When climate-change talk isn’t cheap.
When climate-change talk isn't cheap.
T here is some consistency in the entire drive to a “net zero” economy (in the West) by 2050, including the fact that those pushing this agenda forward have little idea how this will be achieved technologically, or, given its possibly devastating impact on living standards, democratically (if that is still a concern).
What is certain is that this project will involve spending immense sums of money — other people’s money. Sometimes those costs will be borne by the taxpayer, sometimes by the consumer, sometimes by industry, sometimes by investors, and sometimes by a combination of one or more of the foregoing.
The investment industry has reached a “tipping point”, with almost half the world’s assets under management now pledged to meet climate change goals in a shift that could have huge corporate implications.
Amundi, Franklin Templeton, Sumitomo Mitsui Trust Asset Management and HSBC Asset Management are among the latest big investors to sign up to the Net Zero Asset Managers initiative launched last December.
The latest signatories mean $43tn in assets, or almost half of the asset management sector globally in terms of total funds managed, are committed to a net zero emissions target. The industry oversees $100tn worth of assets, according to data from Willis Towers Watson.
Click on the FT’s link to the Net Zero Asset Managers Asset initiative to find this report from December:
Thirty of the world’s biggest asset managers, which collectively oversee $9tn, have set a goal of achieving net zero carbon emissions across their investment portfolios by 2050 in a move expected to have huge ramifications for businesses globally.
The group, which includes Fidelity International, Legal & General Investment Management, Schroders, UBS Asset Management, M&G, Wellington Management and DWS, said they would work with their clients to cut emissions across their investments.
The decision means asset managers would be forced to shun companies that are ill prepared for a lower carbon economy if they are to meet their net zero targets.
“The transition to net zero will be the biggest transformation in economic history and we want to send a clear signal that there is simply no more time to waste,” said David Blood, who co-founded Generation Investment Management with former US vice-president Al Gore.
More details about “Generation Investment Management,” yet another part of the flourishing “sustainability” ecosystem, can be found here.
But back to the FT and that tipping point:
Fund managers’ focus on net zero goals will have ramifications as investors are forced to look for cleaner investments to meet their climate targets.
Fund managers, for the most part, invest, yes, other people’s money. Many of those “others” will be small savers or people relying on managed pots of money for their retirement. Not all of them will appreciate being conscripted into the hunt for what may be — at least on the currently envisaged time scale — an illusion.
There is, of course, nothing wrong with investors actively choosing to sacrifice some return. (Whatever the claims to the contrary, that will be the trade-off.) But with “almost half the world’s assets under management now pledged to meet climate change goals,” those with other priorities will find it increasingly difficult to opt for investment vehicles focused exclusively on financial return.
The FT:
“We are convinced that the financial sector is a key catalyst for action in this race to net zero,” said ValérieBaudson, Amundi chief executive.
Baudson’s talk of a “race to net zero” — how is it going in China, Valérie? — is interesting both for its presumption and, in the way that is intended to convey a sense of unstoppable momentum, as propaganda.
That said, there is no doubt that quite a bit of that momentum is real enough.
The FT:
A total of 128 investors are now part of the Net Zero Asset Managers initiative — up from just 30 with $9tn in assets in December. Signatories have pledged to set short-term emissions reductions targets across their investment portfolios for 2030. They will also work with clients who elect to reach net zero on their investments by 2050.
Al Gore’s is not the only familiar name to make an appearance.
The FT:
The investors are expected to report their exposure based on Task Force for Climate-related Financial Disclosures (TCFD) recommendations, a framework backed by former Bank of England governor Mark Carney.
Before turning to Carney, it’s worth looking at the TCFD, a body set up by the Financial Stability Board, an international organization established during the financial crisis by the G-20 and others. Its mission is “to strengthen financial systems and increase the stability of international financial markets” by, among other tasks, “coordinating national financial authorities and international standard-setting bodies as they work toward developing strong regulatory, supervisory and other financial sector policies.”
