Welcome to the August/early September edition of the Chronicle. August was a relatively quiet month, but activity is ramping up very rapidly with many reports, decisions and events in September. We've also linked to some excellent longreads in the financial media, such as Adam Tooze tackling the topic of monetary policy and climate change and reflections on the great achievements of economist Martin Weitzman.
Oil stocks begin to reflect transition risk
A new sentiment towards oil & gas stocks has crystallised during the Northern Hemisphere summer: for a while, share prices have remained lacklustre even when oil prices are high, and now some large asset managers and owners are retreating from the sector altogether to minimise their transition risk.
Bloomberg’s Liam Denning describes it as “the dumb money wising up”, arguing that the increasing wariness of investors about oil companies, is a combination of foresight - about the shift of growth away from oil - and of hindsight, or by recognising that with exploration & production companies shares “past windfalls generated by price rallies tended to accrue to drilling budgets and executive compensation instead of [investors]”.
The FT explores this same theme, calling it a “crisis of faith” among investors in US energy stocks. Comments from analysts and investment managers in this story indicate that the shift in attitude is secular, and that even if the future holds more upticks for stock prices, the wariness is here to stay. Redburn, a UK investment research firm, went further in September by declaring the entire oil & gas exploration & production sector as “sell” rated [Financial Times]. Redburn said “it believed long-term forecasts for oil demand growth were at least 30 per cent too high, saying the International Energy Agency — widely used as a benchmark in the industry — and others were underestimating the speed of regulatory and technological shifts.”
The theme was underlined by a couple of small but symbolic inflection points: firstly, ExxonMobil dropped out of the 10 biggest S&P 500 companies for the first time since the index’s inception 90 years ago. [Bloomberg]. And back in July the FTSE Russell Index renamed the Oil & gas producers sector category “to “Non-renewable energy”. Perhaps even more worrying for the oil & gas sector, they find themselves lumped in with coal producers - who were previously under Basic materials/mining category. [Guardian] [Financial Times]
Investors and businesses manage Brazilian exposure in response to Amazon fires
The $1tn Norwegian oil fund will be scrutinising supply chains and businesses, "expecting companies to have a strategy for reducing deforestation in their own activities and supply chains” [Bloomberg]. Nordea Asset Management said it had suspended purchasing any Brazilian sovereign debt, and a number of large clothing businesses, including VF Corporation, announced they were excluding Brazilian leather from their purchases. [Guardian]
Sustainable funds vote with management against climate resolutions
Funds labelled sustainable by BlackRock, Vanguard and JP Morgan Asset Management mostly voted with management on social and environmental resolutions; even when those resolutions won as much as 40 per cent of the vote. Analysis from Morningstar indicates BlackRock's support for management increased substantially over the previous year, rising from 23% of environment and social proposals to 72% this year. In contrast some asset managers, such as Deutsche Bank's DWS, supported a number of resolutions across all their products, not just their sustainable funds. [Financial Times]
PRI launches tool for modelling abrupt transition
The PRI launched its Inevitable Policy Response scenario at its conference in Paris today. The IPR seeks to serve as a realistic transition scenario, as opposed to the IEA's central New Policies Scenario, which PRI chief executive Fiona Reynolds described in the FT as "an unrealistic policy outlook" that "assumes the world will glide towards 3C without any further climate policy action beyond what has already been announced". [Financial Times] The IPR was developed with Vivid Economics, Energy Transition Advisors, Grantham LSE, 2 Degrees Investing Initiative and Carbon Tracker Initiative. Rather than being constrained by a temperature goal, the IPR models policy responses to climate change, hinging on a ramp up of action around 2023 to 2025 under the ratchet mechanisms of the Paris Agreement. [Responsible Investor] [PRI]
The Federal Reserve is mulling climate change
Unlike most of its peers, the US central bank hasn't joined the Network for Greening the Financial System, where questions about the intersection of monetary policy and climate change are thrashed out. But the San Francisco Fed is hosting a symposium on climate change in November, with a call for papers based on the working paper published by the FRBSF in March by Glenn Ruddesbusch [Axios].
There was also some deep coverage of the central banking-and-climate issue in the US media in August, with Foreign Policy running a long, thoughtful piece by economic historian Adam Tooze, and by the Atlantic, which published an interview with Tooze that is equally worth reading.
