by Torsten Becker & Valerie Muschik
Having brought some clarity – hopefully – about the actual purpose of ESG investments in Part 2.5, let’s return to the false promises of banks and fund managers as laid out in Sustainable Investment 2. Just a little recap: Even those of us who “only” have a bank account without actively investing must face the fact that most banks place their money in industries that harm the environment. The world’s 30 biggest financial institutions have invested more than USD 740 billion in the oil and gas industry over the past two years. The net zero commitments of many banks are nothing more than lip service.
Now, as it turns out, the problem could be even more precarious than expected. The oil and gas sector is still on a path of further expansion, also when it comes to investment volumes. The recently updated Global Oil and Gas Exit List (GOGEL) – a database of 900 companies covering 95 % of the worldwide oil and gas production, meant to support banks and asset managers in making investment decisions – reveals that 655 of 685 upstream companies are following plans to enhance extraction and open up new fields (plus 20 % since the last report in 2021). 512 of these companies are actively working towards extracting 230 billion barrels of oil equivalent in the next seven years from so far untapped sources.
By extracting and burning these resources, an estimated 115 billion tons of CO2e would be emitted, corresponding to 30 times the yearly emissions of the EU. Therefore, our entire remaining so-called “CO2 budget” would be consumed within just a few years. Or, to put it differently: these oil and gas reserves must be kept underground at all costs if we are to stand at least a minimal chance of reaching the 1.5 °C target.
The NGO Urgewald, which puts together the GOGEL along with 50 partners, wrote in its press release (in German) on the recent numbers: “The oil and gas sector is ready to sacrifice the Earth.” Almost at the same time, at the start of COP27 in Egypt, UN General Secretary António Guterres stated in front of dozens of heads of state and government that “we are on the highway to climate hell, with our foot on the accelerator.”
In world politics, only very few people seem to pay attention to this warning. The facts have been well known for years, yet far from enough has been done to address them. However, it would be too easy to just blame politics’ failures since many of the billions of US dollars fueling the oil and gas sector – knowingly or unknowingly, directly or indirectly – come from private persons. Or, as Guterres continued in his opening speech: “Also private sector investors and financial institutions must step up with concrete actions”.
The right investment strategy
By switching to a social-ecological bank, we can at least ensure that the money kept in our bank accounts is used in a responsible and sustainable way. But what is the right strategy for those who are active in the capital markets and want to invest their money with a positive (or at least without a negative) impact on the environment? In the previous article, we already shed light on the fact that greenwashing and deception are common phenomena when it comes to ESG funds and other “sustainable” investment products.
Perhaps the even more difficult question is: how to deal with oil and gas companies we’re already invested in, and how to deal with investment companies allocating huge amounts of private and institutional capital to these industries? What to do with the ETFs in our online portfolios, many of which replicate big indices like S&P 500 or MSCI World – and hence contain a considerable portion of oil and gas? As is often the case, there is disagreement both in theory and in practice.
Divestment vs. Engagement
On the one hand, there are the advocates of divestment, defined as the targeted sale of climate-damaging stocks in order to decarbonize investment portfolios. Among them are scientists of the Wissenschaftsplattform Sustainable Finance. The idea is to push down stock prices and pressure affected companies to act more climate-friendly. At first glance, this strategy seems intuitive. Companies are to be hit where it hurts most – their capitalisation.** A study analysing 4,500 investment funds published in Responsible Investor shows a corresponding causal relationship.
**In this context, obviously, other financial service providers like insurers play a big role as well. As an example, Munich RE, the world’s biggest reinsurer, announced that it will no longer insure (or finance) any new oil or gas projects from April 2023 onward, following the example of other big players like Swiss Re and Allianz. Thus, the insurance industry successively turns its back on fossil fuels.
The counter-argument is that the sale of assets through climate-conscious investors leads merely to other (less conscious) investors taking their chance to buy them at a cheaper price, while nothing changes in the company itself. Only those who stay invested can actually influence a company’s strategy through investor engagement. On the contrary, if the owners care about nothing else but profit, climate protection will – most likely – not be among the company’s priorities (at least not before the necessary laws and regulations are in place and being properly implemented).
