4. Turmoil in Finance World

Gas Free Pensions

In which fuel CAN we trust?

Coal is clearly out: CO2 and dirty smoke. Expensive operations. So insurance companies don’t insure or quote higher premiums. So the coal industry is in trouble. Running operations at costs higher than renewables does not help their future outlook. The only reason presidents of big countries keep them afloat with weird regulations and subsidies is that these countries don’t want to depend on another country for their energy. That is not normal market influence!

Oil is also in trouble according to financial analysts: a lot of companies had to loan a lot, for their operations and to keep up their dividends. The dividend kept the image of the industry as “safe investment” or “good investment”. Until this spring, that is. When even ECB (European Central Bank) quantitative easing could not prevent Royal Dutch Shell and Norsk Equinor from slashing their dividends. Amerenco could not get their shares sold. And the share prices across the sector dipped twice as hard as other companies, and did not bounce back as easily. All this shows that the financial health of the oil sector is not good. The ecological arguments did not yet seem to affect oil companies, not even with all the court cases pending for damages after spills. Ecologically oil is already known to be not so good: think CO2 emissions, tanker spills and sinkholes. And the refinery residues, which keep our ocean transportation going, is also slowly getting the bad smell it deserves.

Gas’ flame still shines brightly in this sector. Ecologically it has a good name, because it burns clean. The fracking industry has done a good job of not having a lot of stories out with the public at large on the chemical wastes, the extra earthquakes and groundwater pollution they cause. Yet. That can be only a matter of time, with the scale they are operating on and the risk being great enough that Great Britain has suspended all licenses recently for exactly these ecological reasons.

The normal gas extraction does not have these chemicals in its process, and thus not that waste or the groundwater risks. Earthquakes, however, are a known side effect. This has caused the Netherlands to close up their gas extraction prematurely, when the half million people province of Groningen voiced enough anger and frustration about the risk of actual collapse for about 40% of their houses. This has not been positive for their feeling of well being (duh!), even with a double take in the corona times: having to stay inside when you don’t know whether an earthquake is going to wreck your home is not a happy feeling. And for the side effects of the other chemicals involved: read more

All of this happy bunny feeling does not take into account what our website said about the fact that the actual contribution of methane to the climate crisis is almost four times worse than what was calculated: The Global Warming Potential (GWP) of methane is defined to be 28 to 34, whereas in reality it should be 120.
And it does not take into account the methane gas leakage from operations, where the fracking industry adds so much. Because this is probably not in the calculations, the GHG protocol underestimates the gas’ industries “help” to climate change.

How does the financial world see fossil fuels?

Then again, the marketing of Gas also did not get to work on this new methane picture, so we will see how the financial world reacts to this bad news that no part of the fossil fuel sector can be labeled as positive for the environment by any sensible person. The current thinking in the financial world still is that Gas is clean. So Gas is an option for the future and still can be invested in and called “green” or “sustainable”.

But Mark Carney, governor of the Bank of England, was plain right when he stated: ‘Climate disclosure must become comprehensive, climate risk management must be transformed, and sustainable investing must go mainstream’. Our pension money needs to be invested sustainably – for the sake of our safe and prosperous future. We need our pension money to work for us, not against us or our living environment.

Then again: as the former boss of the Bank of England and currently UN Convoy on Climate Finance, it does make sense he is the first to see it. As long as we do óur jobs in making it happen.

What should we do?

We are risking our future and lives on earth with the burning of fossil gas and other fossil fuels. But we are also risking stranded assets when the world realizes that gas and all fossil fuels are worthless due to the havoc they create. Those assets, that money – could be invested sustainably instead. And the longer we wait to make a change, the greater the risk for the climate, and being left with those stranded assets. The investments that with decreasing value are destroying our planet, instead of making it heal and get better. The risks of wildfires, extreme weather, sea level rise and floods all increase the longer we wait to take action on the climate crisis. But our pensions are also at risk in this picture. Pensions funds are a large part of the financial system – about half actually. How your money is invested is therefore of great importance, and it can do great good. So we should check in with our funds to see where they can do better.

