Week 42: Welcome to a new era of local

In this issue: ▸ ESG is from the West ▸ A new wave of local is coming ▸ The greenwashing continues ▸ Is carbon capture a viable solution? ▸ And much more...

Oct 23, 2022

Dear all,

“All economics will be local.” I had to dwell on this one. Read it several times, make the words sink in. Local. Economy.

We are children, slaves and kings of a globalised world. The globalisation circus is just one click away.

This is even more true when we look at the ESG landscape.

The context in which ESG investments and activities are deployed is dominated by the western, or rather Anglo-Saxon world view. This is counterproductive and not what ESG investments, in their core, are intended to contribute too.

What “we” do in the West is supposed to be a role model for the rest of the underdeveloped, corrupt, unequal world that needs to pull itself up from its treacherous reality.

Our “values”, dominated by words rather than deeds, are supposed to make people and business leaders in the Global South and Global East inspired and encouraged, so they also can shift towards a “sustainable” future.

Well, many of the political and even business leaders in other parts of the world sometimes look at our “narrative” and wonder if we really live on the same planet. Sometimes it feels like we don’t.

India off the grid, 100 million in extreme poverty

For example, did you know that 13% of Indian households still don’t have access to grid-connected electricity?

A survey suggests that nearly 87% of the country’s population has access to grid-based electricity, while 13% either use non-grid sources for electricity and lighting or don't use any electricity at all.

So 13%. And India has 1.4 billion people... Well, you get the picture.

And on that note, according to the World Bank’s ‘Poverty and Shared Prosperity Report 2020’ the estimate is that 88-115 million people worldwide will be pushed into extreme poverty (living on less than $1.90 per day) in 2022 as a result of Covid-19.

We need local, not global ESG

ESG investments are not deployed where they make the biggest difference. We know this. How many ESG funds do we have who are investing in Africa, broader Asia, central America or Eastern Europe? Barely few.

ESG investments today are cajoling the current world order that got us where we are today. African is resource pool, Asia is factory muscle, central and south America are tourist destinations. A globalised ESG dominated by “our approach to rule them all” is all but the solution we need.

The punishment Asian companies get for their own view on governance and loyalty that some of the board members vow over decades to one company is seen as weakness by ESG rating agencies in the West. “We know this is not good”. Well. This globalised world of ours is going to become more localised, and it will look far different from what we have experienced so far.

A new wave of local is coming

Long before the pandemic or Russia’s war in Ukraine, a host of shifts, demographic, geopolitical, technological, was moving the world away from the one-size-fits-all globalisation and towards a more heterodox world of economic policymaking and business models better suited to local interests.

A wave of technological innovation is making it possible to move jobs and wealth to a far greater number of places. A generation of millennial workers and voters are pushing politicians and business leaders alike to think about local sustainability rather than just global growth.

Some people feel that there is no middle ground between unfettered, 1990s-style hyper globalisation and the nationalism (or even fascism) of the 1930s. But there has always been a shifting balance between national interests and global ones; too much of the former results in protectionism or worse. Too much of the latter means that many lose trust in the system.

Globalisation isn’t dead – it’s just different

Today, we are entering a new era of localisation. That doesn’t mean that all things global will fade. Quite the contrary – business, policymakers and society as a whole need a bit more focus on the local to ensure continued buy-in for globalisation. Ideas and information will still flow across borders (although there will be limits on that depending on geographic differences in privacy and data regimes), as the world economy becomes ever more digital.

Capital too, will be mobile, although it’s unlikely to be quite as unfettered as it has been in the past. There will be more limits on what financial institutions in liberal democracies can do to fund autocratic governments or degrade the economic wellbeing of citizens in their own home countries, as there should be.

There will also be a rethink of trade rules, labour rights, and how to figure both the costs, as well as the benefits, of economic growth into the data that policymakers use to shape our world. Think citizens, not consumers. With the rise of the stakeholder capitalism movement, there is a swing away from consumer welfare to the national wellbeing of citizens.

Politicians are pushing business to think about their impact on entire communities, not just consumers. And customers want to know whether the companies they buy from are good local and global stakeholders. In an era in which politics matters more than it has in half a century, Main Street, not Wall Street, will be ascendant. That means that values, enforced by laws, will begin to matter more.

