Fossil Madness

    According to the UN’s passionate and outspoken Secretary-General, António Guterres, “investing in new fossil fuel infrastructure is moral and economic madness.” Well, madmen (and surely women, too) are still all around us, it seems. Unapologetically so these days, with geopolitics as a tailwind and oil prices on the rise again, boosted most recently by the unholy alliance between Saudi Arabia and Russia. Despite an ever-increasing proliferation of net-zero initiatives and carbon-neutral pacts, there seems to be no lack of funding for new pipelines or fracking plants.

    This week, the Great Green Investment Investigation (GGII)[1] came up with yet more facts to confirm the image of a financial world gone totally bonkers. According to them, energy companies that actively expand their fossil fuel operations have issued more than 1,600 bonds since the signing of the Paris Climate Agreement, amounting to over a trillion Euros. Of course, they haven’t done it on their own. Mapping each of these bonds, GGII can tell you exactly who the helpful financial facilitators are. The list of banks eager to underwrite fossil bonds is dishearteningly long. None mentioned, none forgotten.

    Hardly surprising, as bond underwriting is a lucrative business. Also, unlike many other financial products and services, bonds impact the bank’s balance sheet for a very short time, making the risks easily manageable and reporting requirements minimal. So, while fossil fuel bonds issued since 2016 have generated revenues of at least several billions for the financial sector, their ‘carbon footprint’ in the banks’ books is negligible. By the way, the Net Zero Banking Alliance is still pondering how to align capital markets transactions (such as the underwriting of bonds) with the alliance’s goal towards climate neutrality.

    Meanwhile, banks are not the only culprits. Another recent analysis by Ceres, ERM, and Persefoni finds little evidence that insurance companies (at least the biggest ones in the US) are shying away from fossil fuels in their investment portfolios. “While insurers are highly sophisticated in responding to climate risk regarding liabilities, they have been much less attentive to the matter regarding their assets,” conclude the authors. Well, those fossil bonds (and the stocks of the companies issuing them) have got to be on someone’s books, after all.

    It is not all gloom and doom, though. At least not according to the updated version of the International Energy Agency’s Net-Zero Roadmap. Upon unveiling the original roadmap in 2021, the agency’s executive director, Fatih Birol, was quite adamant that “there can be no new investments in oil, gas and coal, starting now – from this year” if we were serious about the climate crisis.

    A lot can happen in a couple of years, though. The latest iteration of the report sounds much more upbeat. “Despite the scale of the challenges, I feel more optimistic than I felt two years ago,” comments Birol. “Solar photovoltaic installations and electric vehicle sales are perfectly in line with what we said they should be, to be on track to reach net zero by 2050, and thus stay within 1.5C. Clean energy investments in the last two years have seen a staggering 40% increase.”

    Birol says that the IEA’s position on fossil fuels has not changed, yet “this doesn’t mean that, as of tomorrow, we don’t need any investment for oil and gas.”

    Getting mixed signals, anyone?

    [1] The Great Green Investment Investigation is a pan-European investigation set up by Follow the Money and Investico into how the financial sector deals with climate change. International media such as Handelsblatt (Germany), Børsen (Denmark), The Guardian (UK) and Le Monde (France) also participate

    Image courtesy of NordSIP
    Julia Axelsson, CAIA
    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.

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