Welcome to Moral Money. One thing to start: Moral Money subscribers are entitled to a complimentary pass to the FT’s Investing for Good Europe: Mainstreaming ESG event on November 3. Check out the full event agenda here, which includes a keynote interview with Marisa Drew, chief sustainability officer at Credit Suisse.
Today we have:
A fossil fuel conundrum for Canada’s giant pension fund
The cost of going green is not in style (yet)
Gas companies face credit threat
How green is your art gallery?
Canada’s largest investor backs fossil fuels while promoting ESG bona fides
The science is clear: upwards of 80 per cent of the world’s fossil fuel reserves need to stay in the ground if there is to be any hope of controlling climate change. That creates a massive risk for anyone who owns these assets, but as of now — with the vast majority of the world still running on fossil fuels — many large investors are not in a rush to ditch oil and gas companies.
The UN-backed Net-Zero Asset Owner Alliance, whose members committed to cutting carbon from their portfolios by 2050, believes working with fossil fuel producers to help them transform into clean energy companies is more effective than divesting. Sticking with the companies, they say, allows investors to push for the shift to renewables and speed up the transition to a carbon-free economy.
One could easily argue it’s not working. But the alliance’s premise is that things would be even worse if climate-conscious investors all pulled their money and walked away.
Another critical issue for investors is ensuring the people in regions dependent on fossil fuel money are not abandoned and left to rot as the world’s energy needs change. For countries like Canada, where oil and gas make up a large part of the economy, this is especially important.
The energy sector accounted for more than 10 per cent of Canada’s gross domestic product and supported more than 800,000 jobs in 2019, so it comes as little surprise that its largest investor, the C$434bn Canada Pension Plan Investment Board (CPPIB), is a strong backer of fossil fuels, even as it sets out to show it is taking ESG seriously.
“There are clearly stakeholders asking for investors to exclude oil and gas companies from their portfolios. To do that, I think, would be an active short on human ingenuity,” Richard Manley, CPPIB’s head of sustainable investing, told Moral Money. “You actually have to take a very deliberate view that these management teams will not respond to changing regulation and changing expectations.”
CPPIB sees big potential in hydrogen, solar and geothermal energy but oil and gas will be part of the equation for a long time, said Mr Manley. He expects that technology such as carbon capture will emerge to keep the industry viable even as emissions regulations ratchet up.
“Carbon dioxide is a piece of chemistry headache,” he said. “Every economic challenge or every technological challenge the oil and gas industry has confronted, it has mobilised its human capital and its financial capital to find a solution.”
Climate advocates are sceptical, to say the least. Cynthia Williams, a professor at York University’s Osgoode Hall Law School, suggests the CPPIB may be shirking its duty to society.
CPPIB is clear that its duty is to “maximise returns without undue risk of loss”. But Ms Williams argues that it needs to “fundamentally re-evaluate its role”.
“Should CPP Investments be making investments that are supporting the Canadian economy as it is now, resource dependent and inconsistent with the low-carbon economy that is needed, with all the financial risks that approach entails?” she wrote in a paper published by the Canada Climate Law Initiative in September. “We contend that it is time to have a serious discussion of those questions and the role of a significant public pension fund in its home country.”
The fund, which provides retirement income for 20m people, has a fiduciary duty to promote “intergenerational equity”, she argues, and that would mean proactively promoting a low-carbon future. (Billy Nauman)
Consumers fail to drive fashion towards green progress
Biarritz in August is a pleasure to die for. Biarritz in August 2019 was also where Kering chief executive François-Henri Pinault and French president Emmanuel Macron won applause for a new “fashion pact”, which included agreements by Burberry, Inditex, Prada and other clothing companies to arrest global warming, restore biodiversity and protect oceans. Since then, Burberry, Chanel and others have issued sustainability bonds that have been oversubscribed.
Despite all this good news there is a big problem — customers are not interested. According to an October 22 report from Morgan Stanley on brands’ sustainability, consumers say they value sustainability when picking clothing, but “we have not yet seen any evidence that confirms this”.
