At COP26, Green Capital’s spokesman-in-chief took to the world stage – and delivered a setback for its credibility.
Having contributed a recent four-parter on carbon credits, scheduled to appear during COP26, there was a lurking fear that my content could be overtaken by events; it’s always embarrassing to be caught stridently demanding something a few days after it’s been delivered… With a growing buzz that Mark Carney would announce something spectacular, was the leader of the Taskforce for the Scaling of Voluntary Carbon Markets (TSVCM) about to declare a breakthrough? After all, this had been his stated priority.
TSVCM did indeed make an announcement, though readers can be forgiven for missing it entirely. The unveiling of their new governance structure, to oversee the formalisation of future governance structures, didn’t exactly capture the imagination, nor satisfy the need for immediate change. Not that the first structure is complete, mind you – appointees representing Indigenous Peoples and Local Communities are still being sought, and a TSVCM expedition is probably at this very moment paddling up the Amazon in search of a willing Yanomami.
Carney’s attention was instead focused on the launch of his latest grand projet, the Glasgow Financial Alliance for Net Zero, or GFANZ (pronounced G-fanz, as in Gee-whizz!). And indeed the ex-BoE Governor did pull something impressive from under his hat: that $130tn. After an almost audible intake of breath, scepticism followed: this figure represents some 40% of the assets of the entire world.
Leaving aside that such figures are somewhat abstract – if $130tn in assets were suddenly put on sale, there actually wouldn’t be enough cash to buy them – critics immediately pointed out that in terms of concrete commitments to spend any of that capital on tangible, real world stuff… there weren’t any. Worse, it quickly became apparent that this sketchy figure included egregious double-counting. Readers may recall that ominous phrase as the scourge of carbon credits, indeed a prime concern which TSVCM had tasked itself to deal with, so it was disappointing to find it in this context.
There was plenty of ammunition for environmentalist critics, then, and even more from an investor’s perspective. This is due to the fact that
GFANZ don’t own these assets,nor are they mandated to use them to further any cause.
In actual fact, GFANZ signatories manage assets on behalf of the actual owners: most – if not all – of us, through our savings, pensions, even mortgages, so it remains unclear and potentially unfathomable how they can be directed towards environmental action. True, there is growing demand for ‘green’ funds, and investors are increasingly making this their preference. However, a much larger (and also growing) sector is the vanilla tracker funds, which many GFANZ signatories deal in. There is thus no mandate for them to act on our behalf, especially in pursuit of some end – however worthy – not specifically stated in the T&C, And GFANZ will find it extremely difficult to reach net zero. Tracker funds, by their very nature, simply buy a representative basket of assets to track a market index. It was both misleading and breathtakingly arrogant to imply otherwise; as Greta herself might have said: ‘How dare you?’
Asset managers thus have three alternatives: a) divesting ‘bad’ assets; b) keeping them but seeking to exert influence as shareholders; and/or c) ameliorating them by offsetting.
The prerequisite for option a) is that for every seller there must be a buyer. The good news for GFANZers is that there are indeed buyers, ready and willing to hoover up those dirty assets, especially at knock-down prices: the growing private equity sector for example. Clearly not risk-averse, given the received opinion that oil is now merely a stranded asset, they are prepared to take a punt that we are not quite done with it yet. Keen environmentalists will have spotted the problem: option a) makes hardly a dent in the motivation for oil majors to keep pumping, as they can just sell off the most embarrassing assets.
Option b) appeals because it allows GFANZers to indulge their Masters of the Financial Universe fantasies from the attractive vantage point of the moral high ground. In practice, as stated above, while many managers have neither carrot nor stick to employ, those who do may come to wish otherwise. They face some tricky decisions – not least, where all this will end. It’s not just fossil fuel producers who need a good talking-to, there are those users: airlines, shipping companies, in fact all of us. Doubtless GFANZ will rely on government sanctions and public opinion to do the heavy lifting for them; but greenhouse gases don’t cover the spectrum of environmental issues, not by a long chalk. All that plastic choking the turtles, the particulates choking us, the leaky land-fill, the fertiliser and pesticide run-offs, and on and on… and that’s just the ‘E’ of ESG.
A further complication is that option c), even more than a) and b) depends on a clear definition of what net zero actually means for an investment portfolio; a matter on which there is no clear consensus, and which will occupy GFANZ signatories for some time. In fact, Carney has form here, having recently been forced to make an embarrassing rowback from claims that Brookfield, an investment fund he is vice-chair of, was carbon neutral. In a rare show of unanimity, industry spoke with one voice to call out Brookfield’s methodology. Offsetting relies on agreed and enforceable standards for offsets – which is exactly what TSVCM was supposed to be providing – but hasn’t yet.
The real problem with GFANZ’s vacuous announcements, is the distraction it creates. Separately at COP26 there was (after one of those knife-edge, burning-the-midnight-oil jeopardy sessions) an actual announcement on carbon credits. There’s no space for comment on the implications of that here, and readers’ attention – like that of the world’s media – may have drifted onto other matters now – but perhaps in the comments below let us know what your key takeaway from COP26 was?