Global MarketsInvestor PsychologyMacro Trends

The big financial players are turning green

26 Oct 2021 6 month(s) ago

Following what the big investors are doing increasingly means thinking low emissions.

When investing, one commonly used method is to follow the big money. In Australia the biggest players in the stock market are the superannuation funds. They have about $3 trillion under management which is about 50 per cent more than the value of the Australian stock market. It is very clear that they are focusing their investment decisions on what will reduce carbon emissions.

That should factor into the thinking of SMSF investors as well. It does not mean that they should necessarily follow the climate change herd, but if investing in companies that create high emissions, a more contra strategy might be apropriate.

Witness the comments of HESTA chief executive Debby Blakey. She claims the Investor Group on Climate Change (IGCC), a collaboration of Australasian institutional investors (who wield the big money in the market) estimates that if Australia adopted Paris-aligned 2030 goals and committed to net zero, it could “unlock $131 billion in additional investment and job opportunities over the course of this decade.” New transactions, in other words.

“Our country’s more than $3 trillion superannuation industry represents an incredible national advantage in positioning Australia for a low-carbon future,” she said. “Institutional investors have the long-term investment focus and the skills and experience in regional investing to support sustainable job creation and to help communities transition.”

IGCC research of its Australian and New Zealand institutional investor member base found 40 per cent have portfolio-wide commitments.

There is similar thinking evident throughout the market. Local stockbrokers and consultants are obsessed with ESG ratings, continually advising the big institutional funds that they must urgently remove ESG risk from their portfolios. BHP, the world’s biggest miner, recently sold off half its oil and gas assets to Woodside Petroleum in order to improve its ESG rating, which the company clearly thinks it needs to do to protect its share price.

The pressure from outside the market is also intense. For instance, the Grattan Institute has released a report saying that Australia needs to switch to electric cars to cut carbon emissions, “but we also need to ensure we don’t become more dependent on cars as we emerge from the COVID pandemic.”

Grattan says the Federal Government should impose a cap, or ceiling, on the emissions allowed from new cars sold in Australia each year, and to ratchet the ceiling down to zero by 2035. Then they go full fascist, which seems to be the fashion these days. Must crush freedom of choice whenever possible.

“Cheaper driving could mean more driving, so state and local governments should act to discourage driving and make public transport and cycling safer and more attractive.” I guess transport in Communist China used to be mostly bicycles, so it must be a good idea.

Meanwhile, Bank of America has made an estimate of the amount required to reach so-called net zero, which is effectively a plan to monetise air quality. Here is a chart:

“The energy transition to a net zero greenhouse gas (GHG) economy by 2050 will be a very expensive exercise, estimated by the IEA (International Energy Agency) at $US150 trillion of total investment, over a period of 30 years. At $US5 trillion per annum, the IEA see it costing as much as the entire US tax base every year for 30 years.

“BNEF (BloombergNEF) has a higher estimate that the total investment needed for energy supply and infrastructure could be as high as $US173 trillion through 2050, or up to $US5.8 trillion annually, which is nearly three times the amount invested on an annual basis today. But it can be done, with technology, economy, markets and ESG (Environment, Sustainability and Governance] joining forces.”

The Bank of America report says emission-linked bonds and loans jumped to about $US3 trillion year, and 30 per cent of the flows into global equities (stock markets) are going into ESG, to “support climate-friendly investments, as well as funding new ones needed to further decarbonize our planet like green mining, green hydrogen or carbon capture.”

Critics of investing such large amounts argue that this money cannot be fully provided by the private sector and governments. They have a point. Government budgets are stretched horribly after COVID and there is only about $US100 trillion in global assets under management in the world.

The gap is likely to be made up by scaling up what is called Quantitative Easing (QE), whereby central banks use their reserve powers to effectively print money. QE has been heavily used around the world as a response to COVID.

That is about as ‘unsustainable’ – let me repeat, ‘unsustainable’ – as it is possible to imagine.


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