Richard Morrison of the Competitive Enterprise Institute writes about the growing backlash to ESG:
For the last several years, much of the corporate world has, to a greater or lesser degree, adapted to the demands imposed by “environmental, social, and governance” (ESG) theory, and in that time, those three letters have created a minefield of unintended consequences. Despite the enthusiasm that has fueled the ESG machine, leaders in politics, policy, and the business world have begun to question where it is leading us, with high-profile critics from Tesla CEO Elon Musk to former vice president Mike Pence lining up to denounce it. While we’ve been hearing warnings of a backlash against ESG for some time, it’s worth reflecting on how we got here.
Europe’s power sector is in a bind. Since harmonizing electricity markets in the mid 1990s, EU leaders believed that the comparatively higher price of natural gas in the wholesale market for energy would spur investment in renewables and thus aid the bloc’s transition to a net-zero-emissions economy. Indeed, the bloc’s “marginal pricing system” is designed such that wholesale electricity prices are set by the last power plant called in to meet overall demand on any given day, a role routinely played by the natural-gas power plants meeting approximately 20 percent of the EU’s electricity demand. The hope behind the pricing system was, in other words, that the forces at work in global energy markets would align with the EU’s ambitious environmental agenda.
But this pricing system is now under severe duress. After undergoing a planned three-day maintenance, Russia’s Gazprom announced on Friday that its Nord Stream 1 pipeline linking Russia to Germany underneath the Baltic Sea, which supplies about 20 percent of the gas Europe imports from Russia, would stay shut indefinitely. Gas storage has attained 80 percent of capacity across Europe, two months sooner than targeted. Meanwhile, the marginal pricing system is delivering too much of the results it was designed to deliver. Power plants running on renewable energy, for instance, are raking in windfall profits from selling power at a market price set by their gas-powered competitors.