About a decade ago, investing on ESG principles went from budding concept to moral crusade. About the same time, it emerged as one of the prime tools to fight climate change.
In simple terms, ESG – environmental, social and governance – meant investing responsibly. Grubby, carbon-intensive businesses were, in effect, to be punished unless they moved fast to clean up their acts. If they didn’t, investors and customers of the saintly variety wouldn’t buy their shares or products.
Companies that did not wreak planetary destruction in the pursuit of profits were to be rewarded. Out with the “bad,” in with the “good,” even if the latter could never be adequately defined. Were Amazon and Tesla “good” companies because they didn’t dig great gobs of fossil fuels out of the ground? Apparently yes, given their spectacular stock market performances. Never mind that Amazon’s gasoline-powered trucks filled the streets or that Tesla’s global supply chain extended to distinctly ESG-unfriendly cobalt mines in the Democratic Republic of the Congo.
What was certain was that oil, gas and coal companies, and most mining companies, suffered the ESG backlash, turning them into market laggards and raising their cost of capital. Their lives were made more miserable by the new ranks of ESG crusaders – among then Mark Carney, Michael Bloomberg, Klaus Schwab (founder of the World Economic Forum) and just about everyone on the United Nations payroll – who promoted the glories and rewards of ESG investing.
Even Wall Street got into the game. Its investment banks were obviously attracted to the notion of financing the transition to a low-carbon economy. Existential threats to the planet didn’t preclude commercial opportunities with lavish profit potential.
The ESG craze was not the main cause of today’s energy crisis, which is especially acute in Europe and China, but it certainly contributed to it by propelling investment dollars away from the “black” economy and toward the “green” economy.
Guess what? When you crunch spending for oil, gas and coal exploration and production, but keep using those commodities, prices soar – and keep soaring when renewable energy is incapable of filling the gap. Globally speaking, renewables supplied only 12 per cent of the energy market in 2020, according to the International Energy Agency. Almost 80 per cent came from oil, gas and coal, with small bits from nuclear and biomass.
The downside of ESG has been suddenly exposed, and we’re all paying the price. Prices for gas and coal, which are used to produce electricity, and electricity prices themselves have all set records recently. Crude oil has doubled in the past year.
While prices will likely fall somewhat – the best cure for high prices is always high prices – they probably won’t see their old levels any time soon.
Years of declining investment in fossil fuels will be reversed, but it can take five or 10 years to bring on new supplies. The oceanic and atmospheric phenomenon known as La Niña could trigger another cold winter and Russia is not sending enough pipeline gas to Europe. Talk of another commodities “super cycle,” like the one in the years before the 2008 financial crash, may not be farfetched.
ESG investing did not contemplate such shortages. The gusher of investment funds toward renewable energy was supposed to make oil, gas and coal die an uneasy death in the name of preventing runaway global warming.
Indeed, it became unfashionable for politicians, CEOs, environmental charities and scientists to point out that a worthy and essential moral cause might not be up to the job; ESG was simply adopted as gospel. Most of the big mining companies, including Rio Tinto and Anglo American, sold or spun off their coal divisions or announced that their coal reserves would be depleted, as Glencore has. They did so because they feared that they would become stock market pariahs if they kept the dirtiest bits of their empires.
Everyone loved ESG. The Green parties loved the flow of government subsidies to green initiatives, from rebates for electric cars to tax incentives for wind and solar farms. Investment bankers loved the renewable energy deals. Fund managers flogged ESG-friendly funds. Politicians touted the benefits of going green, promising endless new jobs and healthier lifestyles. No one consulted a technician or engineer to find out whether ESG could actually help shield us from energy shortages and price shocks.
The solution is not to kill off ESG. We need scads more renewable energy if we are to meet the UN climate goals and take the edge off future energy price spikes. But at the same time, we have to be realistic about the length of the transition to the green economy. It will take decades. In the meantime, we cannot abandon all fossil fuels if we need to keep the lights on.
Above all, ESG – a private-sector attempt to get businesses to green themselves up – needs help from governments. Governments need to fund the invention of green technologies, such as battery technology, improve energy efficiency standards in homes and offices, encourage energy conservation and, above all, tax carbon emissions in an equitable way. The current energy crisis has proved that ESG investing by itself can’t change the world fast enough – or without costly disruptions.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.