How they got rid of the $ 44 billion in polluting assets

How they got rid of the $ 44 billion in polluting assets

Pressed by investors, activists and governments, the five Western oil giants have escaped $ 44 billion worth of polluting assets since 2018 and, according to consulting firm Wood Mackenzie, the disposal will continue in the coming years – assets are targeted worth $ 128 billion.

ExxonMobil recently announced, for example, that it will phase out shale gas and oil exploration in Canada, with Shell getting rid of Nigerian mining assets. However, they are not permanently closed, but end up migrating from transparent capital markets into the hands of less transparent owners. Since 2016, the value of investments in financial products that claim to meet current environmental, social, and governance (environmental, social, governance, ESG) standards has increased from $ 23 trillion to $ 35 trillion.

According to Bloomberg Intelligence figures quoted by The Economist, it could reach more than $ 50 trillion by 2025. For those who invest in those companies listed on the capital market, the message of the huge sums allocated to ESG is that those Businesses are honoring their contribution to the global effort to combat greenhouse gas pollution. And most new owners are taking advantage of what these funds and companies are selling.

It’s just that their good faith is often misleading because no one is able to expose the false claims of those who claim to be fighting for environmental protection. The rise in ESG investment and the stigma of listed energy companies have an unintended side effect – the dirtiest assets in the Western world end up in a shady area, where reporting on environmental standards is perhaps not the most rigorous.

Profitable pollution

Listed companies, including European ones such as Shell, but also mining companies have put out their most polluting assets to satisfy their ESG investors and achieve their carbon footprint reduction targets. However, as I said, oil wells and coal mines, because they are about, will not be closed. They will be bought by private companies and funds that have alternative sources of capital and are not in the spotlight.

But a small surprise – owning a polluting asset may require a thick cheek these days, but it may still be profitable. So desirable. In the last two years alone, private equity firms have traded $ 60 billion in fossil fuel assets. And the appetite could increase in the context of tensions between Russia and Ukraine, which could raise the price of a barrel to over $ 90.

Taking refuge in private ownership is part of a broader trend. More opaque entities take over this kind of polluting assets. State-controlled oil giants, such as the Saudi Aramco, should not worry too much about what investors believe. Neither do state-controlled companies or banks that own or finance an entire chain of coal projects in the Asian region.

Pollution control

Migrating from the transparent area of ​​the capital market to a lesser area remains problematic for two reasons – first, the claim of listed companies (and ESG funds) that they are putting their shoulder to the decarbonization of the planet is debatable. Selling (further) a dirty asset does not reduce emissions as long as it continues to operate. Secondly, polluting assets end up in private hands and it is difficult to say whether the new owners really want to reduce the polluting activity or, on the contrary, to expand it. In reality, all that has been done is a system of poultry assets (sale-purchase) in some undeserved applause.

But what would be the solution? First, higher carbon taxes should be imposed. Pollution control is the best tool for aligning profit targets with the imperative to reduce emissions. Thus, free market forces can be released to reallocate capital quickly and efficiently. A tool that can work throughout the economy, not just in certain industries.

Rejected for a long time as politically unrealistic, they are slowly being introduced in some places. Almost 50% of the carbon emissions generated by the energy sector in the G20 economies are covered by a carbon tax (up from 37% in 2018, according to OECD figures). However, this coverage needs to be further increased (carbon must be more and more expensive) in order to reduce emissions as efficiently as possible.

The other answer comes from institutional investors (pension funds, insurers, etc.). Some are proud to be beneficiaries of ESG funds that clean their portfolios of dirty assets, but they are also partners of private equity funds that buy these assets. If institutional investors are serious about saying they want to reduce pollution, then they need to consider the carbon footprint of all the companies in their portfolio.

Finally, investors should question the idea that the best way to get operators to pollute less is to get rid of their actions. Moving would make capital more expensive for polluters, which would prevent investment in such companies. It doesn’t work if there are (and there are) plenty of privately funded alternatives willing to buy those shares.

Larry Fink, head of BlackRock, the largest investment fund, suggested a different approach. Honest “green” investors – and there are many – should keep their assets in the portfolio as well, but work with managers to reduce their carbon footprint. To be truly “green”, investment strategies need to be less in black and white, concludes The Economist’s analysis.

Eco-dilemma

In 2021, 20 climate events in the United States alone resulted in more than $ 20 billion in total damage.

• NEUTRAL. The European authorities have set the EU’s goal of becoming climate neutral by 2050. However, this is an impossible goal to achieve without a drastic reduction in fossil fuels. • COST OR INVESTMENT? Analysts say in unison that environmental protection and sustainability policies in companies, the so-called ESG, should be seen by companies as an investment opportunity and not as a cost.