Week 46: A real nightmare

In this issue: ▸ The COP nightmare ▸ The “WTF” report ▸ Plastic reality ▸ ESG shows free markets are working ▸ And much more...

Dear all,

What a nightmare. Elon, the newly elected president of USA, was… No, not that nightmare. The other one. Ah yes. Ok, here it goes.

People were on the streets celebrating the launch of a global price on tonne of emitted CO2. Oil and gas companies were informing their shareholders about the reserves that will stay in the ground. The financial industry was assessing the real cost of business based on the new global price of CO2 emissions which was rapidly shifting flows of investments. Overnight, valuations and stock prices were adjusted to reflect the real potential and the real risk. News outlets, social media channels flooded by updates on how things, this time, certainly will change. Corporate CEOs together with government officials around the world were launching cooperative programs to enable a just transition for millions of workers affected by the sudden shift. The air was thinner, brighter, crispier. NGOs around the world began collaborating on global and regional reconciliation commissions between the corporate and public sector to protect Mother Earth. A new dawn of humanity.

I woke up. Feverish, bathed in sweat in a dark room, gasping for air. After a couple of minutes in the dark, eyes adjusted, I could see a dot of light right under the door. I stepped outside, hesitatingly. I walked over the floor to reach my phone, almost scared. In that short moment between the door and phone my mind processed selectively. That fearful feeling of discovery. Opening my phone, looking at the stream of news, updates and messages. Nothing. Even worse than nothing. Nothing multiplied with less. I sat down on the chair looking out in the dark Nordic November morning. An unpleasant, cold, raw morning, feeling utterly stupid.

Engineered failure. Man-made. Not one of the 40 markers of climate action are on track to meet the targets that governments have agreed. In the first nine months of this year, the seven biggest private sector oil companies made around $150bn in profits. Yet governments continue to supplement this loot by granting oil and gas companies $64bn a year in public subsidies.

There are no longer any feasible means of preventing more than 1.5C of global heating if new oil and gas fields are developed. Yet fossil fuel companies, with the encouragement of the governments that either own or license them, are planning a major investment surge between 2023 and 2025. The biggest planned expansions, by a long way, are in the US. The soft facts – the vague and unsecured promises at Sharm el-Sheikh about curbing consumption – count for nothing against the hard facts of extending production.

The rich world’s governments arrived at the conference in Egypt saying “it’s now or never”. They left saying “how about never?” For how much longer will we sit and watch while our governments throw it all away? Yeah, this sounds so activist-like, almost arousing. Doomsday-like. It is all good, we got this. Step by step. Rome was not built in one day, or declined in one year. But people in the Rome never realised it was declining…

Now, for the sake of sanity and realism, we need to look at the science, I guess? Or is science also a “matter of view”?

I recommend you read George Monbiot’s opinion piece on COP27 here.

Oil prices fell sharply…

Melting glaciers in Europe, North America and Greenland could release more than 100,000 tonnes of potentially harmful bacteria, researchers at Aberystwyth University have found, underlining the need to slow global warming.

Vast amounts of bacteria could be released as the world’s glaciers melt due to climate change, scientists have warned. Potentially harmful pathogens are among the thousands of microbes that could leak into rivers and lakes. The team at Aberystwyth University estimated the situation could result in more than a 100,000 tonnes of microbes, such as bacteria, being released into the environment over the next 80 years – a number comparable to all the cells in every human body on earth.

The team’s calculations are based on a “moderate” warming scenario, as developed by the IPCC. This would see global temperatures rise by between 2C and 3C on average by 2100. As the flow of microbes into rivers, lakes, fjords and seas increases, there could be “significant” impacts for water quality, the team explained. But this would be followed within decades by the microbe tap being turned off, as the glaciers disappear completely. 

But who cares, right? The big news this week is… brace yourself now… Oil prices fell sharply in the week!

This happened as mounting concerns about weakening fuel demand in China outweighed fears that Russian supply could drop next month when tighter EU sanctions on its crude exports come into force. West Texas Intermediate, the US benchmark, lost about 10 per cent this week, falling 1.9 per cent on Friday to settle at $80.08 a barrel.

It was the biggest weekly loss since March. US oil prices fell by more than 4 per cent to $78.50 a barrel earlier in the day, to what was the lowest price since September. The WTI futures curve also switched into mild contango – a market structure in which the forward price of a contract is more expensive than the spot price, and which reflects perceptions of oversupply.

Read more here.

“WTF” report… 

Apart from its better known meaning, the acronym WTF stands for “Where’s The Finance”. It’s a new report from an expert group on climate finance chaired by economists Vera Songwe and Nicholas Stern, and it lays out some serious suggestions for how the enormous funding gap can be closed.

In developing countries, excluding China, it says investment of $2.4tn a year will be needed by 2030 – roughly triple the level of 2019.

The report stresses that about half the additional funds can be mobilised within the countries themselves – notably through strengthening capital markets and tax systems, and by scrapping or reducing fossil fuel subsidies. Its focus, however, is on external finance – and it makes clear that there are some very low-hanging fruit here.

The report adds to the pressure on the World Bank and other multilateral institutions, urging them to take a much more proactive stance on climate responses and the energy transition. It calls for a redrafting of the institutions’ mandates, with mission statements that “clearly reflect environmental sustainability, given its fundamental impact on development”.

