50 shades of green

27 Jan 2022 | Green is planet, green is money, green is naive.

View from the top

🌷 Should we worry about a green bubble? Fears grew last year; now, “the explosion of green finance incorporates features that look uncannily similar to earlier—overheated—bouts of financial innovation.” Except… unlike previous bouts of innovation, such as mortgage-backed securities, ESG vehicles aren’t all that original under the hood. Most look like broad market funds with a tilt to tech (bubbly, but not due to ESG flows). The irony? Greenwash might save ESG from outsized liquidity shocks.

💸 One exception: clean energy, which probably is overheating. Does that matter? Writing about Web3, Tim O’Reilly observes two types of bubble: the tulip kind and the Industrial Revolution kind. Disruptive technology requires infrastructure, which—for almost every transformation—is developed in a bubble. Current valuations are financing the infrastructure and longevity of clean energy, in whose fundamentals both public and private equity investors appear to have faith.

⚒️ To reach net zero by 2050, the world must spend $9.5T annually on low-carbon infrastructure, finds McKinsey: $3.5T more than today. Infrastructure = raw materials = mining. That’s a problem for the EU, which represents just 5% of global mining and so depends on monopoliser China. But supply risks, not to mention emissions from unregulated projects and transport distances, stymie the EU’s decarbonisation aims. As green tech demand grows, it may need to start mining again.

🏷️ Could raw materials be a canary in the (coal)mine? This week, the EU came under fire for proposing gas and nuclear plants be labelled as green investments. On the one hand, member states need gas and/or nuclear in the transition; failure to invest in (highly regulated) regional companies could see power shift to autocratic regimes. On the other hand, gas isn’t traditional green. Perhaps binary labels don’t work for non-binary issues, perhaps investors should use their discretion, IDK.

💬 “Even though corporate purpose statements are appearing everywhere, for most companies, it’s business as usual with some pretty tinsel on the side.” SASB’s Robert Eccles hits the nail on the head re the recent storm-in-a-teacup re purpose. The issue is linguistic: investors expect targeted objectives and measurable outcomes that align with the interests of asset owners. Instead, they get “shallow and flimsy” comms “lacking substance and any mechanisms for accountability.”

50 shades of green vs. one shade of brown

Labels have an important job. Exit signs, for instance, or hazard symbols.

They help us organise facts into buckets. Under lockdown rules, honing your baking skills at home = OK; ambushing large groups of people with the output = not OK.

Problems arise, however, when there isn’t a binary delineation between the stuff a label covers and everything else: something with which the EU is now grappling as it seeks to clarify what exactly is and is not a ‘green’ investment.

Gas and nuclear might not be seen as green, but they’re not as not-green as coal. Renewables are generally considered green, but the long journey from mine to blast furnace to ship to infrastructure development is not—even if it doesn't factor into official EU emissions figures.

As hard as it is to separate green from brown, the EU’s job is further complicated by the fact that green denotes something: Goodness. Green = ethical; brown = unethical. Except, except, except: green energy alone can’t meet the needs of some 450 million EU citizens. Germany tried that, and failed, and now the EU is saying gas is green so people can keep their heating on, and investors will have to decide for themselves whether an investment is or is not green. Thanks a lot, guys.

With policy as with stakeholder capitalism, there will always be winners and losers. As summed up by Pebble’s James Esdaile: “It may be acceptable tradeoff, but pretending there’s no downside is doubly problematic. It is disingenuous. And it will create a constituency who know they must fight or be dismissed as irrelevant or, even worse, as morally undeserving.”

If green is an unhelpful label, ESG is even worse. Not only is no company categorically good or bad, but the investments that trend towards goodness on ‘E’ very often trend towards badness on ‘S’ and vice versa. Trying to fold every conceivable issue into a single score is, when you think about it, kind of insane.

If not ESG, then what?

Let’s assume:

  • Broadly speaking, no company/action is ‘good’ or ‘bad’;
  • Every company/action has a lot of real-world outcomes.

A good strategy (better than a purpose statement or ESG score) might include:

  • Honesty about all the good and bad bits, i.e. don’t be disingenuous;
  • Accountability for all company/action outcomes, i.e. don’t ignore the real world.

Stepping up to the plate as a case study in what not to do and reinforcing the thesis that there isn’t a single shade of brown, Exxon has, in one week:

  • Countersued critics who say it’s lied about the climate crisis, on the basis that lying is its First Amendment right (see: honesty);
  • Underwhelmed with a net-zero-by-2050 target that addresses only its Scope 1 & 2 operating emissions and not their use (see: outcomes).
Top 20 O&G companies by market cap (Oct 21). Environmental impact shown on scale from deep red (more negative) to pale pink (less negative). Calculated as company’s aggregated revenue alignment to SDGs 6, 12, 13, 14, 15

There are as many shades of brown as there are of green. Exxon lags its European peers in terms of the environmental impact of its products (all the stuff not included in its 2050 roadmap). Its net-zero plans were derided, with Gizmodo’s Brian Kahn writing “Exxon’s pledge to have its operations reach net zero by 2050 is like saying you’ll stop smoking while buying cartons of cigarettes and handing them to school kids.”

Only… it’s not really, is it? There isn’t a global socioeconomic need for cigarettes (sorry, smokers) like there is for energy.

A better analogy: Exxon’s pledge to reach net zero by 2050 is like the EU slapping a green sticker on renewables because all the brown activity that brought them into being happened in Other Places.

At least Exxon is doing better than Saudi Aramco, a company to which European investors should start paying attention. If homegrown gas becomes un-investable, and Russia cuts exports, it could soon be Europe’s de facto gas supplier.