Week 36: Can you hear the ticking too?

In this issue: ▸ The ticking is getting louder ▸ We still invest in fossil fuels ▸ And the fossil fuels keep ticking ▸ World’s biggest carbon-sucker ▸ And much more...

“The ultimate, hidden truth of the world, is that it is something that we make, and could just as easily make differently.” – David Graeber

Dear all,

The ticking becomes louder in the evenings. I can hear it during the day as well, a persistent, low frequent, hammering sound. In the beginning, I thought it was because my ears were slightly damaged, due to loud music or noise.

Late in the night, I would sit down in a quiet space and try to localise it in me. Try to locate the ticking in my head.

At some point I realised that it’s not my ears that are damaged. The ticking is something else. It’s the ticking of our time, ticking of days, months. That inevitable, primal human feeling of time. Ticking. Transforming realities and ourselves in these realities.

It’s the ticking of promises, hopes and expectations. A non-linear, circular, almighty ticking reminding us about the beginnings and the ends, about the distances we need to cover.

It’s the ticking banking sector, ticking fossil industry, ticking politics in a cacophony of images, messages and frameworks. And all the faces of the people behind that ticking, ticking for the bigger ticker, being part of a huge machinery of ticking.

There’s people behind all of it. Flesh and blood. Every day ticking, hoping to be seen, acknowledged and respected, striving to do their best and deliver on expectations and targets. People.

The financial industry is one of the biggest industries in the world. Tens of millions of people working this sector, ticking. Every day. Imagine the force. Imagine the power of ticking. Imagine if the ticking changed its direction, moved to another frequency, gaining momentum, had a purpose.

Albeit slowly, you can see that transformation in front of you. Some people ticking in the financial system are trying to change the way it all ticks, to something very different from what we face today. 

We still invest in fossil fuels

So what is it that we face today? What is the current ticking all about?

Well, currently the financial sector is essentially bankrolling the mass extinction crisis, while undermining human rights and indigenous sovereignty.

In 2019, the world’s largest banks invested more than USD 2.6 trillion (the same as the entire GDP of Canada) in sectors which governments and scientists agree are the primary drivers of biodiversity destruction.

The question is what people working in this sector (yes, the people) feel about this?

Do we feel anything or do we just rationalise the lack of action with “we are doing our job”, “incentive models are constructed that way”, “if we don’t do it, someone else will”, “argh, it’s not as bad as the media reports”?  

As with any other entity in the world, the financial institutions are the people that work in these institutions. People who make decisions, people who act on the realities they analyse as relevant and important. Yes, the people in financial industry.

It makes you wonder when you read that the 60 largest banks invested $3.8 trillion into fossil fuels in the five years after the Paris climate deal.

While the coronavirus pandemic did cause a small drop in fossil financing, the combined 2020 total is still higher than that of 2016.

Comparing the combined financing totals for all 60 banks from 2016 with that of 2020 found that the total funds devoted to the fossil fuel sector have increased, even as major banks have made commitments to carbon neutrality in the coming decades.

This does not come from some mumbo-jumbo analysis. The reports behind used transaction data sources from Bloomberg Finance LP and weighted each transaction on the proportion of the borrower’s operations devoted to the sector in question, adjusting for each company’s overall fossil fuel assets or revenue.

You can find reports here and here.

And the fossil fuels keep ticking…

As it is, fossil fuels continue to dominate the global energy system, accounting for 81% of primary energy demand.

After decades of growth, their rate of production and use will need to reverse and decline rapidly to meet internationally agreed climate goals. There are some promising signs, with global coal production peaking in 2013, and oil output estimated to have peaked in 2019 or be nearing peak demand, even by some industry commentators.

The plateauing of production and subsequent decline will mean that large amounts of fossil fuel reserves, prospects that are seen today as economic, will never be extracted. This has important implications for producers who may be banking on monetizing those reserves in the future, and current and prospective investors.