You can read the WTF report here.

Plastic reality…

Global efforts to reduce plastic pollution in oceans has failed, according to a report released on a biodiversity day in Sharm el-Sheikh by the Nippon Foundation Ocean Nexus Center.

Almost 14mn tons of plastics end up in the ocean each year, comprising about 85 per cent of ocean trash, according to the report. Plastics and their associated chemical additives are killing aquatic life and even harming humans as the additives travel through the food chain.

A crucial part of the problem is corporate accountability, the report said. Though specific companies are not named by the Ocean Nexus Center, the biggest producers have been oil major ExxonMobil, chemicals group Dow and Chinese oil refiner Sinopec.

Exponential expectations for ESG…

As ESG-orientated mandates fast become the default – not just in Europe but also the US – the race is on to shift allocations and retrofit existing funds to keep pace with investor expectations. But as vital as the conversion efforts are, they’re only a stopgap. As a new study published by Harvard underlines, long-term survival and success depend on the ability of asset managers to prepare for the next big shakeup in the market by differentiating their strategy and delivering on their purpose.

81% of institutional investors in the US plan to increase their allocations to ESG products over the next two years, almost on par with Europe (83.6%). Under our base-case growth projection scenario, ESG AuM in the US would more than double, from US$4.5 trillion in 2021 to US$10.5 trillion in 2026. Spurred on by recent landmark legislation that commits US$390 billion to fight climate change, the overall direction of travel among US investors is clear, even if the complexion of administrations changes and some state governments continue to push back on ESG.

Other global regions aren’t far behind. Asia-Pacific is projected to have the fastest growth in ESG AuM in percentage terms, albeit while starting from a much lower base than Europe or the US. AuM in Asia-Pacific will more than triple to US$3.3 trillion in 2026.

ESG investment products in the Middle East and Africa are also gaining market share from their base in well-established Shariah-compliant funds, though such growth in these regions is much smaller in absolute terms. And in Latin America, where ESG products now account for US$25 billion in AuM, investor interest is also growing.

Simply put, ESG-orientated AuM is set to grow much faster than the AWM market as a whole. In the study’s base case scenario, the share of ESG assets over total AuM would increase from 14.4% in 2021 to 21.5% in 2026, comprising more than one-fifth of all assets. Although the current growth is derived largely from retrofitted funds – at the end of 2021, 27% of funds in Europe had been repurposed to integrate ESG factors – the study’s authors believe that new funds will be set up, raising new capital.

Read the study here.

China… 

If ESG investing is going to remain legitimate, it needs to incorporate geopolitical concerns, democracy, and human rights. The international community and companies alike have made meaningful strides in curbing illicit trade practices.

For instance, growing global outrage to Chinese sponsored forced-labour, primarily targeting the Uyghur community, an ethnic and religious minority in Western China (most acute in the commodity concentrated region of Xinjiang), has led to ambitious global regulations to curb forced-labour production. This includes marquee U.S. legislation, The Uyghur Force Labour Prevention Act (and other global versions in Europe), requiring all American imports to prove products are not contaminated with Chinese forced labour.

Although progress has been modest, it is also important to caveat that several forced labour “unknown unknowns” still exist in the global supply chain, the scope and scale which the trade community is still grappling with. Progress has been made, but glaring limitations and inconsistencies exist within ESG ecosystems, which is, in part, a by-product of the trade community’s complex relationship with Beijing.

While ESG-compliant companies tout net-carbon goals, many continue to purchase or remain deeply ingratiated with carbon’s highest emitters, are direct or indirect beneficiaries of forced labour, and/or closely associated or complicit with the Chinese Communist Party, and their repressive practices. This holds particularly true in the energy and finance industries. The refinement and production of EV materials and solar panels remains problematic.

While dislodging Beijing’s grip on certain commodities will take time, the international community has only partly begun to understand the depth of companies’ production lines implicated in Chinese-forced labour practices. Despite all the risks and objectional practices (systemic censorship, tracking of persons, and other attacks on democracy/human rights), the world’s largest investment firms remain bullish on and deeply entrenched in China. Some have plans to triple their exposure to Chinese assets, undoubtedly driving significant investment flows back into Beijing’s economy. Others have even began issuing Chinese-based mutual funds.

ESG shows free markets are working…

What started a few months ago as isolated critiques of ESG has now exploded into a reactionary backlash. This dangerous rhetoric is now turning into policy, notably in states like Florida and Texas, with very real and very negative ramifications for investors.  

To understand how this happened, one must understand why ESG is practiced and why it has become so widely embraced. Investors, many of whom are signatories of the Principles for Responsible Investment, consider responsible investment factors because they know they can be material to the value and performance of investments.

There should be nothing controversial about investors taking facts into account. Primarily, the fact that climate change is real and poses a rapidly growing threat to the long-term feasibility of investors’ current holdings.

For example, the increasing frequency and magnitude of climate-related risks is causing insurance premiums on coastal properties around the world to rise, rendering some completely uninsurable. Investors should have the tools they need to fully consider relevant factors like these when making investment decisions over the long term. Read more in this opinion piece.

Have a great dream week! 

Sasja