Fossil Fuel Divestment - ‘ESG’, or Simply Changing Ownership?
The Economist Leader for the 12th February 2022 edition ‘The Truth About Dirty Assets’ is a reminder of issues of fundamental importance to investment in Environmental Social and Governance (ESG) funds.
The article quotes Bloomberg Intelligence estimates that in excess of $50 trillion could be channelled into ESG funds by 2025, and that firms promoting these funds claim, and investors believe, that this must contribute to addressing climate change.
Yet the Economist article (and similar coverage in the Financial Times and other business news services) points out that one unintended side effect of ESG investing is that as public firms in the West, such as European oil major Shell, and large listed mining firms are being pressured to sell off their most polluting assets, the oil wells and coal mines are not being shut down.
What Are Environmental, Social, and Governance (ESG) Criteria?
Investopedia gives the following definition:
Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments.
Environmental criteria consider how a company performs as a steward of nature.
Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates.
Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
Instead, they are being acquired by private-equity firms, which have bought $60 billion worth of fossil fuel linked assets such as pipelines and infrastructure in the last two years alone. Private-equity firms, like state owned oil, gas and coal concerns, do not have to concern themselves so much with the views of ethical investors; and with the current volatility in politics and prices, the assets are generating large revenues.
The article advocates wider use of carbon taxes or carbon prices. It also argues that it is more effective for investors to hold onto fossil fuel shares and to work with managers to reduce emissions, instead of divesting the assets and claiming that this alone will result in lower emissions.
But the article also questions the actions of institutional investors, such as pension funds, endowments and insurers, where these sometimes work with ESG funds selling fossil fuel assets, but also with the partners of private-equity funds acquiring them. This does not reflect the entire carbon footprint of the institutional investors’ portfolios, and suggests that there may be more to constituting genuine ‘ESG’ investments than simply adhering to rulebooks and ‘cleaning up’ portfolios, if this overlooks the overall picture – a point for regulators to consider.
The operations of the largest private-equity groups in reinforcing fossil fuel production are now attracting increasing critical scrutiny, for example with the February 2022 report by the Private Equity Stakeholder Project ‘Private Equity’s Dirty Dozen’. Similarly, plans by state owned oil companies to invest hundreds of billions of dollars in further fossil fuel production are also starting to attract critical comment, as it has been noted that for these investments to break even will result in the 2oC of the Paris Agreement being swept aside.
Greater transparency about fossil fuel investment and fossil fuel subsidies must be a necessary starting point, and this should be a key issue on which to focus for COP27.
Russia’s invasion of Ukraine will presumably affect every aspect of energy markets in the near and medium term. It is reported that some countries are turning back to short-term reliance on coal - but soaring prices for oil and gas may be a reminder that reliance on fossil fuels comes with exceptionally high political and economic costs, as well as threatening uncontrollable climate change.