More than just a PR exercise, ESG ratings can dramatically impact a company’s ability to raise capital. Equity financing is increasingly challenging for organisations with poor ESG profiles, such as fossil fuel companies.
Asset owners that choose to pursue a greener investment strategy are now feeling compelled to dump planet-wrecking stocks from their portfolios, reducing their exposure to climate risk and replacing it with low carbon investment opportunities.
All sounds great, but here is the catch…
The way capital markets behave is a product of strict supply and demand dynamics that determine prices and return on investment. If the demand for oil and oil-related products still exists and current government intervention is not enough to drive its consumption down, by divesting in fossil fuel companies, aren’t we just inadvertently creating investment opportunities for institutions that perhaps do not hold themselves to the same standards as the majority of the developed world? In short, can we force fix the supply side of this equation without drastically influencing demand?
Guy Opperman, UK pensions minister, recently said that he wants “a partnership between trustees, asset managers, and fossil fuel groups as these companies transform themselves into clean energy companies”. Whilst it is clear that these companies must be held accountable for their environmental footprint, shouldn’t we as a society leverage their know-how, capital and human resources to help us move the dial and ensure a smooth energy transition?
The recent European Bank for Reconstruction and Development (EBRD) Just Transition initiative is predicated on the principle that the benefits of a green economy transition need to be shared widely, while also supporting those who stand to lose economically, be it countries (fossil fuel net exporters), industries or individuals. Through strategic partnerships and project financing, the EBRD is targeting the conversion of fossil fuel assets into renewables, while simultaneously protecting the livelihoods of those that are dependent on high-emission business activities.
So, to use a popular modern expression, should we ‘cancel’ fossil fuel companies or instead apply a healthy dose of realism to this problem and ensure they are active players in the green revolution that we so desperately need?
If you’d like to discuss any of the points raised in more detail, please don’t hesitate to contact me.