This article originally was published on Climate and Capital Media and is reprinted with permission.
In the multi-trillion-dollar energy transition, as Sherlock Holmes would say, the game is afoot.
As large amounts of money shift to ESG and sustainability, some hedge funds have been snapping up shares in fossil fuel and other carbon-intensive industries at fire-sale prices, placing their climate and business bets using a very different calculus.
On one side are those arguing that investment in traditional energy must wind down or even stop completely if there is to be any chance of addressing climate change in time. They argue that investment in renewables must be ramped up to be effective.
Others claim that engagement with legacy fossil fuel and related companies, not divestment, is the best path to make change. Some say effective “engagement” for a transition could include buying up low-cost divested “dirty” energy stocks to finance their transition to clean energy. This may be a realistic, and profitable, approach at a time when fossil fuel resources still meet most energy needs and the nascent renewables industry is just scaling up.
The stakes are clearly outlined in recent investing strategies adopted by hedge funds that are less constrained by ESG concerns. Several firms have taken positions in oil and gas companies as those companies’ shares have been sold off by large, environmentally-focused institutional investors. With the sharp rise in fossil fuel prices — coal, gasoline, oil and natural gas — and a corresponding increase in supply-demand in advance of the northern hemisphere winter, these funds see a lot of profit in buying up distressed, “dirty” energy stocks and are cashing in on the rise in valuations, driven by sky-high prices for their products.
Considerable gains are to be made. Odey Asset Management says its European fund is up more than 100 percent this year. Bison Interests is up more than 377 percent this year, profiting from its positions in oil and gas. But it is inarguable that this is more opportunism than opportunity, a grab for short-term gains at the expense of making longer-term progress toward pushing oil and gas firms to adopt more climate-related energy strategies.
Several firms have taken positions in oil and gas companies as those companies’ shares have been sold off by large, environmentally focused institutional investors.
The fiery debate over what works better
Activist-hedge fund manager Chris Hohn takes the opposite tack. His “Say on Climate” campaign is credited with prodding dozens of companies within his fund’s portfolios to set out plans for dealing with their GHG emissions and allowing investors to evaluate them. Now, he has launched a similar campaign to pressure banks to stop financing fossil-fuel projects and is criticizing regulators for being complacent about systemic risk. Hohn has written to the world’s central bankers — the Bank of England, the European Central Bank, the European Banking Authority and the U.S. Financial Stability Oversight Council — to propose reforms.
What has his values-driven investing done for TCI, his hedge fund? It’s considered one of the more successful, with almost $40 billion assets under management.
Then there’s the recent announcement from BlackRock that some of its institutional clients will be able to play a larger role in shareholder votes. This move to empower proxy voting applies to 40 percent of the $4.8 trillion in index equity assets that the firm manages. It’s part of BlackRock’s long-range view that there will be a vast reallocation of capital into ESG strategies. The move adds more fuel to the fiery debate over what works better: Selling out of legacy energy stocks or staying invested to push for progress through ownership?
The stakes are high, the potential rewards are great: Gaining the reputational spotlight that shows a financial entity taking a leadership role in future global energy and, of course, the promise of earning substantial profits. The sums in play are huge. Government and business committed to net zero are expected to reallocate realignment of $11.4 trillion of annual revenue globally. And U.S. energy policy has pledged to invest $2 trillion in zero-emission electricity infrastructure by 2035.
Government and business committed to net zero are expected to reallocate realignment of $11.4 trillion of annual revenue globally.
The current energy crisis could quash the momentum to renewables
But how to sort the right opportunity at a time of unprecedented chaos and confusion in energy markets? With the prices of fossil fuel sources skyrocketing by double- and triple-digit increases to recent record highs, the current crisis in traditional energy supply threatens to quash the momentum of the transition to renewables.
This energy crisis is hitting worldwide with three weeks to go until COP26 convenes in Glasgow. Until recently, there was optimism among climate activists that the conference could declare an end to the use of polluting coal and accelerate the global renewable energy transition with more ambitious climate change mitigation policies. Now, with winter approaching in the northern hemisphere and weather forecasts predicting colder temperatures than normal, there’s a global scramble to acquire traditional fuels, just as the calls for divestment of fossil fuel stocks and an end to oil and gas financing are reaching a crescendo.
This is what happens when an energy crisis collides with the climate crisis. It’s an unprecedented crunch that appears to offer a stark, fork-in-the-road choice: The world’s economies can either turbocharge long-term funding to renewables or slow down the transition by supporting short-term investments in fossil fuels.