A weekly five-point roundup of critical events in the energy transition and the implications of climate change for business and finance.
Rich Countries Say Almost Any Investment They Make Fights Climate Change
What happened: At the 2015 Paris talks, developed nations promised the United Nations they would funnel $100 billion into what is broadly referred to as “climate finance”: projects that might have some ability to mitigate the effects of climate change. Some countries, however, are really stretching that already broad definition.
Why it matters: Because it increases skepticism of any and all projects that claim to have a climate angle. Japan financing a new coal plant in Bangladesh; Belgium providing grants to a romance movie; Italy helping a retailer open gelato stores throughout Asia. If these are “climate finance” then there’s a chance these countries risk diluting the words until they mean nothing.
What’s next: Some countries, like the United States and Canada, submit detailed reports of their climate finance spending. Expect Reuters’ big report to ripple through the U.N. in a way that promotes a higher standard for all other country’s reporting. (By Staff, Reuters)
Here’s Why Your Bank Isn’t Worried About Climate Credit Risk Yet
What happened: Earlier this year, British bank Standard Chartered Plc. did something few of its peers have done: in its annual report, it disclosed when it might start to feel the effects of credit losses from some of the higher-carbon sectors in its loan book. In short, last year “climate risks were financially irrelevant for the bank” and that doesn’t look to change for five, maybe even 10, years.
Why it matters: There’s a disconnect between rhetoric and reality. For banks, at least, high carbon emitters are “currently a gold mine” because of commodity prices. What’s more, the bank has little incentive to change, since most of its loans to this sector come due within the next five years. Translation: well before the credit worthiness of those same companies might pose some risk to the bank’s balance sheet.
What’s next: More chicken and egg problems. The companies that most need to forge a path towards energy transition are also those least incentivized to do so. And as this report suggests, banks are in no hurry to goad some of their best customers into changing. (By Alastair Marsh, Bloomberg)
Climate Activism Needs a Pivot. Here’s a Possibility.
What happened: “Of the dozens of proposals put forward at annual shareholder meetings of U.S. banks, insurers, and oil and gas companies over the last month, only one received majority support, the worst showing for ESG-related proposals since 2017.”
Why it matters: Climate activist shareholders are getting bolder as their calls for action are hitting more roadblocks. It’s hard to know who exactly is to blame, but at some point ESG, and especially its focus on diversity issues, became a dirty word, and as a result more company boards, and more shareholders, are wary of anything associated with the term.
What’s next: Either lawsuits or a lack of investment. Possibly both. The Sierra Club in Australia and the U.K.’s largest pension fund chased those strategies, respectively, and managed to reroute billions in investments. Expect one or both to land stateside at a large company or fund sometime soon. (By Tim McDonnell, Semafor)
Study Says Green Investing Can Actually Lead to More Pollution
What happened: A new study co-authored by researchers at Yale and Boston College finds that “the most widely used approach to sustainable investment is actively pushing heavily polluting firms toward greater greenhouse gas emissions.”
Why it matters: Investing in so-called “green” companies often means plowing money into sectors like insurance, health care, or financial services. These companies have low emissions by nature of what they do, but a lower cost of capital doesn’t suddenly make them greener. The assumption that increasing the cost of capital for so-called “brown” companies, like oil and gas producers, would incentivize them to reduce their carbon emissions turns out to be backwards: instead, the paper found, it often encourages them to double down on the dirtier, but more profitable, short-term investments, and prevents them from long-term, initially unprofitable, but ultimately greener endeavors.
What’s next: “With this research, Shue hopes to offer a counterweight to media coverage that tends to focus on the laudable goals of sustainable investing, rather than its concrete outcomes. The current discussion highlights the incentives offered to green firms without realizing that brown firms have much greater scope to change their environmental impact.” (By Susie Allen, Yale Insights)
India’s Rapid Train Electrification Now Has to Contend With Tragedy
What happened: Since the 2014 election of Prime Minister Narendra Modi, India has made massive investments in electrifying and modernizing one of the world’s largest railway systems, to the point that it is now more electrified than France or the U.K. The worst rail disaster in decades threatens to halt progress.
Why it matters: The death count of 275 and counting in the Indian state of Goa is the highest of any crash since 1999. And it has highlighted a gap between PM Modi’s accelerated investment in new electric rail lines, and a lack of investment in the maintenance of existing tracks.
What’s next: Modernizing one of the largest rail lines in the world was both a political winner and a boon for the climate. Making similarly-sized investments in safety and maintenance will garner far few headlines, but might end up happening anyway to avoid the sorts of tragedies that threaten further electrification. (By John Reed, The FInancial Times)