Week 2: In a world of contradictions & what Sultan al-Jaber really said

In this issue: ▸ The wrong question ▸ What Sultan al-Jaber really said ▸ How can investors make a difference on oil and gas? ▸ The Exxon scientists were uncannily accurate ▸ And much more...

Dear all, 

A gun is on the table and the lights are turned off. That feeling. It is almost impossible to navigate the current developments. Contradictions are so rife that even the calmest among us wonder what is going on.

News is becoming hammer-like. Heavy, hard-hitting yet numb. Like a spent force, not making any difference. The climate emergency debate and narrative around how to deal with it has been taken over by mainstream power deal breaks.

The guardians of the current system are making sure to protect the modus operandi that has served us, 10% of the world population, for such a long time. Growth, scale, consumption. Repeat. The middle classes of the western world will not start radical system change movements. Why? What is in it for them? How would that improve their life? 

The question is not “how do we cut emissions?”

I think that one of the major flaws of the climate emergency movement across the world, and in the financial so-called ESG world, has been the focus on how to cut CO2 emissions. That is probably the third question to be asked.

The first one is: “What is the root cause of the situation we are in?” The second should be: “Who is responsible and accountable?” And then the third question is how to cut CO2 emissions. Which is done by changing the underlying root cause and making people responsible for it to act and assume that responsibility.

By the way, the answers we nowadays receive back from the system are: “The current system is not worried about this and will try to do its utmost not to change, and the people responsible for the entire situation is all of us. And CO2 emissions are going up.”

We continue having meetings, COPXs, and newspapers continue reporting and, and, and. What? Nothing. In a real capitalistic system, everything has a price, externalities such as water, air, rivers, mountains, biosphere, birds, animals, oceans, and forests, all of which have a price. But does not cost anything. Quite a system we have.

What Sultan al-Jaber really said

Now in terms of contradictions, here is one of them.

Sultan al-Jaber, chief executive of state-owned Abu Dhabi National Oil Company, was appointed to be the COP28 president by the host country the United Arab Emirates earlier this week.

In a speech on Saturday, he said the world was “way off track” to meet its climate goals and was “playing catch-up”. To rapidly slash greenhouse gas emissions, the world must triple renewable energy generation by 2030 and “more than double” the production of “low carbon hydrogen”, Jaber said.

Jaber argued that one solution to mitigating climate change, alongside a rapid acceleration of renewable energy production, was the use of the “least carbon intensive oil and gas”, and stressed the need for a “just transition that leaves no one behind.”

You have to read between the lines here. What he says is that we keep it flowing and we find a way to brand some of “least carbon intensive oil and gas”. It will take years to define what it is, but who cares? It sounds better, and by the way Norway is the World Champion in rebranding oil and gas, not the Middle East.

Nevertheless, oil and gas it is and we do all of this for the poor people, it needs to be “just”. Yes, we are doing it for the poor people. So noble. Goosebumps or not.

How do we know that this is how we should read Jaber’s words between the lines? Well, countries, including Saudi Arabia, have blocked an effort by a broad coalition, including the EU and the US, to include a reference to phasing down all fossil fuels in the deal agreed upon at the summit in Egypt.

Jaber said he wanted the next summit to be about making progress on key issues including mitigating and adapting to climate change. He called for the summit to be a “practical COP” and one of “action”. “I am here to listen and engage,” he said. “I urge all parties to help make COP28 a COP of concrete outcomes and practical solutions.”

I truly understand him and what he is trying to say and what he is defending. It all makes sense even when it does mean a rather terrible continuation of dysfunctionality.

The UAE and Saudi Arabia, both leading Opec members, are vying to be the countries that sell the last barrels of oil as demand for the fuel falls, claiming that their production processes are less emissions-intensive per barrel than those of other nations.

You can read more about it here.

How can investors make a difference on oil and gas?

Now let’s look at this from an investment point of view. Mr. Jaber represents a national oil company. And most of the oil and gas reserves are owned and controlled by national oil companies. Approximately 90% of proven reserves.

If you are an investor and you truly believe that oil and gas is not part of the solution going forward, you usually go for the stock-listed oil and gas equities, there’s about 200 of them, and you pick and choose which one to keep and which one to sack.

You choose mostly based on “do they have a transition plan or not, and what does that plan look like?”. Then you make an assessment and see that few if any are planning to make a major shift in their businesses. A few of them do, but not even close to enough. Our economy needs it. The oil and gas sector performance impacts all other sectors all the time. It gets very complicated, risky and unpredictable for an asset manager. And it has costs money and impacts performance.

If you are a passive investor it comes with the territory to have some of these 200 since they constitute different indices that passive investors mirror. Now, you can engage even on the passive side and as some of the big passive houses do, write letters and demand change on the governance level. It's sort of odd and does not make a big difference, but it sounds good, and passive investors have a “claim to ESG fame”.