Investments made today in fossil fuel energy therefore risk being stranded. Very big ticking. However, there continues to be a disconnect between the production outlook of different countries and corporate entities and the necessary pathway to limit average temperature increases.

The USA sees production growth until 2025, peaking at 16.9 million barrels per day, before constant decline out to 2050. Ticking. This initial increase is due to several factors including falling imports of oil into the USA, the continued use of oil in the transport sector before strong growth in low-emission vehicles and the flexibility of light tight oil due to its production dynamics (that is, high production growth and declining rates from tight oil wells).

This is the latest report on the state (and ticking) of the “stranded assets”. And please have a look at the numbers in that report. They tell their own story. 

The world’s biggest carbon-sucker

As we know, there are solutions. For ticking. For people. Technology.

This week, the world’s biggest carbon-sucking machine was switched on in Iceland.

The largest direct air capture (DAC) plant in the world opened on 8 September in Iceland. Operated by the Swiss engineering startup Climeworks, the plant, known as Orca, will annually draw down a volume of emissions equivalent to about 870 cars.

Orca will boost total global DAC capacity by about 50%, adding to the dozen or so smaller plants that are already operational in Europe, Canada, and the US.

The plant is composed of eight boxes about the size of shipping containers, each fitted with a dozen fans that pull in air. CO2 is filtered out, mixed with water, and pumped into deep underground wells, where over the course of a few years it turns to stone, effectively removing it from circulation in the atmosphere.

This business model – the sale of offsets – is how Climeworks is approaching a key problem for the nascent DAC industry: How to make money.

The alternative is to sell the captured CO2 to manufacturers who can use it as a raw material for cement and other products, or to oil companies that, ironically, use it to help dredge up more oil. But those customers are more accustomed to prices around $100 per ton. 

Doing good or feeling good? That’s the question.

I’ve written about it before, but now there’s more data supporting the observation: Fund companies are rebranding their out-of-fashion investment offerings as green, hoping to grab a portion of the cash pouring into sustainable products. In some cases, the rebranding has been in name only.

Last year, companies that manage mutual funds and exchange-traded funds rebranded a record 25 funds as sustainable, according to Morningstar.

They say these funds have adopted investment strategies that utilize data on companies’ ESG performance to pick stocks. Since 2013, fund companies have rebranded 64 funds, which had $35 billion in assets as of June. 

There are vast inconsistencies between the stated climate objectives of money managers and “the reality of their investments.” While perhaps an unsurprising statement given all the reporting on Wall Street greenwashing, this conclusion by Paris-based business school EDHEC is tied to a more nuanced assessment of strategies behind climate-focused funds.

While asset managers talk at length about the use of climate data to construct their ESG portfolios, many funds aren’t run “in a manner that is consistent with promoting such an impact,” EDHEC academics wrote in a 65-page report entitled “Doing Good or Feeling Good? Detecting Greenwashing in Climate Investing”.

Even though investors and managers communicate extensively about the use of climate data to construct their portfolios, these data points represent at most 12% of the determinants of portfolio stock weights on average. Looked at another way, this means that 88% of what guides a climate fund is what you’d find behind any other, non-green investment. 

Read more here and here.

Do finance people invest in ESG themselves?

Ok, people in financial sector, do we really want this? It this reflecting who we are? Our values, purpose, our contract with the societies we live in. Is this what makes us proud when we meet our children, friends, families, our clients? Is this how we want to contribute to the transition to a sustainable future? 

Do our clients really want to be fooled because we think they want to be fooled, that we are smarter, understand more? That this is just like any other game we have played many times before.

“Yeah, it will pass, as many other things. Today it’s ESG, tomorrow it’s something else. Clients want ESG, let’s give them what they want. We rename, repackage, rebrand.”

It would be interesting to see how much we, the people in the financial industry, have invested in ESG funds, products and solutions ourselves. How much of our own “medicine” do we consume?   

We, the people working in this industry, need to change this. Now. We can do better, much better. 

That’s all for now… while the ticking goes on.

Best regards,