Week 20: Are our ESG investments off-track?

In this issue: ▸ Would the real sustainability please stand up? ▸ The Chinese promises ▸ A roadmap for the energy sector ▸ How much is a tree worth? ▸ And much more...

Dear all, 

This week we take a closer look at some of the promises made in relation to climate action – and some of the evidence of how these promises are actually being delivered.

I think that most of us share this overwhelming feeling of a momentum related to change. We see the changes in policies, regulation, business models, narratives.

But how are we progressing in reality? Can we truly see it and put it in the context of the challenges we want so much to address?

Would the real sustainability please stand up?

I’ve written about this before, and I’m certainly repeating myself here, but the climate emergency we are facing is an absolute game – not a relative one.

ESG is an absolute game too, although very often that intention is shadowed by the relative terminology applied to the companies we – the financial industry – invest in and lend money to.

Our aim is to improve how companies manage risk and opportunities on an absolute level relevant for their business, not on a relative level in relation to the competition in the same sector. An oil and gas company that is best in its sector is still an oil and gas company. A fast fashion business model is still a fast fashion business model no matter how it’s performing relative to its competitors. And, sadly, even the ‘best’ performing companies in the sector are still not pay living wages, and they still deplete natural resources.

What is really the point with the ESG spectacles on investments? What is the goal with ESG investments? What do we want to accomplish? Where?

Most of our ESG investments ought to be channelled to the markets that face the most heavy challenges, like Africa, South America, Russia and Asia. Most of our ESG investments ought to be channelled to tackle the extraction of the commodities we need for the transition to a sustainable future. But that is not the case today. 

Why do we need to channel ESG investments to those markets? Because our investments will have the maximal effect on people and environment in those places. Unfortunately, today most of the ESG eligible stocks are not from Africa, Asia or South America since most of the commodities we use to live and to produce stuff from are deemed as non-sustainable.

In simple terms, companies and commodities from ‘resource countries’ are not sustainable, while the companies that process these resources for our use and consumption are either sustainable or in a process of becoming more sustainable. And these countries are based in the EU, UK, US and Japan.

We construct our own universes of what is ok and what is not ok regarding ESG, and we never ask the question about what we really want to address and where. We never ask the question about where our investments will have the maximal effect for people and planet. This will change in the next wave of ESG evolution. This has to change.

Here’s a great article by Duncan Austin on this topic, and I really recommend that you read it:

The Chinese promises

Back to the promises made. Let’s have a look at the Dragon in the East… China!

China’s carbon dioxide (CO2) emissions have grown at their fastest pace in more than a decade, increasing by 15% year-on-year in the first quarter of 2021, a new analysis for Carbon Brief shows.

The post-pandemic surge means China’s emissions reached a new record high of nearly 12bn tonnes (GtCO2) in the year ending March 2021. This is some 600m tonnes (5%) above the total for 2019.

The analysis is based on official figures for the domestic production, import and export of fossil fuels and cement, as well as commercial data on changes in stocks of stored fuel.  

The CO2 surge reflects a rebound from coronavirus lockdowns in early 2020, but also a post-Covid economic recovery that has so far been dominated by growth in construction, steel and cement.

If emissions in 2021 as a whole match the growth seen over the past 12 months, there would be little room for further increases to 2025, under the targets of China’s 14th five-year plan.

Not so funny reading, I would say. Not very encouraging at all, to be honest.

Is China playing the long-term game or? Can we get a vaccine against short-termism?

China is currently producing two things for the rest of the world: emissions and billionaires. When you read this, please make sure that you sit down. It’s Elon Musk on Top, the rest are Made in China.

The 15 billionaires on Bloomberg Green’s new ranking showcase the explosive growth of electric vehicles, batteries, and solar power. But it’s far from every dollar in these fortunes that are derived from climate-aligned businesses whose core products reduce greenhouse gas emissions. 

A roadmap for the energy sector

Did you read the flagship report entitled “Net Zero by 2050 – A Roadmap for the Global Energy Sector” which was released this week? If not, here’s the link:

There are many good insights in the report, but one is clear: WE NEED TO STOP EXTRACTION OF FOSSIL FUELS. Today. Otherwise, it will get complicated, very complicated. 

Long-term pays off, but CEOs go short…

By early 2020, short-termism was attacked by everyone from executives at Davos to environmentalists at not-for-profit groups such as the World Wide Fund for Nature.

Their frustration is unsurprising given the evidence of how bad it is for business.

