Tuesday, January 25, 2022

The Lack Of Prospects For ESG (at the moment)

Bill Smead, founder of Smead Capital interview at The Market.ch (NZZ), January 10 i.e. before the recent rumpus as Jeremy Grantham calls it:

...Where else can you find investments with upside potential?

Compared to the oil price, stocks of energy companies are significantly lower than they have been in the past. That’s because of what I call the ESG discount: The enthusiasm people have for ESG. The massive amount of capital that’s been thrown at ESG friendly stocks is not dissimilar to the capital that has been thrown at profitless total addressable market stocks. But here’s the problem: There is no money to be made temporarily in buying into ESG companies because most of them are brand new companies. It’s just a giant «needle in a haystack» session. It always ends badly because nobody is good enough to find the right needles in the haystack. Thus, there is massive capital being wasted in a very careless and foolish manner.

What does that mean in terms of your investment strategy?

The ESG discount is available to be taken advantage of. Let me give you an example: The first ESG discount was on tobacco. In 1968, the U.S. government mandated that cigarette commercials be taken off the broadcast networks. Philip Morris could no longer run the Marlboro Man commercials on television. In the next forty years, adult smoking in the U.S. dropped from 40% to 20%, and the price of a package of cigarettes went from 20 cents to $5. At the same time, the taxes went from 5 cents to $2.50 a pack. Yet, Philip Morris was the best performing stock on the New York Stock Exchange from 1968 to 2008. That’s because when you’re going from getting 15 cents a pack to $2.50, you don’t care that you have half as many smokers.

So what does this have to do with the energy sector?

That’s where oil and gas stocks are right now. They are the tobacco stocks of the late sixties. Sure, it’s likely that there will be dramatically fewer carbon transportation vehicles on the road forty years from now. But it’s not likely that there will be less total need in the world for oil and gas since they are the least expensive sources of energy. In the U.S., if we didn’t have natural gas and combustion turbines for generating electricity, we would be up a creek without a paddle right now. Wind and solar are still a couple of decades away from reaching critical mass. It’s just simple math: Our investments are contrary believes in how long it’s going to take for the energy transition, and how incredibly attractive gasoline and natural gas are in comparison to renewable sources of energy.

However, stocks of oil and gas companies have already recovered significantly since the low in spring 2020.....


ESG is currently over-owned, oil & gas under-owned in light of the fact that 10 years of "stranded asset" talk (yes, it's been a decade) from the intro to a 2016 piece*:

Since 2012 when the Carbon Tracker Initiative came up with the idea as a pitch to keep hydrocarbons in the ground we've been kicking around in-house what, if any, effects the the carbon bubble/stranded assets arguments will have on price, and to this day don't have a clear-cut answer for patient reader.
Well, six years later we have a bit more clarity, oil companies have been putting money in shareholder's hands rather than in the ground, nothing dramatic, on a year to year basis but on a decadal scale it's hundreds of billions/trillions that didn't go into exploration.

As noted regarding this piece regarding oil & gas stocks: 

ECB: "Looking through higher energy prices? Monetary policy and the green transition"

....She pretty much lays it all out right there. As with European carbon, it appears that we have an upwardly moving market price created by rules and regs. If the above doesn't communicate what has been decided let's try....

*Here's 2014's "In His Latest Letter Jeremy Grantham Ramps Up The Carbon Bubble/Stranded Assets Argumentum":

We've been following the proponents of the Carbon Bubble argument since the term was first floated by the Carbon Tracker Initiative in March 2012.

Al Gore tried to frame it as analogous to the sub-prime bubble but no one is really listening to him. Mr. Grantham via his Grantham Research Institute is going with the unburnable carbon/stranded assets approach and is probably the most prestigious voice making the argument followed in rapidly descending order by Nick Lord Stern who Chairs the GRI; billionaire political activist Tom Steyer who is making full use of Citizens United and who recently hooked up with Michael Bloomberg (just named the U.N's climate change/cities envoy) and former Goldman honcho (and less powerfully, U.S. Treasury Secretary) Hank Paulson in their Risky Business initiative.

A related movement is divestment from fossil fuel producers by some public employee pension funds and demonstrations for same from college endowments. In the most famous instance Harvard said no.

The thesis hangs on the 2°C target that the EU adopted as their goal for maximum global warming.
I should probably do a post on that one of these days.

I hope I've left enough breadcrumbs for our journalist friends to, should they wish to, write the book (or at least this chapter) on the global warming story.....

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