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Don't tread on ESG

30 Jul 2022 | ESG in US political crosshairs; Emissions aren't enough; Time to face energy transition tradeoffs.

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🏆 But first, some Util news. In the last month, CEO Patrick Wood Uribe was announced a top-25 FinTech CEO of the Year, while Util scooped ESG Research of the Year, North America at Environmental Finance’s Sustainable Investment Awards 2022 and made the shortlist for 'Best Sustainable Investment Research & Ratings Provider' and 'Best Sustainable Thought Leadership Paper' at Investment Week’s Sustainable Investment Awards 2022.

🇺🇸 Be warned, ye Cabals of Bureaucrats and Woke Financial Titans: The GOP is coming for your Radical ESG Agenda™. From constraints on fund managers to boycotts on banks boycotting fossil fuels, recent anti-ESG state proposals exacerbate the rift between the GOP and corporate America. A vacuous distraction from any valuable debate about ESG, the unwinnable culture war is a harbinger of political risk. But it also signals how entrenched stakeholder capitalism has become. Consider: If you’re opposed to Big Government and like free markets, dismantling social and environmental protections at a federal level is — for better or worse — ideologically coherent. Not so to throw Big Government weight against markets acting freely, by attacking a) private companies codifying those protections to attract employees; b) financial institutions integrating those principles to attract customers; latterly c) shrinking the finance available to your state and, according to Wharton research, costing your taxpayers millions in borrowing costs. The GOP argues, rightly, that the primary function of business is to maximise shareholder value. But this is businesses maximising shareholder value. Anti-ESG politicians have a new favourite soundbite: ESG represents a suite of goals the Corporate Cartel Elites™ could “not achieve at the ballot box.” If a majority of constituents does, in fact, care about those issues, then perhaps there’s something wrong with your ballot box — ESG or no ESG.

🌡️ Is ESG a distraction from climate change? As net-zero pledges come under fire during a summer of record heatwaves, the question is generating renewed scrutiny. In a widely circulated article, The Economist argues ESG “risks setting conflicting goals” and recommends investors instead “drop the S and the G, and shift the E from “environment” to “emissions”” to make carbon exposure easier to measure and manage. If that seems reductive, at the very least, “it makes sense to split up the E and the S and the G to create a customised approach to materiality,” as “lumping three disparate categories into a single scoring system ignores inevitable trade-offs.” Case in point: Reuters reports that European companies, forced by cost pressures or national policy to use coal, are protecting their ESG scores by “finding other ways to burnish their environmental credentials, or by focusing on the S and G in ESG.” Of course, no “fantastic commitment” can “counterbalance” the impact of burning coal. Equally, however, a singular focus on emissions without a view to its myriad interrelated issues (energy security, social welfare) seems retrogressive. Sustainability data offers value not as an authority on what constitutes a ‘good’ investment, but rather, as a source of contextual information. Neither EU and UK regulation of third-party data nor disclosure standardisation will answer the real question demanding attention from companies and investors: What data matters to you, and why?

Story of the week: It’s all political

Collective action or collective suicide?

UN Secretary General António Guterres was talking about fossil fuel-induced climate change when he posed the question to 40 governments this month, but he could have been talking about the energy crisis.

As they battle heatwaves and droughts, countries have put on the back burner a looming winter fraught by scarce and expensive energy. The EU is in “an incredibly precarious situation”, says the IEA, with renewables “not enough” to plug the gap filled by Russian gas. On Tuesday, member states agreed to curb gas use by 15%. If that, too, is not enough, the bloc will backslide into coal.

When it elected to include gas and nuclear in its list of sustainable economic activities recently, the EU was criticised for reneging on its climate commitments. The FT observed that Russia’s newfound pariah status introduced an “intensely political debate [to] an initiative that was meant to be purely science based.” But every policy is couched in context, and as such, inherently political. The EU Green Deal is not, nor ever was, an exception.

The energy transition is steeped in contextual tradeoffs. They may be acceptable, and they may have been easier to ignore before a global energy crisis and near double-digit inflation, but pretending they don’t exist is problematic. It’s not only disingenuous, warned Pebble Finance’s James Esdaile back in January, but dangerous. Selling green policy as an apolitical win-win is kryptonite for anti-green political backlash.

The reality of the energy transition is it a) requires sacrifices for distant outcomes, b) will hit some communities more than others, and c) won’t be green.

No company or industry exists in a vacuum. Insight into the emissions generated by the wind power industry is meaningless without data on the emissions generated by its metals suppliers. Insight into the environmental impact of the fossil fuel industry is incomplete without information about its social impact.

Basic emissions data, as proposed by the Economist, does nothing to expose the tradeoffs. Nor, do ‘green’ and ‘brown’ labels. And nor do aggregated ESG scores.

The impact of wind power, left, relative to that of metal mining, right.

At a legislative level, failure to address the inevitable tensions yields policies criticised for being either lightweight (the UK’s vague and “unlawful” Net Zero Strategy), hypocritical (the European Commission), or tone deaf (the ECB).

In that context, last week’s unexpected tailwind for US President Joe Biden’s climate change bill was a positive step. The $369B earmarked for climate-change mitigation — including tax credits and investment in renewables and resilience infrastructure — may not come close to the $4T originally promised. It may have been reframed in terms of energy security and inflation. But it sure is a point for collective action.