Investing 'Ethically'? Prepare to Lose Your Shirt

It’s starting to look as if the world is emerging, albeit slowly and reluctantly, from the utopian dream of halting and reversing climate change by policies based on almost exclusively on mitigation rather than on adaptation. These two approaches have always been the practical choice between real-world alternatives. A mixture of the two leaning mainly towards adaptation is probably the best approach since the costs of mitigation—as in achieving Net-Zero carbon emissions—are huge and its benefits either modest or unachievable.

For reasons outside the scope of this short commentary, however, the world’s governments and global agencies have placed all their money on the mitigation approach. I write carelessly “their money.” It is, of course, other people’s money. And we are gradually discovering just how much of other people’s money they are investing in climate change mitigation. Prepare to be shocked.

Recently the Financial Times reported as follows:

Thirty of the world’s biggest asset managers, which collectively oversee $9tn, have set a goal of achieving net zero carbon emissions across their investment portfolios by 2050 in a move expected to have huge ramifications for businesses globally. The group, which includes Fidelity International, Legal & General Investment Management, Schroders, UBS Asset Management, M&G, Wellington Management and DWS, said they would work with their clients to cut emissions across their investments.

That attracted the attention of National Review’s Andrew Stuttaford (full disclosure: an old friend) who devoted his regular weekly column on finance to examining how and why Wall Street decided to plunge so wholeheartedly into green ink investments. It’s a real humdinger of a column because it solves a financial mystery.

Nowhere to go but down.

After all, the purpose of investment institutions is to deliver the best return on the money that they are lent by savers and pensioners. If an investment house says that it intends to make mitigating climate change one of its main aims, it’s also telling you that your money will be getting a lower rate of return than it otherwise might. That’s a clear betrayal of the fiduciary duty that agents owe to their principals—unless they level with them and admit the likely loss.

That’s exactly what happens with other ESG funds, and I’ve no doubt that this admission will appear in the middle of the voluminous fine print which warns purchasers that socially conscious investments are likely to perform less well than the average. At the same time all the great and the good of the financial, political, and regulatory world from Al Gore to Mike Bloomberg to Mark Carney are bent on assuring nervous investors that they are making a prudent decision in going green.

Their argument boils down to claiming that any investor risks from green investments are trivial compared to the risks of investing in fossil fuels which are likely to prove unprofitable investments in a world moving towards Net-Zero and which might make those companies vulnerable to expensive lawsuits and regulatory restrictions.

The fallacies embedded in that argument were challenged by me in February last year in the first column I wrote for The Pipeline—which was a criticism of Mark Carney’s strident advocacy of strong measure of financial regulation to direct investors into the “right” green companies.

Yet if these climate forecasts are either exaggerated or simply uncertain [as they are], what is the test which would tell us with some reliability that the market demand for fossil fuels is likely to fall along with the value of companies that extract them. It cannot be the additional stress tests or capital requirements that regulators may want the banks to impose on energy companies, for then the regulators would be using their own interventions as the justification for intervening. As yet, however, non-official market participants can’t seem to see spontaneous causes for this threat to the energy sector.

But my tentative point is made more vividly and powerfully by the economist John Cochrane (quoted by Stuttaford) in an address to the European Central Bank in a reply to one of its senior executives:

Let me quote from ECB executive board member Isabel Schnabel’s recent speech. I don’t mean to pick on her, but she expresses the climate agenda very well, and her speech bears the ECB imprimatur. She recommends that,

‘First, as prudential supervisor, we have an obligation to protect the safety and soundness of the banking sector. This includes making sure that banks properly assess the risks from carbon-intensive exposures. . . .’

Let me point out the unclothed emperor: climate change does not pose any financial risk at the one-, five-, or even ten-year horizon at which one can conceivably assess the risk to bank assets. Repeating the contrary in speeches does not make it so. Risk means variance, unforeseen events. We know exactly where the climate is going in the next five to ten years. Hurricanes and floods, though influenced by climate change, are well modeled for the next five to ten years. Advanced economies and financial systems are remarkably impervious to weather. Relative market demand for fossil vs. alternative energy is as easy or hard to forecast as anything else in the economy. Exxon bonds are factually safer, financially, than Tesla bonds, and easier to value. The main risk to fossil fuel companies is that regulators will destroy them, as the ECB proposes to do, a risk regulators themselves control. (My italics.)

“A risk regulators themselves control.” I hesitate to accuse a former governor of the Bank of England, a former Vice President of the United States, and a former Mayor of New York of financial legerdemain, but I think there are laws against stock manipulation of that kind—though I doubt legislators ever envisaged fraud on the scale of nine trillion dollars.

