Good COP/Bad COP

4 Nov 2021 | A critical question hangs over COP26: Who's picking up the bill for the energy transition?

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🌐 It’s COP26’s ‘Business and Finance’ day, which, according to the FT, will be pivotal after two days of disappointing government (in)action. Starting with a bang, Mark Carney’s GFANZ committed $130T of private capital to “transitioning the economy.”

💸 GFANZ has, historically, been criticised for failing to stop fossil-fuel financing. But does rapid divestment simply open the door to PE funding? The NYT reports private investors have invested $1.1T into energy—mostly fossil fuels—since 2010.

🔒 In defence of PE, Blackstone’s Steve Schwarzman warns an energy shortage could lead to “real unrest." Long term, drilling new wells is environmentally bad and financially unprofitable, but should investors consider short-term social pressures?

⚒️ The transition won’t happen overnight, in any case. Renewables face tough times; coal miners are cashing in on the crunch; and the price of carbon allowances hit new records as producers—reacting to soaring gas prices—switch to cheaper, dirtier coal.

⚖️ Do carbon credits actually mitigate the environmental impact of ‘dirty’ companies? Love them or hate them, the market is booming. It recently hit all-time highs in volume and will be worth $1B in 2021, with demand likely to overtake supply.

📐 Speaking at COP26, BlackRock's Larry Fink warns of “the biggest capital arbitrage in history” if private companies don’t adhere to the same climate disclosures as do public. Plus, he argues scrutiny must shift from hydrocarbon supply to demand.

🧩 WEF adds the “true litmus test” of COP26 net-zero proposals will be the degree to which public and private markets work together, as fragmentation grows around how to evaluate ESG policies and ascertain a sustainable investment in the first place.

🔗 Lack of cohesiveness appears to be the biggest threat to the summit. In his opening speech, the UN's António Guterres warned targets suffer from “a deficit of credibility and surplus of confusion.” At a high level, WEF says the no.1 challenge is data.

🧮 Are ESG datasets good enough for factor portfolios? Speaking to the FT, Util CEO Patrick Wood Uribe outlines two flaws. 1. Our research shows they fail to deliver even an ethical tilt. 2. Smart beta calls for quant data, and ESG “simply isn't there yet.”

🗳️ Another week, another survey. Almost half of asset managers would divest from companies that fail to follow ESG best practices, finds PwC. 82% say ESG must be embedded in a firm’s strategy, while 74% first call for uniform reporting standards.

Chart of the week: Energy the elephant in the room

A critical question hangs over COP26 and the economic transition more broadly: Who’s in the driving seat? The public or private sector?

After two days of lacklustre government action, signals point to the latter. Today, Ex-BoE governor Mark Carney, who leads the Glasgow Financial Alliance for Net Zero (GFANZ)—a coalition of 450 international financial companies—unveiled $130T of private capital to help economies meet net-zero targets by 2050.

There is, however, an elephant in the room. GFANZ signatories recently came under fire for rejecting recommended IEA targets (which put a hard stop on fossil-fuel financing) for IPCC targets (which don’t). Can $130T eradicate the environmental impact of new drilling projects? Can carbon credits? Can anything?

The environmental (and social) impact of oil & gas projects is indisputable

As the Carbon Tracker Initiative’s Mark Campanale tells the FT: No group involved in the expansion of fossil fuel projects could claim that it was on a pathway to net zero.

Story of the week: Global resets don’t happen overnight

On the other hand, this transition was never going to be easy.

It’s idealistic to assume we could—after 200 years of industrialisation—switch from a brown to green economy overnight.

Net-zero pledges rest on the mammoth task of phasing out old technologies and introducing new ones such as renewables, carbon capture and battery storage. With all pressure on supply and virtually none on demand (so far), the ethical and financial costs of the transition rack up. Fast.

While fossil-fuel divestment looks like an easy solution, it’s not. Demand for energy doesn’t just go away, and, if public investors don’t fund it, private equity will simply snap up dirty assets at attractive rates.

All would be well if the technology were lined up and ready to go, but it’s not. As we’ve argued before, we simultaneously moved too slowly for the long-term demands of the environment and too quickly for the short-term demands of society.

20th Century capitalism loves a dichotomy. It’s evident in the transition narrative: public versus private; financial versus environmental; profits versus loss. But as the barriers between economy, society and environment start to break down, it becomes impossible and ineffective to address one dimension at the expense of others.

In that regard, the SDGs are a useful framework, as they shed light onto all possible risks and objectives: whether they face global prosperity, people, planet or all three.

Perhaps the greatest opportunity at COP26 is the chance to achieve coordination and cohesiveness, rather than immediate results (or soundbites). Only a considered transition, factoring in all data points, will be a successful one in the long run.

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