And by the way: around the corner is another bubble

Another bubble that is about to burst, and do great damage to investment portfolios, is the carbon bubble. Oil and gas companies report their costs, for instance what they spent to discover and develop a new field, and assets, for instance the earnings they think they will make from these new fields. The last is called “reserves”, as the earning is not yet actually made real. Accountants apparently do count their eggs before they are laid. 

The good news about these reserves in all these company reports, is that they can now be analysed and added up. And the amount of oil in these reserves will generate more CO2 than the Earth can hold within any given Paris scenario (1,5 degree warming, or perhaps a little more). Soooo…

We really don’t know what will happen in real life, whether these reserves are viable. If these new fields cannot be operated or this oil cannot be sold, because of a CO2 tax or Carbon emission laws or a Paris Proof Plan, then our climate might stay some kind of habitable (even with extra storms and floods, but in an order of magnitude that we can haul through). But the fossil companies will have financial problems as their dreamed earnings do not come true. And remember: they already have loaned heavily as looking for oil is not cheap, building oil rigs is not cheap and oil prices have not been good.

That may be the reason quite some (European) oil companies have said to change their strategies and follow Paris. More renewables, less “carbon intensive” products. Let’s hope they mean less oil and gas.

EU is coming to our aid, we see work being done

How can we be sure whether these plans are any good? Which ones should get help from states or federal agencies (EU, VS, …)? Are they good enough to “get us to Paris”, or even any good? 

Not only Hannah and I are asking this question. Even the EU wants to know. So the EU put together a group of experts to translate “Paris” into something the business knows how to measure. 425 ppm (1,5 degree) or 485 ppm (2 degrees) are not things the business knows how to measure in their accountancy. Managers and politicians want to use their usual numbers, processes and instruments and so they can help to do their bit. The EU wants to measure the economy and know what the effect is on the green house gases (and from there on the climate).

That is difficult, because the science of economy does not have a field linking sciences like geography or history to it. No economist knows what happens if a city must move or build a seawall around itself and its farmlands. Economists cannot calculate whether it will create innovation, or is it just a very costly mitigation? How long will it take to earn it back? How much does human productivity slack on a day with 40 degrees heat? Preferably specified by sector, and amended with details like A/C investments. Agriculture will experience different effects than marketing. Is there a minimum of clean fresh water needed at a certain temperature? How are companies affected with forest fires? Sales of new garden furniture might thrive, but tourism falls. And if the economy slumps from 1 aspect, what does it take to make an economy resilient to climate crises.

Undauntedly, the EU presses on. Kudos there by the way. And there are definitely good things about these Paris Aligned Benchmarks. It is strict on which scenario it uses (1,5 degree, no more, and no overshoots). It counts all GHG, not only CO2, though it “converts” the other Green House Gases to the current protocol. It counts not only the company (scope 1&2) but also its products (scope 3). All compliments from our future grand-grand-grandchildren there.

The expert group is now deciding on minimum standards these benchmarks should keep to. Other details are still being worked out, like how to prevent double counting, which estimations are acceptable for Chain Analyses. 

So we all don’t know how it will look. Financial analysts, big investors, CEO’s, political leaders, all look to see what is a good plan. But the ones who think even a little on this topic, know that none of the fossils have any place in the next decade, natural gas included. 

What is the right way to go, master financial analists say?

The chairman and CEO of Blackrock, Larry Fink started this year to tell us like it is – and that he was ready to make a change for the better. He saw the bottom line – they needed to promote long-term value for their clients. And that included sustainability for the planet as a whole.

  • ‘Investors are increasingly reckoning with these questions and recognizing that climate risk is investment risk’ .
  • He himself acknowledged that climate change has become a defining factor in companies’ long-term prospects. In the same paragraph as before he said: ‘But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance’.
  • And he expressed that cooperation and equity was a way forward: ‘Governments and the private sector must work together to pursue a transition that is both fair and just – we cannot leave behind parts of society, or entire countries in developing markets, as we pursue the path to a low-carbon world’.

Larry Fink saw the wholeness of the problem – and the possibilities. Big change lies ahead for the finance industry and Larry Fink was ready to act.

So the intelligent investors were getting out of fossil fuels already – but they were few. The others would be left holding the stranded asset.

Let’s not hope that our pension investments have those stranded assets. So I asked myself whom to ask, and how. I learned that other people did the same, see here. But first I would like to talk to this Oliver at my neighbour’s garden party.

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