50 shades of green
27 Jan 2022 | Green is planet, green is money, green is naive.
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đˇ Should we worry about a green bubble? Fears grew last year; now, âthe explosion of green finance incorporates features that look uncannily similar to earlierâoverheatedâbouts of financial innovation.â Except⌠unlike previous bouts of innovation, such as mortgage-backed securities, ESG vehicles arenât 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.
đ¸ One exception: clean energy, which probably is overheating. Does that matter? Writing about Web3, Tim OâReilly observes two types of bubble: the tulip kind and the Industrial Revolution kind. Disruptive technology requires infrastructure, whichâfor almost every transformationâis 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.
âď¸ 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. Thatâs 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 EUâs decarbonisation aims. As green tech demand grows, it may need to start mining again.
đˇď¸ 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 isnât traditional green. Perhaps binary labels donât work for non-binary issues, perhaps investors should use their discretion, IDK.
đŹ âEven though corporate purpose statements are appearing everywhere, for most companies, itâs business as usual with some pretty tinsel on the side.â SASBâs 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 âshallow and flimsyâ comms âlacking substance and any mechanisms for accountability.â
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 isnât 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 âgreenâ investment.
Gas and nuclear might not be seen as green, but theyâre 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 notâeven if it doesn't factor into official EU emissions figures.
As hard as it is to separate green from brown, the EUâs job is further complicated by the fact that green denotes something: Goodness. Green = ethical; brown = unethical. Except, except, except: green energy alone canât 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 Pebbleâs James Esdaile: âIt may be acceptable tradeoff, but pretending thereâs 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.â
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 âEâ very often trend towards badness on âSâ 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?
Letâs assume:
- Broadly speaking, no company/action is âgoodâ or âbadâ;
- 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. donât be disingenuous;
- Accountability for all company/action outcomes, i.e. donât ignore the real world.
Stepping up to the plate as a case study in what not to do and reinforcing the thesis that there isnât a single shade of brown, Exxon has, in one week:
- Countersued critics who say itâs 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).

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 Gizmodoâs Brian Kahn writing âExxonâs pledge to have its operations reach net zero by 2050 is like saying youâll stop smoking while buying cartons of cigarettes and handing them to school kids.â
Only⌠itâs not really, is it? There isnât a global socioeconomic need for cigarettes (sorry, smokers) like there is for energy.
A better analogy: Exxonâs 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 Europeâs de facto gas supplier.
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