5 Dec 2022 | Plus, US subsidies spark global green arms race. But how clean is green?
View from the top
🐘 From boom to backlash, but not to bust. Last week, Florida CFO Jimmy Patronis announced plans to pull $2B from BlackRock and its “social-engineering projects.” (No word on the 11 other firms managing the state treasury portfolio, 10 of which are signatories of the UN Principles for Responsible Investment.) “I need partners within the financial services industry who are as committed to the bottom line as we are — and I don’t trust BlackRock’s ability to deliver,” said restaurateur Patronis of the company that reported revenues of $20B in 2021. BlackRock admitted to being “surprised, given the strong returns [it] has delivered to Florida.” But this is not about returns. Or facts. This is a culture war, and culture wars only care about feelings. Though $2B is a drop in BlackRock’s $8T (as are Florida state pensions relative to US private pensions), the rift between the GOP and “its longtime corporate allies” is likely to deepen — particularly if Florida governor and ESG shouter Ron DeSantis becomes Republican presidential candidate.
💰 Investors are unfazed. In a survey of 550 Terminal users, Bloomberg finds broad support for ESG. “For all the talk of a backlash, sustainable-investment funds have been much more resilient than other funds during this year’s downturn,” echoes The Economist, even despite recent underperformance due to sector exposure. Their popularity is attributed to a customer base focused on longer term trends over short-term returns, such as those offered by oil majors in 2022. “Social values give investors a non-pecuniary reason for allocating money and sticking with their choice, a rare advantage for funds in an industry where a competitive edge normally means lower fees.” Rare — and underexploited. In a new report, Morgan Stanley reveals a yawning gap between asset owner demands and asset manager delivery. Of the asset owners surveyed, 88% want ESG performance disclosures, 76% dedicated ESG resources, and 73% information about sustainability outcomes: needs that are met by just 39%, 41%, and 45% of asset managers, respectively.
🚩 The rules start coming and they don’t stop coming. (Here’s a helpful recap of a busy month for regulation.) The European Council signed off its long-awaited corporate sustainability reporting directive (CSRD), which aligns company reporting requirements to SFDR and the EU Taxonomy. Draft Sustainability Reporting Standards have also been approved. Under CSRD, companies must report on both their risks from and impact on a suite of social and environmental issues (i.e. double materiality) and to obtain third-party assurance or audits on those disclosures. New research published in the Stanford Social Innovation Review, however, pours cold water on sustainability assurances, described as a case study in “deception, obfuscation, and diversion” and “ultimately just a form of greenwashing.” They have become a healthy source of growth for the Big Four accounting firms, notes the FT. Soon required of all companies reporting in Europe and also, potentially, the US, assurances may become a healthy source of growth for law firms, too.
How clean is the global green arms race?
Sparked by climate awareness and turbocharged by (fast-evolving) geopolitical necessity, the global green arms race is on.
In China, clean energy and electric vehicle (EV) sector growth is outpacing ambitious climate (and sales) targets. Booming renewables investment and expansion have erased energy shortages in India. The risk threatening to “fragment the West,” meanwhile, is neither Russia nor oil prices (on that, there is unanimity) but clean energy: In response to the US Inflation Reduction Act and its sprawling $400B in climate subsidies, the EU is seeking to change its state-aid rules and activate funding to compete for investment and industry.
The headline numbers represent a remarkable opportunity, regardless of your brand of capitalism. One consequence of the clean-energy transition entering full swing, however, is that its dirtier realities are hard to ignore — if easy to hide. Relative to other energy industries, the worst outcomes of clean energy are distributed unevenly across global supply chains. Even as European member states and environmental organisations mount legal challenges against the EU’s inclusion of (much-needed) nuclear in its green taxonomy, unchallenged solar and wind are exacerbating social and environmental taxes in less visible parts of the world.
It is no secret that mining and manufacturing present an ethical — albeit unavoidable — bump in the road to decarbonisation. “Expanding mining and building supply chains for the minerals needed for the net-zero objective” is one of the four urgent challenges identified by the IMF. Burgeoning demand for commodities is driving up prices, encouraging mining giants such as BHP to ditch fossil fuels for mission-critical metals. “Huge volumes of a diverse range of minerals are required to shift the world to renewable energy,” adds a new study. “Production of even a common material such as iron must double, copper nearly treble and lithium increase by a factor of five.” Yet: “Many of these are being sourced from the lands of vulnerable people.”
Util data underscores the damage already being done. Mineral mining exacerbates air pollution (SDG 13: Climate Action; SDG 9: Industry, Innovation & Infrastructure; SDG 11: Sustainable Cities and Communities), ecosystem degradation (SDG 15: Life on Land), and water pollution and stress (SDG 6: Clean Water and Sanitation; SDG 12 Responsible Consumption and Production; SDG 14: Life under Water). Socially, the picture is no better: Pollution and other processing hazards undermine the health of local communities (SDG 3 Good Health and Wellbeing), while mining projects foster social inequality (SDG 10: Reduce Inequalities) and violence (SDG 16: Peace, Justice and Strong Institutions).
Negative outcomes could compound as mining scales. But there are reasons to be optimistic. Unlike its predecessors, this industrial revolution is happening during an era in which governments, investors, and companies have both the motive and tools to drive an equitable transition. Supply chains are complex but not inscrutable, thanks to technological progress on everything from big data to satellite imagery to blockchain.
Meanwhile, the staying power of sustainable investing has surprised detractors and supporters alike. Take the collaboration unveiled at the the annual Principles for Responsible Investment (PRI) conference last week, where the human consequences of the low-carbon transition have garnered fresh attention. Established to galvanise “action on human rights and social issues,” the Advance initiative represents 220 institutional investors.
The impact of resource extraction may be of little interest to Florida’s Jimmy Patronis when not acting in his personal capacity as seafood restaurant owner and possible Deepwater Horizon oil spill plaintiff. But it matters to the asset managers and PRI signatories managing his state treasury funds. Even as the GOP rails against climate action, the finance industry is widening its scope.