Part of the FSB’s job is to identify “systemic risk in the financial sector, for framing the policy sector policy actions that can address these risks, and for overseeing implementation of those responses.” Given how the failure to anticipate risk played a significant role in creating the financial and, for that matter, euro-zone crises, that seems wise. However, a mandate to identify “systemic risk” can, if stretched sufficiently far, be used to pave the way for regulatory creep — a post-democratic practice all too common when “climate” is concerned. And so, in due course the FSB set up the TCFD, adding another set of initials to the collection that governs so much of our lives. The justification? “Climate change presents financial risk to the global economy.”
As I have noted before, economist John Cochrane, no climate skeptic, discussed this “risk” during a presentation to a conference organized by the European Central Bank (ECB) last year. This passage was unlikely to have been well-received:
The European Central Bank and other institutions are not just embarking on climate policy in general. They are embarking on the enforcement of one particular set of climate policies—policies to force banks and private companies to defund fossil fuel industries, even while alternatives are not available at scale, and to provide subsidized funding to an ill-defined set of “green” projects.
Let me quote from ECB executive board member Isabel Schnabel’s recent speech. I don’t mean to pick on her, but she expresses the climate agenda very well, and her speech bears the ECB imprimatur. She recommends that
“First, as prudential supervisor, we have an obligation to protect the safety and soundness of the banking sector. This includes making sure that banks properly assess the risks from carbon-intensive exposures. . . .”
Let me point out the unclothed emperor: climate change does not pose any financial risk at the one-, five-, or even ten-year horizon at which one can conceivably assess the risk to bank assets. Repeating the contrary in speeches does not make it so.
Risk means variance, unforeseen events. We know exactly where the climate is going in the next five to ten years. Hurricanes and floods, though influenced by climate change, are well modeled for the next five to ten years. Advanced economies and financial systems are remarkably impervious to weather. Relative market demand for fossil vs. alternative energy is as easy or hard to forecast as anything else in the economy. Exxon bonds are factually safer, financially, than Tesla bonds, and easier to value. The main risk to fossil fuel companies is that regulators will destroy them, as the ECB proposes to do, a risk regulators themselves control. And political risk is a standard part of bond valuation.
That banks are risky because of exposure to carbon-emitting companies; that carbon-emitting company debt is financially risky because of unexpected changes in climate, in ways that conventional risk measures do not capture; that banks need to be regulated away from that exposure because of risk to the financial system—all this is nonsense. (And even if it were not nonsense, regulating bank liabilities away from short term debt and towards more equity would be a more effective solution to the financial problem.) . . .
It is worth remembering Cochrane’s contention that the main risk to fossil-fuel companies (which is not the same as risk to the financial system) is “that regulators will destroy them . . . a risk regulators themselves control.” Cochrane is not wrong about the former, although he may be too optimistic about the extent to which regulators truly control the consequences of their own actions. After all, there’s a decent case to be made that regulations meant to reduce financial risk in the decade or so before the financial crisis actually ended up increasing it.
That’s not a reassuring thought when it comes to the TCFD. A glance at those involved reveals that it might not be as objective as it should be when calculating climate risk. Discovering that its chairman is Mike Bloomberg probably says all you need to know, but check out the 32 “task force members . . . representing both preparers and users of financial disclosures” listed on the TCFD website. This group includes a global head of sustainability, two heads of sustainability (who may or may not be global), a head of ESG (ESG is a form of “socially responsible” investment) research (from BlackRock, no less), a group head of climate change, more modestly titled heads of, respectively, climate-change strategy and positioning, climate-change strategy and climate-change research, a head of environmental and climate risk research, a chief responsible investment officer, a chief sustainability officer, a general manager (corporate sustainability), and a vice president of sustainability and climate change. Denizens all of the sustainability ecosystem.
On TCFD’s website, it is noted (my emphasis) that “climate change poses both risks and opportunities for business.” I couldn’t help noticing that one of the task force members is a PwC partner (sustainability and climate change). He is likely to be a busy man.
PwC will increase its global headcount by more than a third over the next five years as part of a $12bn investment in recruitment, training, technology and deals designed to capture a booming market for environmental, social and governance advice.
