This is the era of parallel universes. Pandemics that are not really pandemics, vaccines supposed to be ‘our one shot of getting out of here’ that only make the problem worse, privacy rights that are merely state-determined privileges as long as you shut up and obey. Don’t complain, this is the reality you are being told to consume.
Another parallel universe, now becoming more obvious in economies and the financial markets, is the ESG (Environment, Sustainability, Governance) movement, which is heavily linked to decarbonising the economy. Leaving aside the question of whether or not the science is accurate or valid, it is increasingly looking like the claim that it is good policy to get out of carbon emissions may be more perilous than thought. Institutional investors, who wield the big money, are patting themselves on the back by including ESG in their metrics, which we will come to later. But they are also supposed to get good returns on the capital, and that could be ever so slightly problematic.
The evidence is growing of big problems in the world’s energy markets. It may be looming as a bigger shock to the world economy than the oil shock of the 1970s, which plunged most of the world into an era of stagflation:
Goldman Sachs has downgraded its forecast for economic growth in China to zero – a stunning prediction, albeit probably temporary. The reason? Energy.
“It's not just Europe that is suffering the mother of all commodity and energy price shocks: slowly but surely a similar fate is befalling China, where a perfect storm of increased regulation, extremely tight global energy supply, the escalating trade spat with Australia, surging coal prices and a crackdown on carbon has led to energy shortages first at factories and manufacturers and more recently, mass blackouts hitting tens of millions of residents in at least three Chinese provinces.”
The risk is of inflation, which would spill over into Australia.
“While blackouts starting to hit household power usage are at most an inconvenience, if one which may soon result in even more civil unrest if these are not contained, a bigger worry is that the already snarled supply chains could get even more broken, leading to even greater supply-disruption driven inflation.
“There’s more than just supply chains: as Goldman's China strategist Hui Shan writes in a note published late on Monday, ‘the recent sharp cuts to production in a range of high-energy-intensity industries add to the already significant downside pressures in the growth outlook.’ Goldman cuts its growth forecasts for Quarter 3 to 0% (qoq annualized), from +1.3% previously and for Q4 to 6.0% annualized, from 8.5% previously.”
Europe is similarly in trouble. A Zero Hedge article says: “Europe is suffering from a historic gas crisis, one which according to Rabobank is now even more extreme than the US oil price shock.
“Europe's energy crisis is not contained to nat gas, and as we discussed over the weekend in another flashback to the 1970s US, UK gas station pumps are running dry in British cities on Monday with vendors rationing sales as a shortage of truckers strained supply chains to breaking point. Pumps across British cities were either closed or had signs saying fuel was unavailable on Monday, Reuters reporters said, with some limiting the amount of fuel each customer could buy. The Petrol Retailers Association (PRA), which represents independent fuel retailers accounting for 65% of all the 8,380 UK forecourts, said members had reported that 50% to 90% of pumps were dry in some areas.”
So that is parallel universe number 1. Parallel universe number 2 is the ESG world of institutional investment, and their advisers. Macquarie reports that ANZ Bank is trying to impress with its ESG, low carbon strategy:
“ANZ has now engaged with 100 of its largest emitting business customers (up from 60 a year ago), supporting them with identifying climate risks and creating transition plans. Of the 100 largest emitters, 40% are outside of Australia. While ~70% have committed to incorporating climate considerations into governance to date, only 64% have pledged to create climate targets and long-term plans.”
And the virtue does not end there:
“ANZ committed to facilitating at least $50bn in sustainable financing by 2025. Since October 2019, ANZ has funded and facilitated ~$14bn for sustainable projects across renewable energy, green buildings, and low-carbon transport.”
Here are the Australian banks' carbon exposures:
Morningstar is also advising institutional investors to do some witch hunting – root out those high carbon transgressions and terminate them.
“Most investors will be aware that natural-resources-focused portfolios carry high ESG risk. Companies in extractive industries produce emissions, effluence, and waste and face challenges related to health and safety, community relations, and business ethics. But investors may not realize that a dividend portfolio carries nearly 20% more ESG risk than the overall market. The fact that a renewable energy portfolio is roughly 10 times as carbon-intensive as the global equity market might also raise eyebrows.”
Got to be terrified of those raised eyebrows.
Meanwhile, back in parallel universe 1, fossil fuel prices are strengthening and economies’ dependence on them is very much a matter of survival.
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