Week 28: Do you want the red or the blue pill?

Dear all,

Another week, another newsletter.

They keep coming, week after week. In more or less the same frequency as the alarming news about the climate emergency.

Hope and despair

I tend to read most of what I come across with some hope. Hope about some systemic shift, about human ingenuity, about collective conscience, about action.

But some of the reports I come across, as well as some news and insights, are hard to bear, hard to read and hard to digest. It is not the speed of alarming things, it is more a matter of the volume and depth of some of them.

Some days it just takes my breath away to read, for example, that the mighty Amazon now emits more carbon dioxide then it saves, or rather processes.

Some days I hate that feeling of being an extra in the film that plays in front of all of us, directed by us and produced by us, while at the same time there are very few you can point your fingers at.

We all share the same destiny. Only very few will be able to afford a 4 square meters colony space box on Mars.

But as in all drama, as in all tragedy and misery, there is light and there is hope.?

Gore sees progress, Biden approves permits to drill

Let’s start this week with some of the positives. Or: let’s pretend for a moment that things are really getting better.

We begin with the good old Al Gore who is hopeful. The world is finally making progress on addressing climate change, he claims .

When you read the piece, do think about the importance of controlling the narrative. If you control the narrative, you control the audience. And if you control the audience, you…

Al Gore likes to quote Dornbusch’s law: “Things take longer to happen than you think they will, and then they happen faster than you thought they could.”

And then he goes on to explain why we should all be hopeful ahead of the COP26 in November:

“It makes all the difference in the world, and all the difference to the world, when the U.S. is on side, leading, and really providing the kind of momentum that’s necessary. We saw that in Paris; I think we're going to see it in Glasgow, as well.”

This is hope expressed the way only an American (ex-)politician can do it (and perhaps a few CEOs of asset management firms). The hero is back. Just like in the old spaghetti western movies. Bad guys, watch out!?

Well, I don’t know exactly who is directing this new movie that Al Gore is starring in, but this part of the movie does not really correspond with the reports and other things I come across.

And while I learned that Gore is hopeful, I read that approvals for companies to drill for oil and gas on U.S. public lands are on pace this year to reach their highest level since George W. Bush was president.

What a blow. It underscores Biden’s reluctance to more forcefully curb petroleum production in the face of industry and Republican resistance. In the first six months of the year, 2,500 permits to drill on public and tribal lands have been approved.

I try to stay positive, I really do, but this makes it very difficult to stay on a positive track.

Seriously, what is going on?

We live in a time where nothing and everything is true.?

The European Green Deal

But okay, let’s focus on the positives. Let’s not give in, we need hope.?

Last week, the European Commission adopted a package of proposals to make the EU’s climate, energy, land use, transport and taxation policies fit for reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels.

You can read about this monumental achievement here . Some of it is new and rather enlightening:

“A new Social Climate Fund is proposed to provide dedicated funding to Member States to help citizens finance investments in energy efficiency, new heating and cooling systems, and cleaner mobility. The Social Climate Fund would be financed by the EU budget, using an amount equivalent to 25% of the expected revenues of emissions trading for building and road transport fuels. It will provide €72.2 billion of funding to Member States, for the period 2025-2032, based on a targeted amendment to the multiannual financial framework. With a proposal to draw on matching Member State funding, the Fund would mobilise €144.4 billion for a socially fair transition.”

Hmm, look at the sentence on how this will be financed, and read it again. 25% of expected revenues. It says a lot. The EU is pulling its weight, crossing the climate bridges.

And now the crescendo, more good news. The European Parliament just voted for pushing EU member states to end fossil fuel subsidies by 2025.

This comes off the back of a new analysis that shows that 16 out of 27 member states are still financing fossil fuel heating, despite calls to phase out gas boilers by 2025 to achieve EU climate neutrality goals.

These dirty subsidies cripple the deployment of clean heating technologies such as heat pumps and solar thermal devices.

Read more here .

Want to know what’s wrong with the world?

In the sci-fi action classic The Matrix from 1999, there’s a scene where the prophetic Morpheus asks Neo, the main character, if he wants to know what’s wrong with the world? If he really wants to know the truth?

Here’s Morpheus’ famous monologue in writing:

“What you know you can’t explain, but you feel it. You’ve felt it your entire life – that there’s something wrong with the world.

You don’t know what it is, but it’s there, like a splinter in your mind, driving you mad.

It is this feeling that has brought you to me. Do you know what I’m talking about? It is everywhere. It is all around us. Even now, in this very room.

You can see it when you look out your window or when you turn on your television. You can feel it when you go to work, when you go to church, when you pay your taxes.

