Insights

Globalisation is out

25 Mar 2022 | SEC climate disclosures; European (green) protectionism; BlackRock's bye to globalisation. Plus, what can we learn from the SDG impact of oil & gas?

View from the top

🗣️ Climate is finance now. On Monday, the SEC advanced a proposal that would require public companies to disclose “certain climate-related” information in their annual reports. Referencing TCFD, disclosures cover: (1) climate-related risks and their effects on business, strategy, and outlook; (2) governance and risk management; (3) Scope 1 and 2 emissions, plus Scope 3 if material or relevant; (4) the financial cost of risks and transition; (5) targets, tools, and transition plans. Next up, TNFD?

🌊 You know what they say about necessity and invention. In his annual letter, Larry Fink tells shareholders “the Russian invasion… has put an end to the globalization [of] the last three decades.” Short term, “energy security has joined energy transition as a global priority.” Long term, it will “accelerate the shift toward greener energy,” as countries invest in their own sources and the green premium contracts under soaring energy prices. Bad for Russia. Good for renewables. And great for China.

🇪🇺 The end of globalisation is… green? The EU is planning to quit Russian gas for renewables by 2030. To less fanfare, it also reached an agreement on CBAM: its carbon tax on imports. That’s a big deal! CBAM is both climate and good old-fashioned protectionism, enabling the EU to hit its emissions targets while insulating itself from international competition. John Keynes said it first: “Advisable domestic policies would be easier to compass, if… ‘the flight of capital’ could be ruled out.”

🗺️ When do geopolitics matter? Russia’s invasion is drawing scrutiny to the international footprint of ESG investors. ALTSEAN reveals ESG funds hold $13.4B in arms suppliers to Myanmar, 69% of which is guided by ratings from MSCI, FTSE Russell and SPDJI. But MSCI is clear on its website: ESG ratings are about risk, not “a general measure of corporate ‘goodness.’” That arms were used to kill 1,500 Myanmar civilians isn’t good, sure, but manufacturers aren’t at risk judging by their PR tear.

🎐 But ESG is changing. In an open letter, S&P CEO Douglas Peterson makes the case for positive impact, as “an ESG score does not support the basic principles of ESG investing if it considers risk alone.” Guided less by ‘business, business, business’, more by national interest, recent policy decisions are creating a context where the ‘extra financial’—call it risk or impact—is hard for investors, ESG or otherwise, to avoid. Critically for sustainable index funds, that context is proving to be very mutable.

Can’t spell progress without O&G

Each week, we dig into the 120 million peer-reviewed sources that feed into the Util database to discover the SDG performance of an industry or company dominating headlines.

What’s going on?

An energy crunch, as sanctions put pressure on supply and send prices soaring. Scrambling to avoid social crises at home, Western governments are looking to other parts of the world to replace Russian oil and gas.

There’s a strong case for fossil fuels in the short term, but dependency on imported energy—particularly the finite kind—has never looked less appealing.

The SDG impact of oil & gas

Let’s start with the ugly: SDG13 (Climate Action). Oil and gas account for a third and fifth of global anthropogenic carbon emissions, respectively, making the industry a driver of climate change. Direct byproducts include air pollution via toxic emissions and water and soil contamination via accidental spills and leaks.

Unsurprisingly, that’s bad news for SDG14 (Life Below Water) and SDG15 (Life on Land). Watch out for species extinction, says one source, as the “pace and magnitude of change exceeds… evolutionary history.” Already, habitat destruction has “[damaged] ecosystems” and eviscerated local plant and animal populations.

SDG3 (Good Health & Wellbeing) is a casualty, too. Fossil fuel emissions account for 20% of premature deaths: a figure set to rise as climate change exacerbates “heat-related mortality and morbidity and… infectious diseases.” (Interestingly, the trend towards urbanisation—with cities both source and sufferer of emissions—is another catalyser.) Oil & gas breeds a WebMD checklist of diseases: asthma, cancer, tuberculosis, schizophrenia, heart, lung, brain, liver, kidney disease. And, as with environmental and ecological damage, these aren’t ‘just’ attributable to Scope 3.

The SDG impact of the oil & gas industry

But you can’t spell progress without O&G. A “vital contributor to the global economy,” the industry has “fuelled a dramatic increase in employment and population.” That’s good for SDG8 (Decent Work & Economic Growth) and SDG9 (Industry, Infrastructure & Innovation). Affordable, available energy has powered two centuries of industrial development, lifting productivity and profitability in every sector. One source reports a price hike of 125% would reduce employment and GDP by 2% and household consumption by 7%.

Predictably, oil & gas has a positive impact on some concepts underpinning SDG7 (Affordable & Clean Energy). Some, not all, thanks to price volatility, which also hits SDG 1 (No Poverty). Progress is further stymied by a gap between export and import countries. The former “tend to experience higher levels of income inequality in striking resemblance to cross-country results,” with production exacerbating inequality, poverty, economic decline and conflict.

Those problems are inherent in finite natural resources. Our machine-learning models uncover decades of warnings about geopolitical instability as a consequence, not cause, of energy insecurity. Oil & gas exploration “impedes democracy, increases corruption,” “fuels political tension, war and conflict,” and “burdens national security,” undercutting SDG16 (Peace, Justice & Strong Institutions).

There’s a lesson there about another scarce resource: food. It, too, is a victim of the Russian war, as well as, incidentally, the oil & gas industry, which negatively impacts SDG2 (Zero Hunger) thanks to decimation of fish, crops, farmland, and rivers.

While oil & gas has “improved the lives of hundreds of millions, another century dominated by fossil fuels would be disastrous,” says one source. It’s both a “factor for the development of a nation, [and] cause of economic and political conflict around the world.” If current events reinforce the need for available, affordable energy, they’re also a code red for finite sources.