If you really want to do something about oil and gas, you should instead go for the sovereign bonds of the countries that are major producers of oil. You exclude these sovereign bonds from the investment universe and you rule out any financing business with national oil corporations (not that they need cash). You can combine this with additional criteria related to the National Climate Goals achievement score of a particular country and add human rights and rule of law criteria.

In that case, Norway is most likely in and UAE is out. Could this work? I have not seen anyone try it, but it would by all means hit the target in a far more accurate way.

The Exxon scientists were uncannily accurate

More on oil and gas, and do not be surprised!

The oil giant Exxon privately “predicted global warming correctly and skilfully” only to then spend decades publicly rubbishing such science to protect its core business, new research has found.

A trove of internal documents and research papers has previously established that Exxon knew of the dangers of global heating from at least the 1970s, with other oil industry bodies knowing of the risk even earlier, from around the 1950s.

They forcefully and successfully mobilized against the science to stymie any action to reduce fossil fuel use. A new study, however, has made clear that Exxon’s scientists were uncannily accurate in their projections from the 1970s onwards, predicting an upward curve of global temperatures and carbon dioxide emissions that is close to matching what actually occurred as the world heated up at a pace not seen in millions of years.

“This really does sum up what Exxon knew, years before many of us were born,” said Supran, who led the analysis conducted by researchers from Harvard University and the Potsdam Institute for Climate Impact Research. “We now have the smoking gun showing that they accurately predicted warming years before they started attacking the science.”

Read more here.

What is Fed’s role? And ECB?

More contradictions incoming. Jay Powell has said the Federal Reserve will not become a “climate policymaker”, as he mounted a full-throated defence of the US central bank’s independence from political influence.

In a speech delivered on Tuesday, the Fed chair said the central bank must steer clear of issues outside its congressionally mandated purview and instead maintain a narrow focus on keeping consumer prices stable, fostering a healthy labour market and ensuring the safety of the country’s banking system.

“It is essential that we stick to our statutory goals and authorities, and that we resist the temptation to broaden our scope to address other important social issues of the day,” he said at a conference hosted by Sweden’s central bank. “Without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals.” He added: “We are not, and will not be, a ‘climate policymaker’.”

It is a clear message. If you change the laws and rules of engagement, Fed will follow. But we are not changing laws and rules, because we don’t want to change that. It works. For the 10% of us.

Now here comes one more contradiction. At the same event, Isabel Schnabel, a member of the six-person executive board of the European Central Bank, advocated greater action to address climate change.

The German economist pledged to “ensure that all of the ECB’s policies are aligned with the objectives of the Paris Agreement to limit global warming to well below 2C”. The ECB’s position is clear. It worries that high interest rates to control inflation will undermine the green transition by raising the cost of investing in wind, solar, hydrogen and other clean energies necessary for moving to a net zero carbon world.

But ECB and Fed are aligned on two important issues:

First, that the primary role of green intervention lies not with independent central banks but with governments. Powell said that “in a well-functioning democracy, important public policy decisions should be made, in almost all cases, by the elected branches of government”. Schnabel concurred, saying, “governments must remain in the lead in accelerating the green transition”.

Second, they agree central banks have a role when supervising the banking system in ensuring commercial banks understand and manage financial risks from global warming. These include weather-related risks to infrastructure that banks have financed or fossil fuel assets that might become near-worthless in future.

Read more here.

Finally, the ESG inflow numbers…

And we end this week with some ESG inflows numbers.

Exchange-traded funds aligned with ESG outcomes accounted for 65 per cent of all net inflows into European ETFs in 2022, even as ESG strategies underperformed.

The ESG ETFs gathered €51bn over the year out of total flows to European-domiciled ETFs of €78.4bn. The overall totals were down in 2021 when investors poured €160bn into European ETFs, but ESG’s share jumped significantly from the 51 percent recorded then.

There is now €249bn in ESG-aligned ETFs in Europe, representing 18.8 percent of total assets.

“In principle, this speaks of a long-term structural change,” said Jose Garcia-Zarate, associate director of passive fund research at Morningstar. He noted that 2022 was not a year to be investing in ESG for those purely focused on near-term returns. Instead, a more sensible tactical approach might have been to focus on fossil fuel firms or weapons manufacturers.

“I guess it tells us that investors are taking the long-term view,” he said.

Morningstar data show that “sustainable” large-cap equity ETFs in Europe have underperformed their traditional large-cap equity ETF counterparts over the 12 months to the end of December, but also on a three-year and five-year annualised measure.

I wish you all the best in the contradictions of the next week. 

Best regards,
Sasja