“Consumers are generally not ready to pay more for environmentally friendly products,” the bank said. As evidence, Morgan Stanley said “sustainable” brands did not make money, specifically Stella McCartney was “barely profitable”/ (FT Weekend’s Grace Cook spoke with the designer about her A-Z manifesto for environmental change here.)
Consumers are actually getting less sustainable as “generation selfie” and Instagram’s popularity mean people don’t want to be seen in the same look twice online. Today, the average consumer in the UK buys 40 pieces of clothing a year, Morgan Stanley said. This compares with about 20 items 20 years ago — and today these clothes are only worn seven times on average.
For now, brands’ sustainability efforts are not being developed to grow sales but to boost reputation and ward off pesky activists. This is a major problem because companies’ desire for potential sales is surely stronger than the desire to mitigate risks.
Government officials, including Mr Macron, could do more. A mix of taxes, subsidies and enforcement penalties could upend the economics so that sustainable options get less expensive. For now, the free market appears incapable of reversing the garment sector’s position as one of the most polluting industries in the world. (Patrick Temple-West)
A ‘bridge’ too far: ESG threatens gas companies’ credit
Natural gas production globally hit a record high in 2019 as the US became the third-largest exporter, according to the International Energy Agency. A cleaner alternative to coal and oil, natural gas is seen as a “bridge fuel” by Shell and other energy providers that can fill gaps in solar and wind power generation.
But new government regulations to limit carbon emissions pose long-term credit risks for natural gas investments, according to Moody’s quarterly ESG focus. “Natural gas is increasingly being called into question over environmental and greenhouse gas (GHG) emissions,” Moody’s said. “As carbon transition efforts gain ground, natural gas consumption may see a measured reduction in order to meet 2040 and 2050 GHG goals.”
Yet natural gas remains popular. Pew Research, a non-partisan survey provider, said in an October 19 report that 69 per cent of adults in 20 countries favoured expanding natural gas production. In the US, support for natural gas was sharply divided along political lines. Less than half of Democrats support more natural gas while 88 per cent of Republicans support the fuel. This split comes down to fracking — the use of hydraulic fracturing that unlocks natural gas — which is supported by less than a quarter of Democrats, Pew said.
Liberal bastions New York and California have aggressive emissions restrictions, Moody’s said. US efforts to cut carbon emissions could intensify if liberals twist arms under a potential Joe Biden presidency. (Patrick Temple-West)
Chart of the day
How green is your art gallery?
Climate change comes to the fore for art galleries this week with the launch of the Gallery Climate Coalition. The group’s aim is to persuade the industry to reduce its carbon footprint by 50 per cent over the next 10 years, in line with the Paris Agreement (please check out the FT’s article here).
Two of the founding galleries, Thomas Dane and Kate MacGarry, have commissioned in-depth audits and have made the findings public as a galvanising call to action. For both, business flights, air freight for art and building energy use made up the bulk of their footprint in 2018-19, though with different splits. Art transport overseas topped Dane’s activity (57 per cent) with three large air shipments — one to Hong Kong and two to Los Angeles — accounting for more than 40 per cent of this category.
Grit in the oyster
This week, HSBC announced a new initiative with the government of Queensland, Australia, to sell tradable “reef credits” that encourage farmers to stop polluting the water as a way to protect the Great Barrier Reef. But given the fact that Queensland is one of the world’s largest coal producers — and the Australian government itself has identified climate change as a threat to the reef — critics were quick to cry greenwashing.
Ulf Erlandsson of the Anthropocene Fixed Income Institute, a non-profit group, said the A$1m programme was “laughable” and compared it to papal indulgences, where people in olden times could pay the Catholic Church to absolve them of their sins.
Spanish airports operator Aena is about to become the first company in the world to give shareholders an annual vote on its effort to tackle climate change, bowing to pressure from billionaire UK hedge fund manager Chris Hohn.
Moral Money has previously covered the hydrogen phenomenon in the global energy transition. Now, Canberra has prioritised a $36bn renewable energy project which aims to build the world’s biggest power station and export green hydrogen from a remote desert in the outback to Asia. It reflects a shifting attitude on climate change from a previously sceptical conservative government.