ANNOUNCEMENT: Expert Investor is now PA Europe. Read more.

‘Green Revolution’ is a journey in search of a roadmap

Energy transition has been unfocused and frenzied – arguably resulting in the current crisis

“Are we returning to the 1970s as several commentators have recently claimed?” asked Fareed Zakaria in an editorial a few weeks go on CNN. “There are surprising similarities. The humiliating withdrawal from Afghanistan echoes the US defeat in Vietnam. Prices are rising along with demands for higher wages, even as economic growth is stalling. A new economic superpower is challenging American supremacy. Back then it was Japan, now it’s China.”

But, said Zakaria, many of these analogies are superficial.

Many. But not all.

He went on: “But there’s one where the parallels are striking and that one should worry the Biden administration greatly. We are headed for a global energy crisis. Gasoline prices in America are up more than 50% in the last year. Natural gas prices in Europe have risen a staggering amount, nearly 500%. In Asia, Bloomberg reports that power companies are buying liquefied natural gas at record prices to try to lock in supply.”

Zakaria said there were many reasons for this, but the one he singles out for the core of his argument is that while governments have been great at convincing the world that it should move from finite, polluting fuels to renewable, cleaner forms of energy, those same administrations have been less adept at putting in place a plan for how to move from one form to another.

“What we need,” he said, “is a transition strategy.”

Zakaria is not wrong. The current problems with energy supply are what happens when trying to do—or showing the world that you’re doing—the right thing butts up against the realpolitik of the world.

Green gold rush

There has been a lot of noise in recent years about investing with an ESG or green focus. And a lot of it is just noise.

But recent weeks have seen Europe earmarking €177bn for clean energy technology, a commitment from pension funds towards the climate, and £400m going towards mini nuclear reactors in the UK. ESG investing is, apparently, the ‘new normal’ in Europe, although it is never entirely clear what that means.

Much of this has the appearance of a gold rush, of investors and firms throwing money at anything with the word ‘green’ in it. But while everyone is looking to hop from one island to the other, there seems to be little consensus on how to build a bridge between the two—namely how to divest in an orderly and constructive manner.

Weeks ago, before COP 26, Expert Investor quoted a Euractive piece about Vladimir Putin talking about how the current rush to show the world you are investing in green products has led to the energy crisis.

According to Euractiv, Putin said: “You see what is happening in Europe. There is hysteria and some confusion in the markets. Why? Because no one is taking it seriously.” He reportedly went on: “Some people are speculating on climate change issues, some people are underestimating some things, some are starting to cut back on investments in the extractive industries. There needs to be a smooth transition.”

Putin does not have the moral high ground here. Rumours abound that the Russian state is currently inflating gas prices to put political pressure on Western Europe. And even though Putin has pledged to help, recent reporting from CNBC indicates that state energy company Gazprom seemingly had no intention on increasing supply this month.

Basic economics

The problem is that the demand for energy is currently outstripping the supply in Europe. And things will get worse if the brutal winter predicted actually arrives. A friend of mine here in Berlin last week received a communication from the gas company that stated that the cost of fuel would rise from €0.05 to €0.13 per kWh on 1 January.

There is a political cost to rising prices, which is anger at governments. It is one thing to say that you are working to reduce emissions and invest in new energy, but the old ways are hard to give up.

And let us not forgot that abandoning fossil fuels has merely made them quite a nice little investment.

As Hiroko Tabuchi of the New York Times reported last month, private equity has stepped into the space that others have vacated.

Tabuchi wrote: “Since 2010, the private equity industry has invested at least $1.1trn into the energy sector — double the combined market value of three of the world’s largest energy companies, Exxon, Chevron and Royal Dutch Shell — according to new research. The overwhelming majority of those investments was in fossil fuels, according to data from Pitchbook, a company that tracks investment, and a new analysis by the Private Equity Stakeholder Project, a nonprofit that pushes for more disclosure about private equity deals.”

In comparison, what was the share of private equity that went into renewables? It was 12%.

Much like nature abhors a vacuum, money people do not leave money on the table. It is likely that we will see investment flow in and out of fossil fuels for a while because of the tension between letting the world know you are not a soulless monster and meeting the fiduciary responsibility.

So there a political cost, a financial cost, and even at the end of all that, the needle may not shift too much.

The world desperately needs to know what to do.

Some guidance would be appreciated.

MORE ARTICLES ON

  • Can M&A and buybacks breathe life into UK market?

    Can M&A and buybacks breathe life into UK market?

    Both buybacks and M&A should help realise value in UK shares, boosting prices and giving investors another reason to consider the UK stockmarket Not only does M&A activity appear to be picking up, with a high-profile bid for UK electronics retailer Currys, but the scale of company buybacks continues to accelerate. If it goes well,…

  • Capital Group launches multi-thematic Article 8 funds

    Capital Group launches multi-thematic Article 8 funds

    Capital Group has launched a set of multi-thematic sustainable funds that are available for investors in Europe, writes Christian Mayes. The Capital Group Sustainable Global Opportunities fund (LUX) will invest in global equities, while the Capital Group Sustainable Global Corporate Bond fund (LUX) will target fixed income exposure. The launch also includes a multi-asset offering…

  • Bond funds pull in €29.7bn in January – LSEG

    Bond funds pull in €29.7bn in January – LSEG

    Bond products were the best-selling asset class in January, according to LSEG Lipper’s European Fund Flow report, writes Christian Mayes. The asset class pulled in a net €29.7bn in the month, while Money Market USD grouping was the best-selling Lipper Classification after receiving €11.2bn inflows. Providers of mutual funds pulled in €22.5bn, while passives saw net…

  • Quarter of Article 8 funds at risk of greenwashing – MainStreet Partners

    Quarter of Article 8 funds at risk of greenwashing – MainStreet Partners

    A quarter of all Article 8 funds could be accused of greenwashing based on their sustainability framework and practices, according to MainStreet Partners, writes Christian Mayes The 24% of funds classified as a greenwashing risk by the 2024 ESG Barometer report marks a four percentage point increase from the 20% flagged at the end of…

  • EU green rules could stymie decarbonisation projects – ExxonMobil

    EU green rules could stymie decarbonisation projects – ExxonMobil

    The European Union’s climate regulations may lead to it halting its investments in Europe, ExxonMobil has warned. Speaking to the Financial Times, Karen McKee, president of the product solutions division, said the oil and gas giant had struggled to begin decarbonisation projects in Europe due to the regulatory burden. The result, she added, was that…

  • ICE flags need for Europe to double green investment

    ICE flags need for Europe to double green investment

    Investments to modernise energy and transport must double by the end of the decade to reach 2030 climate targets, the EU has been warned. According to the Institute for Climate Economics (ICE), which has released the European Climate Investment Deficit report, the bloc lacks what it calls a “consistent tool” to ensure monitoring of the…