My own advice to investors and pension fund managers is to fight shy of the “watermelon investments” recommended by the great and good. They are written in Green ink today, Red ink tomorrow.

Consider tobacco companies instead. They survived the legal and regulatory onslaught, and today they’re nice little earners.

The Year the Lights Went Out in California

A famous definition of insanity is doing the same thing over and over expecting a different result. California energy policymakers have been monomaniacal about imposing the “climate” agenda. California is presently imposing rolling blackouts due to a shortage of supply, for the second time in less than a year. Energy crises there are not infrequent, and policymakers only press for more in the wake of the havoc this wreaks.

The insult to their own self-inflicted injuries is the demand that the rest of the country suffer under it, as well. Call it the “Green New Deal” though, like most flops, it has already been re-branded, as “Net Zero.”

The climate agenda is not an agenda that claims it will impact the climate, so let’s get that out of the way up front. “Climate,” in policy terms, means imposing energy scarcity. 

This is done through price rationing – recall a presidential candidate boasting to the San Francisco Chronicle editorial board that “electricity rates would necessarily skyrocket… because I’m capping greenhouse gases”? The key word wasn’t “skyrocket,” it was “necessarily.” It’s a feature of climate policy, not a bug. Call it a way to force seniors and the poor, indeed anyone on a low or fixed income, to choose between heating and eating.

It is also done through rationing the actual physical supply of reliable sources of electricity, known as “dispatchable” sources, i.e., whose production can be sent where it’s needed, when it’s needed. The combination leads to “energy poverty” for some, and blackouts for all. 

California’s problem is elementary and one that dogs all “green”-obsessed jurisdictions. In short, each state must have the capacity at all times to produce (or arrange for the importation of) enough power to run its needs. It can dial the dispatchable power down as renewables get into the mood of pitching in, and dial it back up when they stop (say, when the wind ebbs or sun goes down). 

That’s wasteful and inefficient of course, but the agenda creates perverse incentives – build expensive redundancies to meet mandates and with a guaranteed return of investment, but don’t replace or even maintain older, working equipment. Rent-seeking utilities have supported it because the system encourages them to lobby for more new construction with a guaranteed return on investment. The more expensive and redundant, the better! 

So, California is not building dispatchable capacity, and instead is prematurely forcing closure of both nuclear and gas plants while mandating renewables and expensive battery storage, which at the scale required is not realistic. In fact, we are seeing again how grossly irresponsible it is. 

True, one small power plant failed and another was unavailable because it had been put out of service – coherent systems are designed with the understanding that a certain portion of supply will be off-line at any given time. That is, one ensures power reserves. But California has closed its margin for error in response to anti-nuclear and climate change hysterias.

Not long after the October 2019 rolling blackouts, a report commissioned by the beleaguered utility PG&E, obtained under California’s Public Records Act by the Wall Street Journal, predicted that the frequency of these backouts would double over the next 15 years and then double again in the next 15. Also in 2019, California’s Public Utilities Commission warned of shortages as early as 2021 on hot summer evenings. The Journal editorial page gave credit it where it’s due.

That day has arrived a year early. Congratulations to Democrats for beating their own forecasts.

Michael Shellenberger is a former candidate for governor of California who ran largely on the insanity of the state’s man-made energy policy disaster. Reminiscent of the old joke, waiter, the food was horrible, and the portions too small, he notes that “California saw its electricity prices rise six times more than the rest of the United States from 2011 to 2019, due to its huge expansion of renewables.”

This dangerous misery is inarguably the result of misguided policies. Whether this agenda is cruel by intent or merely some condition like the aforementioned definition of insanity, its practitioners show no signs of learning from their own debacles. Joe Biden and Kamala Harris each have sworn fealty to imposing this on the rest of the country.

They do so in the name of the climate, of avoiding more deaths from heat by imposing policies no one actually claims will impact the temperature – but which are shown to increase risk of death not only from heat stroke, but massively increase deaths from hypothermia. These deaths are mostly among seniors, the same demographic ravaged by reckless policy responses to Covid-19 (which also were grounded in worst-case – i.e., least likely – computer-modeled projections).

It’s past time for rational Democrats to stand up to the radical environmentalist wing of their party. Republican must free themselves from the rent-seeking lobbies of utilities and renewables “investors” (actual investments require risk, not guaranteed welfare). Those are the two halves of the Bootleggers-and-Baptists coalition enabling the Climate Industrial Complex.

Policymaking is full of the Noble Lie, the cynical understanding that the public will accept this or that policy so long as it’s to avert catastrophe -- take the government-imposed restrictions attending the Wuhan virus, for example. But as the social costs of energy rationing increase, including the disgrace of a butcher’s bill from energy poverty, it is difficult to argue that the Noble Lie of climate policy is not the most ignoble of them all.