To be fair, other accountancy/”professional services” firms have not been left out (rent-seekers hunt in packs). The task force can also boast a Deloitte partner (sustainability services) and an EY “leader” (climate change and sustainability services).
But back to Mark Carney, the individual who is endorsing the idea that the investors who have signed up to the Net Zero Asset Managers Initiative should be expected to report how they are doing based on standards set by the TCFD. The FT describes Carney as a former governor of the Bank of England, which he is, and he’s a former governor of the Bank of Canada, too. These days he is a U.N. Special Envoy on Climate Action and Finance and a special adviser to British prime minister Boris Johnson ahead of COP-26, the next big climate jamboree, which will be held in Glasgow in November. The sustainability ecosystem is what it is, and so Carney is also vice chair of Brookfield Asset Management, an investment group with over $600 billion under management, where he is the head of ESG and impact-fund investing.
Perhaps unsurprisingly Carney has written a manifesto of sorts, Value(s): Building a Better World for All, which is promoted by its publishers as
a bold and urgent argument by economist and former bank governor Mark Carney on the radical, foundational change that is required if we are to build an economy and society based not on market values but on human values.
That dismissive reference to “market values” ought — if they take the time to think about it — give pause to some of the clients of those investment managers who are submitting to a regime blessed by this sage. As for Carney’s “human values,” well, I don’t think that Peter Foster, who reviewed Value(s) for Canada’s National Post was too impressed:
Carney’s Brave New World will be one of severely constrained choice, less flying, less meat, more inconvenience and more poverty: “Assets will be stranded, used gasoline powered cars will be unsaleable, inefficient properties will be unrentable,” he promises.
Meanwhile, not all climate warriors are persuaded by the promises coming from the investment community.
The FT:
Catherine Howarth, chief executive of responsible investment charity group ShareAction, said it was “very welcome” that asset managers were recognising the need to cut emissions.
“But pledges are the easy part. They need to be backed by forceful engagement with the many high emitters in the corporate community that have been dragging their feet.”
Forceful engagement.
The FT:
Lara Cuvelier, sustainable investment campaigner at Reclaim Finance, said many of the recent pledges from asset managers “seem more zero action than net zero emissions”.
She said the group’s recent research into 29 large asset managers found that while many were making long-term climate commitments, only two had robust policies around issues such as the phasing out of coal.
If there are corporations or investment managers — and there probably are some — who believe that they can fob off climate warriors with a pledge or two, they are in for a disappointment. “Forceful engagement” is coming their way, and from the state as well as from activists.
In late June, SEC chairman Gary Gensler, who has every intention of taking his agency’s mandate far beyond investor protection (although that will be the excuse), had this to say:
I’ve asked staff to consider potential requirements for companies that have made forward-looking climate commitments. . . . I’ve also asked staff to consider the ways that funds are marketing themselves to investors as sustainable, green, and “ESG,” and what factors undergird those claims.
But even those companies that have avoided making any such claims will in, all likelihood, soon be caught within the net.
Gensler:
I’ve asked staff for recommendations for our consideration around governance, strategy, and risk management related to climate risk. In addition, staff are looking into a range of specific metrics, such as greenhouse gas emissions, to determine which are most relevant to investors in our markets.
And the SEC won’t be acting alone.
Via The Hill:
Treasury Secretary Janet Yellen said on Sunday that she will lead a regulatory review to assess the risks that climate change may have on the financial stability of the U.S . . .
“The current financial reporting system is not producing reliable disclosures. We also need consistency of reporting frameworks over time, as well as comparability across firms and jurisdictions, providing the useful information that investors need to make informed decisions,” she said during prepared remarks on Sunday for the Venice International Conference on Climate . . .
Yellen has stated, however, that climate change “introduces new and increasing types of risk,” and that it “challenges one of the financial sector’s most essential functions—ensuring that risk is borne by investors and institutions well placed to manage it.”
Translation: Neither corporations nor those that, directly or indirectly, invest in them will be allowed to weigh climate risk for themselves. Nor will the decision of how much, if anything, they should spend on dealing with it be left to them alone.
But they will be made to pick up the tab. Other people’s money, you see.