The ‘visible hand’ of the law

While Adam Smith, the father of modern capitalism, held that in order for free markets to function properly, participants needed to have a shared moral framework, the global economy today is made up of a huge number of nations with extremely different values and political systems tied together in deals that were more often than not crafted and approved by global technocrats rather than elected officials.

Ironically, the shift towards global market interests has led to exactly the kind of nationalism that the creators of institutions such as the IMF, the World Bank, and the World Trade Organization wanted to avoid.

Like both Keynes and Marx, Hayek, who is as much as anyone the father of “neoliberalism”, believed that the markets didn’t necessarily revert to equilibrium. They needed to be controlled by a “framework” that would connect capitalists and business people around the world, allowing them to float above the socialist interests of labour, or the fascism of the 1930s. As law professor Ernst-Ulrich Petersmann, one of Hayek’s students, put it: “The common starting point of the neoliberal economic theory is the insight that in any well-functioning market economy, the ‘invisible hand’ of market competition must by necessity be complemented by the ‘visible hand’ of the law.”

Law is about values, and countries and regions have different ones. From surveillance capitalism to concepts of corporate power, values and the laws that enforce them will increasingly shape the market as well as ESG.

Read more in this piece by Rana Foroohar in Financial Times.

Why defensive weapons should never be classified as an ESG investment

The Russian invasion of Ukraine has influenced how investors categorize sustainable investments. More precisely, an invasion has been used as an excuse to label investments in companies supplying weapons used in self-defense to fight against Russian aggression as socially sustainable since they are a tool helping democracy to repel the invasion of the non-democratic counterpart.

Suddenly, the weapons industry started becoming an entirely acceptable sustainable investment asset.

This demonstrated that weapons are not the cause but only the result of flawed sustainable investing thinking, which can sometimes be based on ideas that vary widely in terms of consistency and accuracy.

This paper – of which I am one of the authors – discusses some of the reasons underlining systematic problems in the sustainable finance realm and lists why defensive weapons can never be classified as an acceptable asset to invest in.

The greenwashing continues

Feeding the consumer masses of the western world with the… well.

The Authority, which is the UK’s advertising watchdog and has powers to ask brands to pull adverts when they break industry codes, has published a new report looking at how consumers understand some of the most commonly used climate-related terms.

The findings throw up some key considerations for brands. According to the ASA, the most frequently-used environmental claims in advertising in the UK are now ‘carbon neutral’ and ‘net-zero’. The body found that members of the general public typically did not understand what these terms meant, with those least engaged in environmental issues likely to ignore them.

Most of the people the ASA interviewed believed that, in making these claims, businesses were not taking an offsetting-first approach – instead, they were believed to have been reducing their absolute emissions in-house. When the ASA explained that brands could technically claim carbon neutrality by offsetting alone, a majority said they would feel misled.

The Authority found that most people probably believe that the aviation, road transport and energy sectors are doing more in the way of in-house emissions reductions than they truly are. To cry or to laugh?

HSBC ads banned for greenwashing

On that note, the UK’s advertising watchdog has recently banned a series of HSBC’s advertisements for being misleading about its green credentials by not mentioning the bank’s financing of fossil fuel projects and links to deforestation. The ruling sets a precedent for the financial sector, marking the first time the regulator has barred ads by a bank on greenwashing grounds.

The Advertising Standards Authority said on Wednesday that HSBC could no longer run the series that promoted the lender’s planting of trees and its plans to reach net zero greenhouse gas emissions.

Consumers would not necessarily understand that HSBC, which made “unqualified claims about its environmentally beneficial work”, would be “involved in the financing of businesses which made significant contributions to carbon dioxide and other greenhouse gas emissions”, the ASA said.

And in how many ESG funds is HSBC one of the favourite stocks? A lot.

And “we” tell the developing countries what the sustainable transition is about? Yeah.

Our western solutions to tackle the climate-disaster that will hit the most vulnerable people around the world do not work. Period. They do not work.

Is carbon capture a viable solution?

The IPCC (United Nations’ Intergovernmental Panel on Climate Change) scenarios for reaching the net zero emissions target lean on capturing and storing carbon among other means of removing carbon from the atmosphere, especially in heavy industry sectors such as cement, steel and natural gas processing where renewable energy cannot be easily deployed.

