The law of unintended consequences

This week: Musk backs off from Bitcoin; SSGA warns of 'brown-spinning'; ESG alpha comes into question. Plus, what can we learn from the 'looming mismatch' between net zero and mineral supplies?

View from the top

🚗 Elon Musk tweeted Tesla will no longer accept Bitcoin for car purchases, citing environmental concerns. But the cryptocurrency's climate impact isn't news. Could Musk's move instead be a strategic play for the renewable credit market?

🏭 Forget greenwashing. The real threat to the low-carbon transition is brown-spinning, or selling a business's highest-emitting assets to private bidders. Investors must hold companies to account on their paths to net zero, says SSGA chief.

📈 There's no evidence ESG strategies outperform, says Scientific Beta. Returns are driven by sector biases and factor exposure. Sustainability offers value (ethical alignment; positive impact; risk mitigation)—but the alpha narrative is flawed.

🎌 If returns are the elephant in the room, Japan is the canary in the coalmine. Its GPIF is cooling on ESG, as concerns grow about the scheme's underperformance and a retiring population. An argument against ESG, or for better indices?

🎯 Well... behind the scenes, index providers are competing to build the best sustainability indices. But there are problems with how benchmarks are compiled. The challenge (and solution) is finding data that makes objective sense.

🌈 A report from BlueMark finds almost all impact investors work towards the SDGs, but fewer than half consider the 169 targets underpinning the framework. The findings show investors are still struggling to set and meet targets.

📊 Sustainability is a function of EM development. It is essential to enforce human rights and environmental protection. But the dearth of data in EMs makes investing difficult, reports IW. Maybe it's time for investors to look beyond disclosures.

The law of unintended consequences

Humans love a good narrative. Investors are no exception. Our cognitive biases have given rise to a satisfying moral dichotomy in sustainability: tech and renewables = good; oil & gas and mining = bad.

What happens when that breaks down?

Recent headlines prove sectors and companies don't fit into neat ethical buckets. Tesla, the poster child for the low-carbon transition, became the poster child for Bitcoin; Silicon Valley is squaring up against its own ethical issues; and, as it turns out, we may need to mine our way to net zero.

According to a new report from the International Energy Agency (IEA) the world faces a 'looming mismatch' between the energy transition and critical mineral supply. The IEA hones in on an important—but until now, largely ignored—truth about the transition: it leans heavily on the mining industry. Progress towards the Paris targets hinges on the rapid scaling and adoption of clean-energy technologies such as wind turbines, solar farms and electric vehicles. These demand significant amounts of 'energy transition materials', or ETMs, including lithium, graphite and lithium.

Renewable technologies require many more ETMs than do their fossil-fuel peers. Offshore wind requires a massive 12 times more ETMs than natural gas.

Overall, meeting the Paris Agreement requires four times more mineral production by 2040. But prices for commodities have rallied this year, as demand for clean energy technologies has exploded and governments (most notably the Biden administration) have rolled out green stimulus packages.

At the same time, a peculiar potential paradox is emerging. As ESG investing becomes ubiquitous, investment into mining stocks falls. An unintended consequence is fewer ETMs and thus a longer road to a carbon-neutral globe.

Unsurprisingly, our analytics find the mining industry performs poorly against environmental SDGs. Less surprisingly, it achieves a brilliant score for SDG 8: Decent Work and Economic Growth. Perhaps most surprisingly, it fares well against SDG 17: Partnership for the Goals. Like the IEA, we can see how mining occupies a key role in the transition to a just economy.

Sectors can't be split into two buckets. Try 17 (or 169) buckets, however, and you get a more vivid picture of how the world works. From there, it's up to investors to decide what matters most.