Parallels between COP and ESG narratives

I have so far strenuously avoided touching on the subject of COP28 which is unfolding in the UAE but there comes a time when too much is enough. There had already been enough of a moaning and a wailing and a gnashing of teeth about it being held in the lion’s den and with Sultan Al-Jaber having been appointed President of the convocation. I have long turned my back on the annual Global Economic Forum in Davos as a prestige-bound boondoggle but now I must go one step further and place COP ahead of the GEF as a meaningless performance. It differs only by the fact that not only the rich and good are invited but additionally it offers the non-plutocrats an opportunity to have a bit of a luxury awayday. Are you sitting comfortably? COP28 has an eye-watering 97,000 individuals registered to attend.  Of those it is suggested 2,400 are in some way connected to the coal, oil, and gas industries. So?

I am as concerned as the next man for the future of the planet. Well, maybe not quite for I have no fears for our Earth. It will be here for many millions of years. It is us humans who might not. I have in many of my pieces argued over the years that it is not that we are consuming too many resources but that there are too many of us consuming them. One of my key numbers came to light during the Covid-19 pandemic when it was widely being compared with the Spanish flu of a century earlier. How many died in the former can at best be estimated but what is known albeit only as a best guess is that in 1918 the global population was at or around 1.8 billion. When Covid-19 popped up pretty much on the nail 100 years later, that number had risen to 7.8 billion.

The rapid rise in economic output is inextricably linked to hydrocarbons and our ability to reduce the unit cost of energy consumed. It’s over 10 years since I found on my desk a report by the chief economist of some broking firm which sketched out how we had developed from the unit of one man’s daily physical ability being the sole measure of output. That lasted for tens of thousands of years until the horse and the ox were trained to increase the amount of energy which could under the control of that same one man be put to daily work. That production model also lasted for a long time until waterpower was first tamed, followed in the early nineteenth century by steam. At each stage, the unit cost of energy fell. The quantum leap came with oil and when the speed with which our economies grew, and the concomitant growth trajectory went exponential.

The chief economist went on to query how we were ever going to maintain, let alone grow our economies if, as and when we began to decarbonise. In ideal circumstances, and technology has come on leaps and bounds in the past 20 or 30 years, the efficiency of oil is unbeatable. How I wish I had not lost the report and how I wish I could remember who had produced it. It was a work of genius.

The efficiency of oil is best demonstrated if one imagines the calorific value of the content of an oil tanker. I’m thinking truck rather than ship but the same applies to both. So, I send an oil tanker on the road from London to Glasgow. When the truck arrives, other than the fuel it has itself used, its cargo has lost nothing of its energy. If I were to transmit the same quantum of electric energy through cables from London to Glasgow, by the time it arrived the vast majority would have been lost. Oil for the while remains the best we have got and Sultan Al-Jaber was not wrong when he added that were we to immediately give up oil, we might as well retreat to our caves. The transition from hydrocarbons to renewables is a long process and the cost, should we wish to maintain current economic output, let along grow it, will be high and not only in monetary terms.

The little Swedish truant Greta Thunberg might in 2019 have sailed across the Atlantic to New York in order to make her point but she forgot to mention that Malizia II was a highly sophisticated racing yacht built of composites with modern lightweight sails, all of which were oil-based. Had she gone in a wooden ship with canvas sails and jute rigging she might have been a little more credible, but then again might have spent three months getting there, if ever.  And I’m pretty sure that next to none of the 97,000 will have travelled to the UAE by bicycle or by camel. Please don’t get me wrong, I’m not a climate denier and I try do my bit to constrain my energy usage but what can truly be expected to come out of a circus the size of COP conferences? At COP26 in Glasgow, there were “only” 40,000 registered delegates. Two years on and the number has more than doubled. If the conference’s tangible output hasn’t, then we have another case of energy inefficiency and falling manpower productivity.  

It’s not that long ago that the investment industry was totally wrapped up in ESG. Everything had to be aligned with a series of objectives with respect to Environment, Social and Governance. After a series of greenwashing scandals, the ESG thing looks to be on its way to the shredder.  At its worst, investment vehicles and companies alike were running around looking for the ratings agency which would provide them with the best possible ESG score. And in the same way in which everybody can find an index which they can outperform, they found a rating scale which gave them a green light on the ESG front.

It was argued at the time that if governance was to be so important – diversity was writ in capital letters – all serious ESG chasers would have to begin by divesting from Russia, China, Africa, and a fair part of Latin America too. It was clear that running an emerging market fund while at the same time claiming to be in any way ESG compliant was one of the greatest hypocrisies of our time. This brings me back to the issue of rules-based and principle-based regulation. Draw a line in the sand and somewhere someone will immediately begin to seek a way of circumnavigating it. The FT’s most recent Big Read takes a closer look at the shift in the way investors treat the ailing principles of ESG. It begins with BlackRock and its supremo Larry Fink who had been the most vigorous of ESG flag wavers.

I recall some stats being released which claimed returns on strictly ESG-compliant funds to be superior. My own experience of the sector goes back to before the term ESG had been dreamt up by someone’s marketing department and when we still called them ethical funds. It was widely accepted that there was a cost to being ethical by not owning hydrocarbon producers or tobacco or alcohol stocks. Suppliers of systemic weedkillers and genetically modified seeds such as Monsanto also found themselves on the no-go list. But if it all meant investing in a better world, lower performance was a price worth paying. It was clear to anybody who wanted to see it that the dream of investing ethically but with the prospect of higher returns was a fantasy too far.  That was unless one was prepared to speculate that the reduced investment universe of ESG-compliant firms would lead to more buyers than sellers and stock performance driven not by earnings and dividends but simply by the shortage of suitable supply relative to the burgeoning inflows. To some of the hedge funds, this was an easy trade and equivalent to medieval highwaymen holding up and plundering pilgrims.

The sharp rise in inflation – and investors acknowledging Berthold Brecht’s “First comes the grub, then the morality” – has focused the mind on monetary rather than ethical satisfaction and as the ESG model has proven to a large part to have been made up of smoke and mirrors, it has become discredited. Now even BlackRock, once its greatest proponent, is gently de-emphasising its relevance.  

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