Developing (market) polycrisis

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🔋 The International Energy Agency (IEA) has identified bright sparks in its annual assessment of the global power sector. The biggest carbon emitter is now leading the transition to net zero, according to the Electricity Market Report 2023, bringing the sector “close to a tipping point.” The IEA forecasts that new electricity demand will be almost entirely met by renewable and nuclear sources of energy from 2025, bringing clean energy, as a share of total generation, to 35% (2025) from 29% (2022). China is expected to account for 45% of clean-energy growth during that period, followed by the EU at 15%. It must be accompanied by greater investment in grid security, resilience, and flexibility, adds the IEA, which warns the sector will only grow more vulnerable to extreme weather events.

⛽ Plot twist: ‘Energy security’ isn’t the only reason fossil fuel companies might want to defend their revenue streams. Oil companies are finally being honest about renewable energy, reports The New Republic, as record profits prompt a rapid retreat from lofty commitments. Having pledged to cut oil and gas production to 40% by 2030, BP last week adjusted its target to a rather more modest 25% — during, incidentally, an earnings call on which the company announced its highest profits in 114 years. The about-turn is an assurance that fossil fuel production will increase well into the next decade, warns the FT’s Simon Mundy. Should that come as a surprise? As we’ve argued before, it’s naive to expect the industry to pivot voluntarily from a lucrative business to one in which it has less expertise and less profit.

🗳️ If the court of public opinion doesn’t cut it, there’s always the other kind. Non-profit group ClientEarth has filed a lawsuit against all 11 directors of Shell for failing to manage “the material and foreseeable risks posed to the company by climate change.” The first-ever attempt to hold directors personally liable for transition risk has garnered support from institutional asset owners and managers, many of whom are pushing listed FTSE companies to put their transition plans to the vote under a ‘Say on Climate’ resolution. Meanwhile, the FCA told firms to get moving with their transition plans ahead of formal regulatory guidance. There’s a lot to be done, according to a new report from CDP. Of nearly 20,000 companies disclosing in line with its framework, just 81 have a credible strategy to reach net zero by 2050.

Util in the news

Does Adani have a place in Article 8 funds? Speaking to Bloomberg, CEO Patrick Wood Uribe says the debacle exposes serious flaws in ESG ratings and indices.

Developing (market) polycrisis

Perhaps now more than ever, the state of sustainable development depends on where you look.

On the one hand, there’s the incredible rapid fire climate action emerging from global superpowers. Leaning towards public spending and tax breaks over carbon prices and regulation, policymakers are rolling out the red carpet for green industry, innovation, and investment. The new arms race is a powerful lever for tackling climate change, writes Hugo Dixon in Reuters. It’s also deeply unfair.

Discriminatory by definition, protectionist policies make for a rugged playing field. It’s a discomforting refutation of the Western democratic ideals represented, albeit imperfectly, by ‘free global trade’. In theory if not practice, the implicit promise of equal economic opportunity serves to mollify even the gross inequity of climate change, for which developing countries bear least responsibility and most brunt.

To make explicit that a country’s odds of competing in this industrial revolution were cemented in the last one? You’re not supposed to say that part out loud!

Economic bifurcation is a risk even within — and to — the single market, say critics of the EU Green Deal Industrial Plan. Relaxed rules on state aid could widen the chasm between countries that can afford to cultivate their clean-energy industries (France, Germany) and the more fragile economies that cannot. Right now, warns ESMA, there are quite a few of the latter.

And that’s just in Europe.

Deepening sovereign debt crisis

Briefing the UN General Assembly last week, UN Secretary-General Antonio Guterres made emerging economies the focus of his 2023 priorities. He has his work cut out. This year already, Egypt, Pakistan, and Lebanon have been forced to drop their exchange rates to unlock IMF assistance. No fewer than two dozen more countries are in the queue for bailout packages, reports Bloomberg.

Cleaning up the debt mess is just part of the solution to the deepening crisis, warn the FT’s Martin Wolf and Rebeca Grynspan, respectively. Just as important is a better framework for financing development, without which, parts of the world risk losing a decade to escalating disasters and dwindling resources. The costs would be impossible to contain. In the context of growing environmental and geopolitical distress, says Grynspan, the debt crisis facing the developing world is one the biggest threats to global security and financial stability.

Never one to pull punches, Guterres appealed for “radical transformation” of the global financial system under “a new Bretton Woods” framework, one centred on the “dramatic needs of developing countries.” The alternative, he warned, is “global catastrophe.” Guterres sketched out several potential systemic reforms to unlock private capital flows towards developing countries and “rescue the Sustainable Development Goals” ahead of the SDG summit September.

Fixing international financing

At their upcoming spring meetings, the World Bank and IMF face pressure to reform international financing by easing the path for blended and — increasingly importantly — private flows.

Guterres has called on multilateral development banks to adopt first loss positions to reassure and incentivise private-sector investors. The suggestion was echoed by US Treasury secretary Janet Yellen in a recent speech to Washington, during which she urged the World Bank to expand its remit to “address global challenges head on” by reforming international financing — and not just by lowering borrowing costs or issuing low-interest debt instruments. Yellen was emphatic. Reforms must incentivise “stronger mobilization of private capital.”

“International public finance alone will come nowhere close to the level of financing needed to effectively tackle global challenges and achieve the Sustainable Development Goals.”

Lack of investable solutions is often cited as an obstacle to investing in developing economies. It’s an exaggerated claim, reports Natasha Turner at ESG Clarity. Nonetheless, many emerging markets can ill afford to look less investable.

Seeing the wood for the trees

Last week, we explored the Adani scandal in the specific context of sustainable investing. From here, the ESG complex is looking at two possible responses: a) work harder to ensure it doesn’t happen next time, or b) remove any possibility of there being a ‘next time’ by retreating from higher-risk emerging market opportunities

The latter would be another catastrophic development for emerging markets and another characteristic one by the ESG industry.

In an utterly counterintuitive twist, ‘sustainable’ funds are, reportedly, diverting money away from the places that need it most. Put simply — as we did in our August research report and the FT in October 2022 — ESG, as practiced, is bad for emerging markets. Since the strategy once understood to mean ‘invest in positive change’ (impact) is now practiced as ‘invest to avoid risk’ (ESG), emerging markets are at a distinct disadvantage. Their perceived risks, coupled with scant coverage by traditional ESG data providers, exclude them from growing pools of international capital.

The annual shortfall in investment required to meet the SDGs is $4.3T and ticking upwards. To address climate change alone, emerging economies require an extra $2T each year, of which 70% must derive from private finance. The Adani scandal threatens to cast a longer shadow over the financing plans of Indian and, potentially, other emerging market companies, for which foreign investment had already been drying up. Investors must not let that happen.

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