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ESG, Climate, and Democracy

Steam rises from cooling towers of the Electricite de France nuclear power plant behind houses in Dampierre-en-Burly, France, October 12, 2021. (Benoit Tessier/Reuters)

According to the Wall Street Journal’s Joseph Sternberg, 2022 might be the year when politicians begin to change course on climate policy. The reason? Anxiety about the political consequences of where that course is headed.

As Sternberg notes, in the U.K. some parts of the climate policy bill that will fall due are coming into sight, and they are not being greeted with, shall we say, universal enthusiasm.  Looking beyond (but not excluding) Britain, it is also worth adding that, while the current energy crunch in Europe (outside the U.K. and, to a degree, Germany) owes relatively little to climate policy (at least directly), soaring energy bills are providing a preview of what the energy “transition” (at least as currently envisaged)  might look like. When voters start to realize that fact they may be . . . underwhelmed.

Sternberg sees some signs of backtracking in the U.K. (where it’s badly needed), but there have also been some developments in France:

French President Emmanuel Macron faces a campaign for re-election in 2022, and he learned the hard way in 2018 how higher fuel prices can trigger debilitating popular protests. His solution is to double down on traditional French industrial policy, especially concerning support for nuclear power.

Sternberg noted (he was writing last week) that:

At Mr. Macron’s behest, the European Commission in Brussels may be on the verge of including both nuclear and natural gas on a list of environmentally friendly energy sources eligible for “green investment” from governments and private investors.

Well, that process has moved on.

The Financial Times:

Brussels wants to recognise nuclear power and forms of natural gas as “green” activity as part of a landmark EU classification scheme to help financial markets decide what counts as sustainable investment.

In long-awaited plans, the European Commission has paved the way for investment in new nuclear power plants for at least the next two decades and natural gas for at least a decade, under a green labelling system known as the “taxonomy for sustainable finance”.

The labelling system, which will cover industries that generate about 80 per cent of all greenhouse gas emissions in the EU, is the first attempt by a major global regulator to decide what counts as truly sustainable economic activity and help stamp out so-called greenwashing in the financial sector.

A draft legal text, seen by the Financial Times, says the EU’s green label should be awarded to controversial energy sources including nuclear power and natural gas under certain circumstances.

The decision was taken after a vocal group of pro-nuclear countries, led by France, and pro-gas governments in southern and eastern Europe, demanded the taxonomy should not punish energy sources that provide a bulk of their power generation…

This is not yet a done deal. It will need to be approved by a majority of member states (which is likely) and, a wilder card, by the European Parliament too. If I had to guess, however, this will go through: I hope that the Biden administration is paying attention.

Germany will oppose such a move, probably fruitlessly, but even in Germany, a land where Greenery is a potent political force, there are some small signs of a shift:

The deal cementing the [new coalition government]  between the Greens, the larger Social Democrats and the smaller Free Democrats hedges its climate commitments. A coal phase-out will happen ideally by 2030—with the newly inserted word “ideally” blunting Green ambitions by marking the whole project as tentative. Carbon neutrality will wait for 2045, if it ever comes, and more-aggressive limits on aviation and automotive emissions are missing.

All this said, however, the political class has long understood that sooner or later the current direction of climate policy was probably going to run into political problems. That is why so much effort is being made to impose it through regulation and, increasingly, with the help of an important section of the financial community.

Sternberg:

The green true believers . . . are busy devising rear-guard actions by which to insulate environmentalism from real-world political pressures, not least by enlisting gullible or cynical titans of finance to do via pension-fund investment allocations what can’t be done honestly via legislation.

That is indeed the case (and we shouldn’t overlook the growing unwillingness of banks to fund fossil-fuel projects either), but, so far as pension-fund allocations are concerned, I happened to notice this report from the Financial Times on December 30:

Oil and gas shares — knocked early in the pandemic and increasingly shunned by eco-conscious investors — have this year eclipsed the stock markets’ in-vogue environmental, social and governance-focused companies.

As of December 29, US giants Exxon and Chevron had added 48 per cent and 40 per cent respectively in 2021. The duo have helped power global energy equity funds past many of the hundreds of US and European sustainable funds as defined by Morningstar, a data provider.

The iShares MSCI global energy producers exchange-traded fund is up 37 per cent to December 29, outperforming the largest US ESG fund — the $31.8bn Parnassus Core Equity fund — which is up 28 per cent. The largest iShares ESG fund run by giant fund manager BlackRock has also trailed, up 30 per cent. . . .

It marks a sharp change from 2020, with the more tepid performance leading to early signs that investor enthusiasm for ESG funds has cooled, as investor inflows into the fund class have slowed from their breakneck pace at the beginning of the year. . . .

It’s unfair to look at just one year, and, as always in the markets, what goes up can go down, and vice versa, but still . . .

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