Banks’ lobby group writes to central banks’ climate group
The Institute of International Finance - which represents many big international banks - expressed support for the Network for Greening the Financial System’s work programme, but warned against supporting a “brown/green” taxonomy to identify the climate riskiness of assets, as the NGFS did in its First Comprehensive Report in April. The IIF letter describes a brown/green approach as binary, and says that greenwashing can be addressed by disclosure “and application of the current conduct norms around suitability, conflicts of interest, and fraud that have governed oversight of financial services through many cycles of innovation in the financial sector”. IIF also suggests NGFS look to process-based regulation used in the food and agriculture sector, rather regulation that focuses on outcomes.
EIB proposes a new energy policy that excludes all fossil fuels
The European Investment Bank, which contributed more than €14bn to fossil gas projects in the last five years, released a draft revision of its energy lending policy, proposing to fully stop fossil-fuel lending after 2020. This would mean an end to loans from the EIB to oil and gas exploration, gas pipelines, LNG terminals or fossil-fuel based heat and power generation, by the end of 2020. The proposal still needs to be approved by the EIB Board, which meets today (September 10), although a decision may not be immediately revealed. [Bloomberg] [EIB statement]
Germany reviews its fiscal stance, with an eye to funding climate measures
Germany’s “black zero” could turn green, as senior government figures urge deficit spending on climate measures. Finance minister Olaf Scholz last week exhorted the government to take advantage of the fact that its borrowing costs are very low; which is something of an understatement when real costs are negative. The debate will play out in discussions over the 2020 budget through November; Reuters, which has been covering this closely, has a timeline of the upcoming political moments.
Bundesbank becomes a more vocal NGFS contributor
The Bundesbank had initially been seen as one of the less enthusiastic members of the Network for Greening the Financial System, but Sabine Maunderer, a member of the Bundesbank’s executive board now chairs the NGFS workstream focused on scaling up green finance. She spoke with Responsible Investor in July, and more recently with Bloomberg. Maunderer said a green Bund issue was likely, and that the bank was looking at improving sustainability within its own portfolio. In terms of market operations, however, she indicated an aversion to positive weighting of green assets in purchasing programs, saying “I hope and expect that financial markets will become greener and more sustainable. Once that happens, we will be able to reflect that in our asset-purchase programs as well.”
Lagarde makes positive signals on climate change, with “market neutral” limits
Meanwhile Christine Lagarde fielded a number of questions from MEPs relating to climate change, at a hearing last week ahead of her expected appointment as president of the European Central Bank. Ms Lagarde stated that climate change was one of the most pressing challenges facing the world, and that “any institution” had to consider climate and environment risks at its heart. On more specific matters, her answers indicated openness to the ECB shifting the green mix of its portfolio and asset purchasing programmes, but only to the extent that it reflected the mix of the broader market. [New York Times] Still, organisations calling for greener policies said Ms Lagarde’s responses struck a more supportive tone on climate change than that of Mario Draghi, the outgoing president. [ClimateHomeNews]
BlackRock’s fossil fuel investments wipe US$90 billion in investor value
A first-of-its-kind analysis by the Institute for Energy Economics and Financial Analysis (IEEFA) showed that over the past 10 years, BlackRock lost investors over US$90 billion in value destruction and opportunity cost, due to investments in a few fossil fuel-heavy holdings. The study highlights four companies, ExxonMobil, Chevron, Royal Dutch Shell and BP, as responsible for 75% of those losses. BlackRock responded to the analysis by pointing to the fact that most of its equity holdings are held by its passive arm. [FT and WSJ]
Carbon Tracker issues new 1.5C key stranded assets analysis
The report finds that the project pipelines of listed oil companies would blow through the Paris goals, with companies already having committed $50bn on just 18 oil and gas projects that would undermine climate targets. The industry risks losing some $2.2bn if it fails to account for a shift in government policies. For this update to its "2 Degrees of Separation" reports from 2017 and 2018, Carbon Tracker analysed emissions budgets based on a 1.5C pathway, as well as several IEA scenarios. The new report also assumes that projects will continue until the end of their producing life, rather than ceasing at the end of their economic life. [Carbon Tracker Initiative]
Eminent climate economist Martin Weitzman dies
Prof Martin Weitzman of Harvard passed away in late August at the age of 77. Weitzman was highly regarded for his work exploring how to assess the costs of climate damage and mitigation policy, and his questioning of whether modelling can truly account for “fat tail” risks of dire catastrophic. He co-authored “Climate Shock”, an excellent and accessible book on the topic, with Gernot Wagner in 2014. William Nordhaus, on receiving the Nobel economics award last year, commented that he was surprised Weitzman was not his co-recipient. “The Man Who Got Economists To Take Climate Nightmares Seriously” [Bloomberg] gives a brief overview of his contribution while the Economist has a beautiful obituary.
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