The images from Gaza and Israel are a horrific reminder of a complex multi-decade dispute not resolved. Clearly, humanity is still paying the price in the Middle East but our response to the climate crisis is ringing similar alarm bells. Thankfully, the recognition that there is a climate crisis is gaining global acceptance. However, the consensus around urgency, actions and measurement required to prevent ‘global boiling’ has come under attack from a variety of directions. Some surprising and some not.
In the predictable corner right wing political leaders in the US have seized upon climate action as a liberal ‘woke’ conspiracy to curtail individual freedoms. In particular, the states of Florida, Kentucky, Oklahoma and Texas have moved to ban climate-proactive companies from tendering for local government service contracts. The main focus of these legislative moves has been financial services companies who are using environmental, social and governance (ESG)criteria as part of their investment selection process. As many as 15 US states may ultimately deploy anti-ESG legislation to bar the likes of Blackrock, JP Morgan and UBS from state pension management contracts, loan/bond issuance mandates, state treasury services etc . In fact, these institutions run the risk of being sued for using ESG frameworks on current contracts, on the basis that the exclusion of carbon-heavy investments could hurt investment returns for pensioners, public servants, state finances etc. What a mess. But, it gets unpredictably worse…
The UK has previously been in the forefront of climate action. Not now. The desperately inept Conservative Party government, has opportunistically sought to woo a few extra votes for political survival by watering down key green measures necessary to meet net zero targets in 2050. The push back by Prime Minister Rishi Sunak on banning the purchase of new petrol cars to 2035 from 2030, and delaying the target of eliminating gas boilers were the headline acts. However, the messaging around imaginary policies on meat taxes, compulsory car sharing and forcing households to use seven recycling bins was more insidious. The introduction of policy “fear” and individual inconvenience smacks of Brexit incentive tactics but without the red buses – actually, the buses might just trigger memories of other fraudulent claims. However, in the near term this type of misinformation increases the chances of polarising voters and ultimately delaying political action. The deliberate denigration of climate action and ESG has already resulted in one major behavioural shift in the financial world.
The CEO of the largest asset manager on the planet, Larry Fink of Blackrock Inc, has said, “I don’t use the word ESG, any more, because it’s been entirely weaponised.” Blackrock have dropped references to ESG in its products but insists its direction of travel has not changed. It will continue to use its influence and capital to accelerate decarbonisation of the global economy. However, measuring those efforts has become more difficult too. The fund analytics firm, S&P, has discontinued ESG-focused quantitative ratings which looks like an attempt to avoid litigation and could prompt reader despair. But, there is also some good news and interesting developments in the climate crisis fight.
First, the ‘greenlash’ against ESG has possibly succeeded only in linguistic terms. The ESG badge might be too political going forward but two thirds of respondents surveyed by Bloomberg this year expect firms to incorporate ESG-type metrics into their business. In a similar vein, HSBC polled executives looking after $11.5 trillion of assets and found that 60% of respondents believe ESG thinking will be mainstream in the next decade. That’s some serious monetary firepower flagging climate commitment. It also suggests the “ESG” acronym might be the necessary badging sacrifice to steer clear of politics. However, there are also some positive political moves.
Clearly, the impact of US government support via “Bidenomics” subsidies for renewable energy and cleantech manufacturing products has boosted economic and employment activity domestically. Europe is watching and now making its own moves. Most interestingly in recent weeks, there was a below-the-radar launch of a huge climate experiment by the EU. On October 1st the EU initiated a carbon border tax. This could impact across the globe as the EU cannot be accused of protectionism if it is merely applying its internal standards to trading partners. This, in turn, could push high-emitting industries to clean up their production processes and incentivize other countries to impose their own carbon taxes.
This Carbon Border Adjustment Mechanism(CBAM) is not like previous carbon credit purchase schemes; it’s a real tax on imports of traditional carbon culprits like steel, cement, fertilizer and electricity. In the world of finance when one starts to see variations in governmental support (subsidies, guarantees) and trade taxation, it quickly translates into “arbitrage” financing activity. Investment capital likes to exploit financial advantage and we have just been shown a very big real time demonstration of investor enthusiasm for decarbonisation projects in industry. Step forward H2 Green Steel which has just completed the largest private placing of the year with a €1.5 billion fund raise. However, the size of the deal is not the real source of excitement.
The involvement of the Swedish government’s export credit agency as both a lender and guarantor of debt for the project ensured attractive de-risking for equity investors, and better-than-market terms for debt providers. The sharing of project risk between government and private capital was one innovative aspect of the funding deal but two other details caught the eye and are likely to be rapidly replicated in other cleantech projects:
The diversity of equity investors in H2 Green Steel was enhanced by the presence of “off taker” counterparties ie pre-sold contracts with blue chip customers like Mercedes Benz, BMW and Italy’s Marcegaglia who also invested in the equity funding. This helps de-risk the lending proposition for banks too.
The reduction of volatility in future electricity pricing/hydropower has been achieved by adopting two pricing agreements – one based on a floating index with Fortum and one fixed price with Statkraft. This ‘bifurcated’ power purchase agreement protects investors from power price spikes eroding revenues and margins.
Of course, some of these were features of previous funding deals done by EV battery manufacturer, Northvolt, and it is encouraging to see the same banks and similar government guarantees play their part in the H2 Green Steel funding round. As project financing knowledge grows with repeat-experience, the flow of private finance to decarbonisation projects is likely to accelerate. Note also that these huge deals are being done as interest rates are rising.
Clearly, capital can see the future even if it’s not sure what badge to use. Indeed, according to Lexis Nexis research, 88% of publicly traded companies had ESG-type programs in 2022. Dare we conclude that, for once, action is trumping rhetoric and acronym bashing? And, as a final observation, it is no surprise, once again, that financial advantage can be a huge incentive for capital, particularly where taxes are potentially coming. So, it’s quite possible ESG fades from view but that CBAM becomes the most significant acronym or climate policy you have never really heard about.