When institutional investors let factors other than financial return shape their investment criteria, trouble is likely to ensue.
For further proof of this not very complicated idea, turn to Sweden.
Icy towns in Sweden’s far north have found themselves at the center of a “green rush” fueled by promises of a new industrial frontier grounded in the clean energy revolution.
The Swedish government has channeled billions in pension fund savings into start-ups in the region – including the first steel mill to be built on the continent for half a century.
But after years of grandiose rhetoric, those promises appear to be disintegrating.
Two of the country’s flagship green manufacturers have run into serious financial difficulties, sparking a row over potentially eye-watering pension fund losses.
Central planning is bad. Central planning using other people’s pension funds only makes it worse.
The Daily Telegraph:
Sweden helped pioneer the strategy of mobilizing deep capital markets and pension funds to help finance government development goals.
This was never going to end well, especially given the basis on which the Swedish government was thinking. There was going to be a green industrial revolution, you see. Sweden’s then–prime minister, the center-left Stefan Löfven, promised it would be “as transformative as the one 250 years ago.” Perhaps it will, but not in a good way.
After these promises, made ahead of 2015’s Paris climate debacle, institutional investors followed the path of green investment set by the country’s state pension funds. Among the jewels of this new industrial revolution was Northvolt, an electric vehicle (EV) battery maker. I wrote a bit about its road to ruin here, here, and, most recently, here:
In November, Northvolt, the Swedish firm that was once meant to be Europe’s EV battery champion — and was, oh yes, an ESG darling — filed for Chapter 11 in the U.S. It filed for bankruptcy in Sweden in March and has stopped operations. Most of it has now been bought by, oh the shame, an American start-up, Lyten, from (it gets worse) Silicon Valley, which is backed by Stellantis and Fedex, among others. Lyten may or may not do well, but the effect of the Northvolt collapse and other European battery fiascos, including that at Porsche, will, if the EU continues to force through its conventional car ban, be to deepen Europe’s dependence on China.
And let’s not forget Sweden’s “green” steelmaker.
The Daily Telegraph:
The country’s much treasured “green steel” company, Stegra, is teetering too. The manufacturer is facing a €975m (£858m) funding crunch. . . .
Andra AP Fonden, one of Sweden’s state-owned pensions — commonly known as AP2 — had around 1.46bn Swedish kronor (£117.7m) invested in Northvolt before it went bankrupt.
The pension fund had 580m kronor invested in Stegra, a spokesman confirmed to The Telegraph. It is also exposed to the start-up through a 193m kronor investment in former US vice-president Al Gore’s Just Climate fund.
Oh.
The Daily Telegraph:
Oscar Sjöstedt, economic spokesman for the populist Right-wing Sweden Democrats — now the kingmakers in the Swedish parliament — said he was “infuriated” by the funds’ involvement.
“It’s so clear that they just wanted to fool around with the pension funds to propagate their own party policies with no regard to pensioners’ futures,” he said, blaming the previous Left-wing coalition government.
Those are words that the state pension funds in the U.S. that have backed such projects ought to bear in mind, even if they come from someone on the “far right.”
The losses are not likely to hit the defined benefits of those who have retired, but, according to Magnus Henrekson, professor of economics at the Research Institute of Industrial Economics in Stockholm, “those who are retired will have a defined benefit pension but the extent to which they can increase it in line with inflation is not guaranteed.”
And the hits do not stop there. According to Rikard Eriksson, professor of economic geography at Umeå University, “the Riksgalden [Sweden’s national debt office] has also guaranteed substantial amounts. So on top of the pension fund exposure, it will be the state or the taxpayers who will be reimbursing the company if it fails.” In other words, it will, sooner or later, be taxpayers who pick up the tab.
Moreover, there are the losses that are “unseen,” the opportunity cost of this green malinvestment. How much more productively could that money have been invested elsewhere?
The Telegraph also quotes Tom Gosling. He is director of the London School of Economics’ initiative in sustainable finance and thus, ex officio (the nonsense word “sustainable” is the giveaway), being nourished by the green ecosystem. Gosling explains that “if you go back to the late 2010s and the run up to the Glasgow COP in 2021, there was a general sense that society was coalescing behind a rapid decarbonization path.”
Ah yes, “society.”