Is ‘ESG’ increasing our fuel bills?

• The energy supply shock highlights the frailties that come with relying on fossil fuels
• Investment decisions are determined by energy prices which (until recently) were low
• Environmental, social and political imperatives all point in the same direction: away from fossil fuels

I would love to say that ESG and impact funds have forced fossil-fuel companies to dramatically change their investment plans over the last 10 years. Unfortunately, that has not been the case.

Pressure on ‘big oil’ encouraged it to invest heavily in ESG marketing and to make long-range plans to transition away from fossil fuels – but little else has changed. In fact, this lack of change is a key reason why we invest in innovation instead of transition – and why we focus on disruption instead of engagement.

Energy prices determine what oil companies do – not ESG funds

The reality is that weak fossil-fuel prices deterred investment in oil and gas projects over the last five years or so. The combination of a decade-long commodities boom between 2000 and 2010 (driven by the industrialisation of China) and the subsequent US shale-oil boom resulted in significant over-investment. The market became oversupplied with oil and gas, leading to a down cycle in capital expenditure.

So what external pressure there has been on oil companies to reduce investment in new fields fitted neatly with the desire of their boards to rebuild their balance sheets and generate cash. The simple fact is that most new oil and gas projects take up to 10 years to come online – and energy prices over the last few years have been too low to justify investing in new fields.

20 years of boom and bust

Unstable and unpredictable supply and demand

The oil-price shock was not caused by responsible investing…

… nor is it due to the influence of impact investors, climate activists or left-wing pressure groups. Instead, the energy shock is a direct function of building our economies on a geopolitically unstable and finite source of energy whose marginal supply is controlled by a cartel (OPEC) of largely undemocratic regimes. As should be evident from recent write-downs (and climb-downs), many of the biggest oil companies were highly exposed to the Putin regime. This should not be a surprise. ‘Big oil’ can offer little historical evidence of wise or ethical capital allocation.

The terrible humanitarian crisis unfolding in Ukraine means that three powerful and interconnected factors are aligning to make a transition away from oil and gas an environmental, social and political imperative:

1. We must reduce our carbon emissions dramatically to keep global warming below 1.5⁰C.
2. We must reduce consumer energy-price volatility and inflation.
3. We must achieve security of energy supply and energy independence from undemocratic petro-states.

These imperatives all lead us towards the same clear solutions. We must invest in:

• wind energy,
• solar energy,
• battery storage,
• battery electric vehicles,
• grid infrastructure,
• heat pumps, and
• green hydrogen.

To this point, the world has been frustratingly slow to do this. As such, the necessary capacity of sustainable, stable, democratic and lower-cost sources of energy cannot meet our needs today. So we will (unfortunately) need to use non-Russian sources of fossil fuels to bridge this supply gap in the meantime. But these are the solutions that will ultimately solve the horribly unsustainable predicament we find ourselves in.

So we are focused on investing in these technologies – rather than blaming ESG funds for the insecurity and volatility that are the inevitable consequences of our dependence on fossil fuels.