Take Five: Black and Blue Friday
A selection of the major stories impacting ESG investors, in five easy pieces.
US asset managers were left feeling a little bruised after Republicans marked Thanksgiving with a resumption of hostilities.
Renewed assault – On Wednesday, 11 Republican states, including Texas, brought an anti-trust case against BlackRock, State Street and Vanguard for using the power of their index funds to wreck the US coal industry to the detriment of consumers. The world’s largest passive investment houses might have been surprised to be accused of pursuing a “destructive, politicised environmental agenda”, having lent little support for environmental resolutions in this year’s US AGM season, instead putting their energies into ‘profits-over-politics’ voting and stewardship options. Nevertheless, they are being sued for conspiring to use their large holdings in listed coal firms to constrict supply and drive up prices, the better to achieve net zero emissions targets. According to Texas Attorney-general Ken Paxton, “This is a stunning violation of state and federal law.” The case continues long-running Republican attacks on US asset managers and the investor-led climate-focused coalitions to which they largely no longer belong. It also increases the prospect of a fragmented sustainable investment landscape in the US, where state-level policies will likely have a greater impact than rules from federal agencies. As noted in the Financial Times, coal prices spiked in response to Russia’s invasion of Ukraine in February 2022, falling back “sharply” since. A number of traditional customers had made already strategic bets by then, including Paxton’s Texas which saw its solar capacity rocket by 37% to 18,476 megawatts between 2022 and 2023. Solar still lags wind in the Lone Star state, which accounts for 29% of all Texas energy generation (second to gas at 42%), with coal languishing at 13%.
No break – COP29’s last-gasp but not quite face-saving deal took so long to get over the line (around 2:40am Sunday morning local time in Baku) that it just about merits a mention in this week’s blog. Those involved in the negotiations, initially scheduled to conclude Friday afternoon, could have been forgiven for taking the next week off. Not so for UK Net Zero Minister Ed Miliband, who on Wednesday evening back in London admitted to experiencing severe déjà vu – not to mention PTSD – in those final tense huddles, having last represented the UK at COP15 in 2009, scene of an infamous non-deal. Some saw the rise in climate finance represented by the New Collective Quantified Goal in similar terms as the failure in Copenhagen, but Miliband was sympathetic to the objections of India and others, sanguine about the lack of progress beyond COP28’s energy transition commitment, and supportive of the under-fire COP process. His buoyant mood may have derived from the interest shown in Baku in the UK’s blueprint for completing electricity generation decarbonisation by 2030, or the imminent release of the government’s Clean Power Action Plan. The pace of green energy announcements has been one of the few highlights so far of Labour’s return to power, but its former leader seemed happy to draw a distinction between the UK government’s approach and that of those ‘tech bros’ behind another return to office in the US. “We’re trying to move fast and build things, not move fast and break things,” he said.
Road to hell I – The UK also got credit in Baku for being one of the few countries to arrive armed with an ambitious new nationally determined contribution (NDC) to the Paris Agreement. But, as investors have been telling governments for years, the shiny new 81% emissions reduction target counts for little without the delivery of a fully formed NDC next February containing sector-specific targets, pathways and policies. Among these will need to be a more coherent road transport decarbonisation strategy than the “unworkable” one blamed for losing nearly 2,000 jobs in less than a week. With parallels in Europe, the UK’s incumbent manufacturers can’t sell electric vehicles at the volumes needed to avoid fines to an inflation-weary public, assailed with misinformation or willing to sit tight for cheaper, better options. Both manufacturers and governments can be accused of being caught in the headlights of a slow-moving juggernaut, failing to agree on the policy packages that could stimulate demand. But they must also realise that slapping tariffs on those imports, via its Carbon Border Adjustment Mechanism or otherwise, will not be a vote winner.
Road to hell II – The soul-searching that started last week with the Chapter 11 bankruptcy filing by Northvolt and resignation of its CEO, Peter Carlson, continued this week with the revelation that the European battery maker owed US$313 million to the EU itself. Having raised US$15 billion from investors over its short life, the firm collapsed with just US$30 million in cash, alongside debts of US$5.84 billion, include those to the European taxpayer. The demise of a firm that many hoped would become the home-grown supplier to Europe’s extensive automotive industry has been treated as an existential blow to both the bloc’s industrial policy and its green transition. And certainly, questions have to be asked about how Europe now meets its ambitions for domestic electric battery supply, with both Chinese and Korean market leaders carefully weighing up their options. But equally searching questions have to be asked of governments and investors who seem to have assumed that Northvolt would succeed due to sheer scale of demand, despite a record of poor decision-making and performance that should have thrown up any number of red flags.
Joined-up thinking – The Thinking Ahead Institute’s annual Asset Owner 100 study revealed that the number of these large institutional investors to have made net zero commitments has stalled at 52. “The complexity of balancing these targets with financial performance and fiduciary responsibilities has created significant challenges,” the institute noted, adding that such difficulties required a portfolio-wide approach and “strong collaboration between asset owners and managers”. It also requires adoption of systems thinking, which the report sees as a growing trend, defined as “an approach to understanding complex, interconnected systems by recognising the relationships and interactions among their parts rather than focusing on individual components in isolation”. For asset owners, one of the implications is a broader approach to engagement. Of the different types of organisation included in the Asset Owner 100, pension funds represent the largest share in the sample by AUM (51.2%), albeit experiencing the lowest annual growth rate, just 8.9%. According to a separate study, pension funds are also highly at risk from climate change, with North American schemes predicted to see returns halve by 2040, due to their reliance on high-risk assets, while UK, Swiss and Dutch peers are expected to be more resilient. The rise of systems thinking can’t come soon enough perhaps.
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