippe, head of ESG research at Commerzbank AG, said it “doesn’t make the fight against greenwashing any easier.”
Look at the website of the Institutional Investors Group on Climate Change to discover that:
IIGCC is a leading global investor membership body and the largest one focusing specifically on climate change. Our members, mainly asset owners and asset managers, include many of the biggest names in the sector, alongside more specialist investors and select financial service providers.
It is, in other words, yet another creature that flourishes in the ecosystem that ESG has created, staffed by a team who have an interest, naturally enough, in seeing that the demand for their services increases. Its members manage $51 trillion in assets, money that, in many cases, will not be theirs, but will belong to their clients. One wonders what those clients or — where the clients are themselves institutional asset managers — the clients of those clients think of the stance being taken by those to whom they have entrusted their funds, most of whom will have been hired to maximize risk-adjusted financial return. Playing political games with climate policy will do little or nothing to enhance that return and may even reduce it. It won’t do much for the climate either, but that’s a topic for another day.
Read on further to discover that among IIGCC’s projects are:
Developing guidance for asset owner trustees and boards on how to incorporate climate-related issues into board level processes.
Supporting investors in identifying, assessing and managing climate related risks and opportunities across asset classes.
In fact, most investors have, with the exception of dealing with regulatory intrusions, no reason “to incorporate climate-related issues into board level processes.” Nor should they — if they have even a minimal degree of competence — require help “in identifying, assessing and managing climate related risks and opportunities across asset classes.”
Climate-related risks are, given typical investment horizons, of almost no relevance whatsoever so far as asset managers are concerned, other than those risks that flow not from changes in the climate, but from increasingly aggressive climate-related lawfare and changes in climate policy. But with a dangerously powerful combination of greed, hysteria, and lust for power now doing so much to shape that policy (I’ll hold off on commenting on the lawfare: This is a family-oriented site), the last thing that investors should be financing is a group that, if its opposition in this instance to relatively sensible climate policy-making is any guide, will only make matters worse. They should turn instead to lobbyists and lawyers, scavengers of some use in either heading off ill-judged policies or, if necessary, offering some assistance in working through their consequences.
As to the opportunities arising out of climate change (or perceptions of climate change), they are real enough. Investors did well out of the green bubble (R.I.P.) a year or so back. Other opportunities will arise, but they are more likely to be identified by an investor focused on making a buck than by one set on saving the planet.
And in a piece for Capital Matters, economist John Cochrane made this (often overlooked) point:
We are in an energy transition. But old, dying technologies never cause crises. New ones do. The 1929 stock-market crash did not come from the horse and buggy industries; radio, movies, and cars crashed. The 1999 stock market crash did not come from the typewriter, slide rule, carbon paper, and landline-telephone industries. Tech, slightly ahead of its time, failed. . . .
[S]o-called bubbles have always come from exciting new technologies, often fueled by subsidies and cheered on by central banks and regulators, not from slowly decaying legacy industries.
Quite why the head of ESG research (a title that is a reminder of how financial institutions have turned ESG into a moneymaking proposition) at Commerzbank should dislike the EU’s new policy is not easy to understand, notwithstanding his claim that it risks helping “greenwashing.” Perhaps he wanted to burnish his green credentials, no bad thing in his line of work. Or maybe he simply believes that he has a better view of what green should really mean than the EU Commission.
That said, the EU Commission has not been alone in its concession to some pragmatism. The recognition of the need for a more orderly transition away from fossil fuels, a need made more acute by the current surge in energy prices, has also been winning some converts among the financial sector’s ESG mavens. In an interesting twist, one fund manager quoted in the Financial Times last month drew attention to the implications of soaring energy costs for the “S” (social) of ESG. He was right to do so. It’s long been obvious that the “E” and the “S” of ESG can, under certain circumstances, be in conflict with each other, and when those circumstances include the possible devastation of Europe’s economies, well . . .
In that same FT report, which was from mid July, it was also noted that although ESG funds were heavily underweight oil-and-gas stocks, some tentative signs of change had appeared:
Six per cent of European ESG funds now own Shell, compared to zero per cent at the end of last year, according to Bank of America. Holdings have also risen modestly this year in other energy companies, including Galp Energy, Repsol, Aker BP and Neste, across the 1,200 European ESG active and passive funds monitored by BofA.
“We believe [some] ESG funds are revisiting the cost of exclusion [of energy companies] given their underperformance in the first half of 2022 or waiting for regulations to be finalised amid greenwashing fears,” says Menka Bajaj, an ESG strategist at BofA.
An underperforming ESG fund? How can that be?
But back to Bloomberg:
The vote, which passed with a narrower majority than anticipated, means gas and nuclear energy will be included in Europe’s so-called green taxonomy starting next year. The fuels will then be incorporated in a wider European framework intended to steer capital toward sustainable goals. But investor groups were quick to point out that the finance industry may treat the decision with caution, with some potentially even boycotting the new green labels.
“Whether gas and nuclear genuinely meet the conditions for being qualified as a transitional activity is doubtful,” Hugo Gallagher, senior policy adviser at the European Sustainable Investment Forum (Eurosif), whose members represent about $20 trillion in assets under management, said in an interview. “There will certainly be a segment of the industry that won’t consider investment in gas or nuclear as green, regardless of what the taxonomy says.”
Eurosif?
Check out its website:
Eurosif works as a partnership of Europe-based national Sustainable Investment Fora (SIFs) with the direct support of their network which spans over 400 Europe-based organisations drawn from the sustainable investment industry value chain. These organisations include institutional investors, asset managers, financial services, index providers and ESG research and analysis firms totalling over €20 trillion in total assets.
The ESG ecosystem is what it is.