In 2020, for example, the CFA Institute, the association for investment management professionals, estimated the cost of short-termism to S&P 500 companies at $79bn a year in forgone earnings.

Three years earlier the McKinsey Global Institute found that companies which took a long-term approach had 47 percent stronger cumulative revenue growth, with less volatility, than other groups.

Yet 70 percent of executives surveyed by McKinsey last year believed that their CEOs would sacrifice long-term growth for short-term financial objectives.

Read more in this very insightful article.

How much is a tree worth?

Here’s the story that investors seek to build a market for nature. When you think of it, we live in one global capitalist system in various forms and shapes, thus market-driven, and in that scenario most of the things in our world should have a price-tag.

Like your love for your friend or partner; your feelings or companionship when you do sports; your care for your elderly parents; your relationships, feelings, experiences.

Let’s price it all. And now that we’re at it, let’s price natural resources, bees, trees, grass, swamps, rivers, oceans, rain, tigers, elephants, mosquitoes and let’s package them into a financial instruments and let’s sell them to each other. Or?

The notion that we own nature is sick. The notion that we, in our divine ignorant power, have the right to price nature is probably not going to go away, but do we really understand the consequences of this? 

A framework for the financial industry

A recent report that made a big impression on me is this one from the the 2 Degree Investing Initiative. The report introduces a ‘Impact Management System’ for the financial sector.

In order to remain well-below the 2 degree limit by the end of the century, the financial sector needs frameworks for setting up climate strategies designed to contribute to climate change mitigation.

The report gives so many good insights and provides practical tools that the financial institutions can use. As always, we have the tools, but the devil is in the implementation, motivation and incentives.

A call for action from Nobel Prize Laureates

There is hope, and there are words and people that can ignite that hope. The brightest and most focused people among us are the Nobel Prize Laureates. This is their message to the world:

“Global sustainability offers the only viable path to human safety, equity, health, and progress. Humanity is waking up late to the challenges and opportunities of active planetary stewardship. But we are waking up. Long-term, scientifically based decision-making is always at a disadvantage in the contest with the needs of the present. Politicians and scientists must work together to bridge the divide between expert evidence, short-term politics, and the survival of all life on this planet in the Anthropocene epoch. The long-term potential of humanity depends upon our ability today to value our common future. Ultimately, this means valuing the resilience of societies and the resilience of Earth’s biosphere.”

ExxonMobil wants you to feel responsible

And now, perhaps the mind-bomb that will help you understand one of the things I addressed some time ago: We must not blame consumers for climate change. The issue is systemic and we are barking up the wrong tree when we focus on the individual.

Interestingly, as it turns out, the idea that we should focus on the consumer originates from the oil majors, e.g. Exxon and BP, who have deliberately shifted the focus away from their own role.

We now have a comprehensive view of Exxon’s strategy, thanks to a new peer-reviewed study by Harvard research associate Geoffrey Supran and Harvard science historian Naomi Oreskes in the journal One Earth. In a painstaking analysis, they show how hard Exxon has worked to keep the conversation about climate solutions focused on the consumer, effectively individualizing responsibility for the problem.

“Never before has it been proven that fossil fuel propaganda is demonstrably one source of where this [consumer- and demand-focused] mindset has originated from,” Supran said.

Blaming the individual user, rather than the producers, is a well-worn tactic of other industries with dangerous products, including tobacco and firearms. In the case of fossil fuel products, individualizing the responsibility for climate change obfuscates the responsibility of companies like Exxon – one of 20 companies responsible for one-third of energy-related global carbon emissions since 1965 – to extract fewer fossil fuels and shift to cleaner technologies.

According to Oreskes and Supran, not only has this messaging strategy allowed Exxon to “downplay its role in the climate crisis,” it also continues to be used “to undermine climate litigation, regulation, and activism.”

Read more here.

A natural mystic…

When I write these newsletters I usually listen to music from all parts of the world. It’s an old habit and a nice way to travel in the mind.  

And this week, let’s end with a song by Bob Marley:

There's a natural mystic
Blowing through the air
If you listen carefully now you will hear
This could be the first trumpet
Might as well be the last
Many more will have to suffer
Many more will have to die
Don't ask me why

Things are not the way they used to be
I won't tell no lie
One and all got to face reality now
Though I try to find the answer
To all the questions they ask
Though I know it's impossible
To go living through the past
Don't tell no lie

There's a natural mystic
Blowing through the air
Can't keep them down
If you listen carefully now you will hear
Such a natural mystic
Blowing through the air

There's a natural mystic…

Best regards,
Sasja