The International Energy Agency’s highly influential net zero 2050 scenario relies on hundreds of billions of dollars being spent over the next 25 years to capture billions of tonnes of carbon emissions every year from thousands of industrial sites around the world.

“The scientific consensus is we cannot hit important climate targets without [CCS],” says Julio Friedmann, chief scientist at Carbon Direct, which works with companies on carbon removal projects, and a former Department of Energy official in the Obama administration.

The underlying mechanics of carbon capture and sequestration technologies are well established and have been largely unchanged for decades. The CO₂ is captured at the point of emission at big industrial or power plants and run through a chemical process that separates the carbon pollution from the rest of the emissions. It is then compressed, pumped through a pipeline, similar to natural gas, and injected into reservoirs similar to those that hold oil and gas deep underground.

The gas can also be converted to fuels and chemicals to be sold on, a process known as utilisation (CCU). Oil and gas companies have latched on to the technology as a climate fix in part because they see their decades’ of experience pumping hydrocarbons out of the ground giving them an inherent advantage stuffing CO₂ back into the ground.

Unlike other major green technologies such as wind and solar power, carbon capture is an industry that scarcely exists today. Critics argue the money would be better spent on things such as wind, solar and batteries, pointing to a history littered with failed high-profile carbon capture projects, cost overruns and unmet promises about its ability to quickly bring down emissions.

There’s this enormous divergence between this idealised world where carbon capture works really well, gets really cheap, and doesn’t have any other problematic impacts.

Carbon capture and storage projects gone wrong

The $1bn Petra Nova CCS project at an NRG coal-fired power plant just outside Houston, was a flagship project for the industry when it launched in 2016 and received almost $200mn in federal taxpayer money. But just four years later it was mothballed having suffered from lengthy shutdowns and technical glitches that caused it to miss its CO₂ capture targets.

Carbon capturing equipment attached to the $54bn Gorgon liquefied natural gas project in Australia, run by Chevron, Exxon, Shell and a group of Japanese investors, was supposed to cut a path forward for the country’s lucrative gas export business to radically reduce its emissions. But problems with the project’s storage reservoir and faulty equipment have led to fines for missing storage targets.

A decade ago, the Norwegian government pulled the plug on a flagship CCS project at the Mongstad refinery, part of an effort the country’s then prime minister equated to the nation’s own “moon landing.” Costs at the project soared well beyond initial estimates and low European carbon prices at the time undermined its potential profitability.

Most projects in the US today rely on selling captured CO₂ for use in so-called enhanced oil operations, in which the gas is pumped into ageing oilfields to increase crude output. But critics argue this undermines the environmental benefit and the amount of CO₂ that can absorbed for oil recovery is limited. Others sell CO₂ to industrial users, but it is a small market.

It’s time to put up or shut up on CCS.

Social what?

The social EU taxonomy is gone, or let me put it this way, it has been shelved.

Earlier this year, gas and nuclear were included in the EU’s green taxonomy, causing a considerable political wrangle across the continent. And while that argument still rages, Europe’s goal of becoming a benchmark for other regulatory regimes on ESG has been shelved.

The European Commission originally promised a report by the end of 2021 to detail how it would create a social taxonomy. That process is unfinished, meaning no guidelines have been put forward by the EU’s executive branch. In February, the EU’s Platform on Sustainable Finance, which advises the Commission, published a set of proposals for the social taxonomy. It provides details on guidelines for gender equality and humane supply chains, among other issues.

Yet, the proposals did nothing to expedite the process. One reason cited for shelving the social taxonomy is infighting. Another is the Commission’s exhaustion following the green taxonomy row. Either way, the lack of progress has disappointed investors and led to questions about the standards for social lending and investing.

The social taxonomy is the planned classification of economic activities that contribute to the EU’s social goals and provide guidelines for investors, businesses and regulators concerning what is and is not sustainable from a social perspective.

The social taxonomy would represent, in many ways, a change in the priorities of sustainable finance. The European Commission set up a technical expert group (TEG) on sustainable finance in 2018 to assist it in developing an EU classification system – the “EU Taxonomy” – to determine the environmental sustainability of economic activity. TEG presented the first draft of the social taxonomy in July 2021, with the final report released in February 2022, aiming to encourage sustainable investment in Europe.

ESG on a Sunday