Stuart Kirk, former HSBC Global Head of Responsible Investment and one of the more controversial figures in the sustainable finance circus (especially since his spectacular layoff) calls divestment useless, „immoral, negligent, and potentially harmful to the environment.“ According to him, hurting oil and gas businesses by denying them fresh capital could only work during an IPO or capital increase, not by selling existing shares on the secondary (stock) market.
Probably the most famous example of investor engagement is the alternative hedge fund Engine No. 1 which was able to conquer three board seats at US big oil company Exxon Mobil, proclaiming the target of imposing fundamental changes to the company’s strategy and significantly reducing its CO2 footprint – even at the minimal share of 0.02 %. Surprisingly, support came from the world’s three biggest asset managers, BlackRock, Vanguard and State Street, who also hold the biggest chunk of Exxon shares. Even Stuart Kirk applauded this move…
Will the market just regulate itself?
And then, there’s a third view on the dilemma, asking the question of “correlation and causality”, as discussed by Tom Gosling or Florian Heeb: Are investors really turning their backs on fossil fuels for ethical or moral reasons, or because they are actually worried about the competitiveness of the sector? Have growing competition through ever cheaper energy from renewable sources, verdicts like the one against Royal Dutch Shell or potential regulatory changes lowered profit expectations? Supporters of divestment probably won’t care whether oil companies’ stock prices drop because of investors’ environmental conscience or the sector’s decreasing profitability. For scientists, economists and private investors, however, it does make a difference if divestment is about profit-oriented market dynamics or “only” about environmental protection and the public good.
So what should we do then?
But what does all this mean for us personally? How should we handle this non-trivial topic? Should we stay invested in or divest from oil and gas companies? Ultimately, these questions also depend on how big our potential influence as private investors is, and whether or not our fund managers act in our best interest.
An interesting (or ignorant?) development was announced by BlackRock CEO Larry Fink at the beginning of November. Within the scope of a pilot project for various UK funds, the world’s biggest asset manager plans to have private investors themselves advocate for environmental protection and sustainability at the portfolio companies’ annual assemblies. Fink calls the approach a “revolution in shareholder democracy” that will “transform the relationship between asset owners and companies.” Cynics might say, however, that BlackRock now wants to completely shirk its responsibility after years of failing to exert influence.
Personally, we (the authors) must admit that we are hesitant to take one side or the other. In general, we believe in a combination of shrinking competitiveness of fossil fuels and engagement regarding the remaining (necessary) assets. However, at the moment, the competitiveness of fossil fuels is favored by political decisions, and we don’t see our engagement represented adequately by the big asset managers (while the small asset managers and unorganized single investors lack in vigour). So why are we writing this article? Because we think it’s important to sensitize (aspiring) critical investors to this topic and provide some food for thought.
Change of culture and renouncing wealth
What makes things worse: At least in the midterm, Germany will remain massively dependent on fossil fuels. It would be naive to expect that in 10 to 15 years all our energy will stem from renewable sources. The energy transition has progressively slowed down during the last years. The grid expansion is moving slowly (not least because of us citizens – “not in my backyard”), thousands of solar systems (dozens of gigawatts of grid capacity) cannot be connected to the grid due to bureaucratic hurdles, and the political lobbying to maintain the status quo is working perfectly. Not to forget about the German “mobility transition”, which is failing because of the absurd prices of public transportation and the resistance to the accompanying cultural change. Germans and their cars…
To end with some philosophical thoughts: All in all, how we deal with fossil fuels – be it in our investment portfolios or in our consumption habits – will be determined by our readiness to abstain from future wealth and to rethink our definition of wealth, respectively. Demonising the oil and gas sector (and investments therein) is easy, pondering divestment vs. engagement less so. The question will be whether we’re willing to forego the products from the oil and gas sector. And if we’re honest, that is the way bigger challenge.
