The Russian invasion of Ukraine in February 2022 has changed our expectations of the impact of environmental, social and governance (ESG) criteria. We can all see the impact of climate change on the weather conditions around us: too much rain (and flooding) in Western Europe, too little rain (and drought) in much of East Africa.
Pastoralists in the Horn of Africa have suffered six successive years of drought and, if the World Meteorological Office is to believed, a seventh beckons this year. However, our ability to reverse or at least contain the change has been diminished by the invasion.
Voters are accustomed to regular supplies of fuel and foodstuffs at stable prices, and governments are scrambling to meet these concerns. In advanced economies, they have the public funds for the subsidies.
They have also rowed back on clean energy. The UK once employed 1.2 million people in coal mining at 3,000 collieries. Its last deep-pit mine closed in 2015 but the government gave the go-ahead for a new one in north-west England in December 2022, arguing that the output would be allocated to steelmakers.
In Germany coal production picked up last year and supplied more than one third of the fuel for power generation. It is phasing out nuclear power in response to the disaster at Fukushima in Japan in 2011 and had the same plans for coal with a deadline of sorts of 2030.
However, Russia responded to international sanctions imposed after the invasion of Ukraine by limiting the flow of gas through its pipelines to Western Europe. Germany is the most vulnerable country in this respect.
Admittedly, European natural gas prices in the market have been on a broadly downward trend since peaking in August 2022 and in January were back at pre-war levels. This brings down the fiscal cost of subsidy. That said, we are wary of complacency and will not jump to triumphalist conclusions about the failure of the Russian strategy/success of European cooperation and resourcefulness in tapping new sources of supply.
Once we remove the froth and exuberance from the narrative, we can see that the war in Ukraine has induced more realistic thinking on climate change and our efforts to resist it
The oil majors have not fallen into such a trap. In February BP reported record profits of USD27.7bn for 2022 and announced a change in some of its most watched targets. It had planned to cut its oil and gas production by 40 per cent this decade but now aims to reduce output by 25 per cent.
This implies that the company will still be producing 2.0 million barrels per day (mbpd) equivalent by 2030, which compares with the current level of 2.22mbpd. Average annual capital spending is projected at USD18bn this decade, divided equally between fossil fuels and renewables.
The chair of BP America was adamant that the strategy for the green transition was unchanged while Bernard Looney, the chief executive of the parent company, rebutted suggestions that the new targets were driven by a desire to boost valuations (and reduce the gap with the US giants, Exxon and Chevron).
It also emerged in February in the Financial Times that the board of Shell had considered moving the listing and headquarters of the company to the US in 2021 before deciding to leave the Netherlands and consolidate its base in London. Its chief executive, Wael Sawan, is known to be concerned about the same valuation gap. The US giants are valued at about six times their cash flow, compared with three times for Shell.
All oil producers, notably those listed in the “West”, are under pressure from the media, activists and new research bodies for failing to live up to their proclaimed green credentials.
The critics are surely correct on projections for low-carbon investment. Blackstone and other leading asset managers are also under fire for their ESG investing. Large public relations departments in the majors indulge in greenwashing.
We should say, however, that the ESG industry is not without influence or resources. It is not yet an even match with the majors but nor is it a case of David vs Goliath. Sovereign credit ratings now incorporate a score for ESG considerations. MSCI in the US offers the same for listed companies.
Read also: Quoted companies and the power of ESG
Its ESG research unit has produced a 165-page document to explain its methodology, boasting of 1,000 data points, data on 100,000 individual directors and coverage of up to 20 years’ annual shareholder meetings. MSCI is not alone in this market: Refinitiv has a comparable product.
Once we remove the froth and exuberance from the narrative, we can see that the war in Ukraine has induced more realistic thinking on climate change and our efforts to resist it.
This has bought some additional time for oil producers in the emerging markets universe to make the necessary adjustments for their transitions. A few have begun work in earnest (such as Saudi Arabia) but many have barely started (such as Nigeria). That time is limited because there is irreversible momentum behind international moves at official level to address climate change.
The US Treasury secretary, Janet Yellen, is pushing for a new transformational agenda at the World Bank once a new president is installed. We will get there (life with limited use of fossil fuels) one day but not nearly as fast as the purists believed at the outset.
