Insights

Who's outmanoeuvring whom?

The IEA calls for fossil fuel halt, banks pivot on green financing, companies talk (and talk) about carbon. Plus, how can investors outwit corporate spin?

View from the top

⚒️ This week's big news: The IEA called on energy groups to halt new fossil fuel projects as part of a new roadmap to net zero by 2050. "Clean energy innovation” will be critical, as will “a singular, unwavering focus from all governments."

💡 Just recently, however, the IEA warned of a chasm between climate targets and the minerals needed for clean-energy tech: the same tech on which its target hinges. While pressure is on for renewables, the world economy is low on materials.

🗞️ “Sustainability disclosure is now at the top of the agenda for the world’s largest investors, companies and regulators." But problems remain. The FT takes a deep dive into the contentious world of sustainability measurement and standardisation.

📣 Carbon is a buzzword on earnings calls, says UBS, with mentions of carbon tripling in the last three years to 1,600 per quarter. But are keywords enough to go on? We think better insight is gleaned from the real-world output of companies.

💸 Since the Paris Agreement, banks have poured 3x more into fossil fuels than green bonds. Says Bloomberg: that's about to change. In 2021, for the first time, banks are committing more financing to climate-friendly than fossil-fuel projects.

🏦 All eyes on banks this week, as the Fed came down on their climate risks and Deutsche Bank warned lenders of losing their operating licenses if they fail to prioritise green finance. It increased its own green financing to €220bn by 2023.

🗳️ In Europe, MEPs voted through a €17.5 billion Just Transition Fund, which aims to support regions and communities impacted by the closure of fossil fuel facilities. The vote marked an important step towards ensuring the transition is socially fair.

Who's outmanoeuvring whom?

A fascinating game is playing out between companies and investors, and sustainable finance is the board.

The dynamic was simpler when the only signal that mattered to investors was a company's bottom line. Financial performance is binary. As a metric, it can't be easily fudged. The same cannot be said for extra-financial issues. Most are difficult to measure and manage: a situation made worse by so many measurements and so little standardisation.

Without an objective 'extra-financial' metric on which to fall back, investors must rely on a patchwork of third-party ratings and corporate disclosures. But what happens when you can't trust the latter?

It's often been said that disclosures are subjective and unreliable. And now companies are becoming increasingly smart about how they share information with stakeholders. (A brilliant recent example comes from Tesla, which, in its latest shareholder deck, bedded a single line about its $101m bitcoin sale as a JPEG—thus keeping it obscured from journalists and their CTRL+F function.)

For clever IR teams, sustainable finance is an open goal. They can shape investor communications, including shareholder decks and earnings calls, to paint a picture that may well be out of step with reality.

Let's take keyword bingo. This week, UBS analysts revealed to the FT that carbon is now a buzzword on corporate earnings calls. Mentions of carbon and associated keywords have tripled over the last three years, reaching 1,600 per quarter. Google searches for the word in a financial context have also reached an all-time high.

It's no coincidence that the growing emphasis on carbon emissions comes during a period of rapid growth in sustainable investing. As the analysts observe, the momentum behind green investing is a big motivation for companies, as accelerating flows of cash into carbon-conscious companies and funds have driven up valuations.

While many companies have a genuine, evidenced commitment to sustainability targets, others are less sincere: flooding their communications with keywords that speak to material issues. The financial incentive is right there.

Which begs the question: in the numbers-driven framework that underpins capital markets, are words worth anything?

It's time investors were armed with a metric: one as reliable, objective and universal as a dollar. One that makes it possible to compare the sustainability profile of any two companies like-for-like. And, critically, one that can't be managed by the very companies it seeks to measure.