The information contained in this article is not intended to be interpreted as any form of financial or investment advice or recommendation. Capital at risk.
Energy companies are making hay whilst the sun shines as they announced record profits in the second quarter of 2022. The source of this profit is of course purely the rise in energy oil and natural gas prices, both natural resources. The result is an enormous transfer of income from consumers to the energy companies – maybe the largest in peacetime. In 2020 energy costs totalled 3.9% of all UK household income.1 According to Age UK this had risen to 9% by April 2022 and is likely to rise to 20% in October 2022.2
These are average figures and as usual, those on the lowest incomes will suffer disproportionately. Extrapolating the trends from the 2020 data above, the lowest 10% of income earners could be paying close to 40% of their income to the energy companies versus 10% for the highest 10% of income earners.
Despite the obvious hardship and inequity of the situation, the government is reluctant to step in with an additional windfall tax on the energy companies who have done nothing to earn their super normal profits. Two reasons are being given by the government and one of the candidates to become prime minister, Liz Truss. Firstly, that it will act as a deterrent to companies investing in the UK. Secondly, it will deter energy companies from investing in renewable energy.
The first argument is easily dispensed with as energy companies are benefitting from a squeeze on the supply of a natural resource. For example, nobody is talking about changing the tax regime for car manufacturers. The second argument would be defensible if the energy companies were leading the way on renewable investing. But the sham of energy companies investing in renewable energy is highlighted by a great piece of analysis by Matt Mace of Edie which summarises neatly the lack of transparency and paucity of information the major energy companies are providing about their renewable energy programmes.3 However, what we do know is that their renewable investments are a fraction of their fossil fuel investments.
As a climate-conscious investor, I do not want to invest in fossil fuel industries because they are not in alignment with the Paris Agreement on climate change. Can I trust financial institutions to invest my money in a way which is consistent with the Paris Agreement? No. As we know there have been a plethora of funds offering ESG strategies. According to Morningstar, money held in sustainable mutual funds and ESG-focused exchange-traded funds rose globally by 53% last year to $2.7 trillion.4 This is fantastic news until you realise that many of these asset managers are still investing in fossil fuel industries, so they are tapping into the new demand for sustainable investments whilst maintaining their climate-damaging strategies.
Again, this might arguably be acceptable if the managers were really pressurising brown industries to transition to net zero. We know that this is not the case. The world’s largest asset manager, Blackrock, made an infamous U-turn on its CEO’s pledge to back sustainability by reducing its commitment to back pro-climate change agendas of its invested companies.5
Blackrock is not the only financial company to back down on climate issues after a backlash from vested interests. A shocking but unsurprising example of such pressure is the State of Texas in the US which is barring banks from participating in its municipal bond auction unless they support the fossil fuel sector and, incidentally, the gun industry.6 The Republican presidential hopeful DeSantis has put a “flat ban” on the Florida State Pension System from incorporating ESG investments.7
Investing sustainably can seem daunting because the world still remains heavily dependent on fossil fuels. Whilst there is universal recognition that the world needs to move rapidly to decarbonise, this challenge is made more difficult by the vested interests and lack of transparency of the fossil fuel industry. Investing with asset managers that offer ESG funds, whilst still unquestioningly investing in fossil fuel industries, is still greenwashing.