It is the world that has been pulled over your eyes to blind you from the truth.

What truth? That you are a slave, Neo.

Like everyone else, you were born into bondage. Born into a prison that you cannot smell or taste or touch. A prison for your mind.”

Now, a film is a?film, and reality is reality, and what we’ve seen above in the US and EU cases, well, it all sounds and looks very real…

Central banks increase focus on ESG issues

I stay in the positive mode. I mean, why not? The future is not written, and with all ESG muscles we now have in the world and all the trillions of dollars invested in this way, it has to create some tangible change.

I keep my spirit up as I read that around a third of central banks and sovereign wealth funds have raised their focus on ESG issues over the past year as the pandemic has highlighted issues ranging from carbon emissions to inequality.

A total of 63% of the central banks responding to an Invesco survey felt that tackling climate change fell within their mandate – with nearly half believing that mitigating the consequences of climate change should be a monetary policy objective.

Great and positive. Imagine the scale, the volume of assets that will be shifted.

I tell that negative little fellow on my shoulders to beat it. But then, it happens again. I start looking at the ceiling to avoid the words on the screen. Oh no, not again.?

Human rights or profits?

The topic of profits vs human rights is a show stopper in ESG-topia. The dilemma over human rights exposes an uncomfortable tension at the heart of the ESG boom.

Is all the effort spent measuring and evaluating “ESG factors” simply a way to improve returns by avoiding some hitherto under-appreciated risks? Or is investing more “sustainably” an end in itself?

Asset managers love to pretend both these goals are in perfect harmony. Logically, that won’t always be the case. And up to now a poor human rights record has been little barrier to borrowing money from western investors.

Saudi Arabia has successfully sold $32bn of international bonds since the start of 2019, according to data from Bond Radar, despite the worldwide condemnation of the 2018 murder of journalist Jamal Khashoggi linked to Crown Prince Mohammed bin Salman and Riyadh’s military campaign against Houthi rebels in neighbouring Yemen.

Over the same period Russia, under international pressure over events such as its 2014 annexation of Crimea and its role in Syria’s civil war, has raised more than $10bn on international bond markets.

Egypt is a very popular holding among emerging market bond managers, even though president Abdel Fattah al-Sisi’s government holds tens of thousands of government critics in prison on politically-motivated charges, according to Human Rights Watch. Prominent holders of its bonds include BlackRock, AllianceBernstein and Crédit Agricole. ESG and human rights are important issues for all three, according to their websites.

Foreign investors have also grown active in China’s massive bond market, despite the imposition of a security law in Hong Kong and its treatment of the Muslim Uyghur population in Xinjiang province, which the US state department has described as “genocide and crimes against humanity”.?

Maybe now you see why the scene with Morpheus and Neo fits in here. The sad truth is that it’s not a film. It’s the bad, harsh reality.?

Why is this the case? See this chart. It’s called higher yields.?

“We’re not here to measure the extent of human rights violations,” says the head of emerging market debt at a big global asset manager that holds Belarusian government bonds. “We’re not going to go to Saudi Arabia and ask them to become a democracy.”

Nor would their investors wish them to, he argues in this article .?He adds: “Some investors don’t want to invest in countries that have a problem with racism. Does that mean we shouldn’t invest in the US?” he asks.

It’s a funny argument, but also a dangerous one. It means, in a plain English, that everything goes, there are no limits.?

But since March 2021, the EU rules have required fund managers to disclose how they account for the ESG impacts of their investments. And from 2023 they will be asked to provide further information on the human rights records of the countries they lend to, giving investors greater transparency.

I’m so much looking forward to read the reports.

Is ESG just a butterfly-like distraction?

I have tried to be positive, looking for glimpses of the real thing in latest developments in the world of ESG and climate action. While doing so my expectations, another word for hope, began to fade away.

Until I found this splendidly refreshing piece, which is the perfect way to end this newsletter on a the real-thing note.

Recently, Eiji Hirano, the former head of Japan’s (and the world’s) biggest pension fund, cautioned that he sees signs of a stock bubble developing. Not in the rich valuations of Wall Street tech stocks (where such warnings are common), but in the holy of holies… in the ESG stocks!

But it goes deeper than that. ESG investing may be not only a bubble, but a pretty and butterfly-like distraction floating above the grim landscape of climate change, which is going to require much more interventionist financial and other action if an existential disaster is to be averted.

Finally someone who calls a spade a spade!

Now there’s only one question left: Do you want the red or the blue pill?

That’s it for now. Have a great week everyone!

Best regards, Sasja