Bourgeoisie do-gooders are still warm at nightSubmitted by Sims Investment Management, LLC on October 22nd, 2020
Provided by Cory Sims, AWMA®
If you’ve ever found yourself in the UK in January, you likely had a couple sweaters and a coat on hand. It’s cold, and while not Alaska cold, it’s cold nonetheless. The UK is so cold that when St. John’s College (part of the University of Oxford) professor and manager of the school’s financial affairs, Andrew Parker, received a demand from students that the school divest its investments in fossil fuel companies, Parker figured he could use this as a teaching moment (with the January winter as a willing ally).
Parker responded to the student’s demands with a concise retort:
“I am not able to arrange any divestment at short notice, but I can arrange for the central gas heating in college to be switched off with immediate effect. Please let me know if you support this proposal.”
It must have felt good for Parker to pen such a stinging rebuke. And to be honest, it probably wasn’t the most appropriate, but it appears the man had been stretched to the limit. Needless to say, the students weren’t pleased, and the fight continues, but it begs the question as to the lack of perspective and critical thinking we are witnessing worldwide at the moment. In terms of creating a cleaner planet, it would be tough to find a human being not interested or at least in favor of the notion. That much is certain. The tricky part is the measures we employ and whether they result in the desired outcomes.
The developed world is obsessed with a “fossil fuel-free future.” Fossil fuels produce carbon dioxide when burned, and the emissions trap heat in the atmosphere, ultimately leading to climate change. It’s not an energy source without its faults. But what doesn’t have a “cost” associated with it? Pools provide entertainment and relaxation to hundreds of millions of people yearly. They also kill hundreds of thousands due to drownings. Cars transport people and cargo millions of times per day and kill hundreds of thousands due to negligent or accidental driving. You get the gist.
Fossil fuels have their downsides, but the world economy is built on them. However, one movement that has been gaining steam (it better be clean steam) are environmental, social, and governance (ESG) funds. The premise - rather than continuing to invest in firms that are polluting or are harmful to the environment, we can shift our money into funds that are invested based on environmental, social, and governance factors. Collectively, our investment actions will better position us to combat climate change, and doing so will bring about a positive future. There are currently 300 mutual funds and ETFs (exchange-traded funds) focusing on ESG. Rating agencies such as MSCI or smaller firms like Sustainalytics provide composite scores, and those scores drive investments.
Here, however, is where we’re running into trouble. The composite scores vary dramatically across rating agencies. It turns out it’s SUPER hard to rate a company on environmental, social, and governance factors. And it’s even harder to come to a consensus on how to do it. Take Xcel Energy as an example. Xcel consistently ranks as one of the world’s worst when it comes to their carbon footprint. A substantial share of its power comes from coal, so this is understandable. Yet, Xcel is the first US utility company that has declared it will be 100% carbon-free by 2050. Moreover, it’s also a leader in constructing wind-generation facilities. Doesn’t the latter merit some positive scores then?
How about Kinder Morgan? This is a gas pipeline company, and of course, scores poorly due to its carbon-intensive energy. Yet, in terms of the cleanest-burning carbons, natural gas is right up there. In fact, if natural gas could replace coal then we’d be much closer to reaching our overall environmental goals. Again, this should elicit a good score, but because it’s natural gas, red-marks across the line. You then have companies like Bank of America that score poorly with one ESG rating agency and above-average with another. At the end of the day, ESG investing comes down to whichever rating agency you believe in and their fuzzy qualitative measures.
This brings us back to our initial point - we can disinvest and reinvest ourselves immediately, but there will be consequences. There are always consequences. In the case of Oxford students, that would be cold dormitories. But it’s a whole lot worse for half of the world that depends desperately on stable electricity, heating, and a whole range of basic household needs. Energy has lifted millions out of poverty, and any threat to its stability would drive millions back into impoverished situations. It would be fantastic if a child living in a Lagos slum could study in the evening thanks to a wind farm’s electricity. But that’s not the case at the moment, and Lagos slums are not well-positioned to handle immediate supply shocks.
Those that tout renewable energy and ESG investing are overwhelmingly wealthy or enjoy the spoils of a wealthy nation. We’re not saying we shouldn’t march toward less reliance on fossil fuels. But demands to disinvest and shift our entire way of living overnight is plain irresponsible. It is also a bankrupt argument as wealthy nations didn’t become wealthy thanks to solar panels and wind farms.
Cory Sims, AWMA® may be reached at 513-278-7467 or firstname.lastname@example.org.