Weekend press round-up: Leaked report warns climate crisis threatens human survival

In our review of this weekend's newspapers we see mounting pressure on investment banks to put funds into environmentally sound companies; JP Morgan has warned the climate crisis could endanger the human race; and the government is told it must do more than carbon offsetting to reach its climate goals.

Government warned not to rely on carbon offsetting to reach net zero

The government has been warned not to rely on carbon offsetting to reach its net zero goals, after a Telegraph investigation revealed major flaws in some schemes.

The Department for Transport is currently considering whether to force airlines and other transport companies to include a carbon offsetting charge for all journeys.

The government has also indicated that it will rely on an international offsetting scheme in order to reach net zero emissions from the aviation industry.

But they have been warned that they risk making a “terrible mistake” after The Telegraph revealed some voluntary offsetting schemes, which are self-regulated, risk fooling consumers hoping to mitigate their emissions contribution.

“We are concerned that ministers will be tempted to put the government’s stamp of approval on carbon offsetting in their forthcoming aviation strategy. This would be a terrible mistake,” Greenpeace chief scientist Doug Parr said. “Carbon offsetting looks like an easy way out but in reality it’s a dead end.”

Grant Shapps, the Transport Minister, has spoken out in favour of carbon offsetting schemes, telling parliament it was “a great idea” and promising to work closely with the transport sector on it.

The government also played a key role in negotiations to set up the international aviation offsetting scheme, Corsia, under which growth in emissions after 2020 will be offset. The international aviation body ICAO is expected to decide next month which offsets it will allow to be used in the scheme.

The Telegraph

JP Morgan economists warn climate crisis is threat to human race

The world’s largest financier of fossil fuels has warned clients that the climate crisis threatens the survival of humanity and that the planet is on an unsustainable trajectory, according to a leaked document.

The JP Morgan report on the economic risks of human-caused global heating said climate policy had to change or else the world faced irreversible consequences.

The study implicitly condemns the US bank’s own investment strategy and highlights growing concerns among major Wall Street institutions about the financial and reputational risks of continued funding of carbon-intensive industries, such as oil and gas.

JP Morgan has provided $75bn (£61bn) in financial services to the companies most aggressively expanding in sectors such as fracking and Arctic oil and gas exploration since the Paris agreement, according to analysis compiled for the Guardian last year.

Its report was obtained by Rupert Read, an Extinction Rebellion spokesperson and philosophy academic at the University of East Anglia, and has been seen by the Guardian.

The research by JP Morgan economists David Mackie and Jessica Murray says the climate crisis will impact the world economy, human health, water stress, migration and the survival of other species on Earth.

“We cannot rule out catastrophic outcomes where human life as we know it is threatened,” notes the paper, which is dated 14 January.

Drawing on extensive academic literature and forecasts by the International Monetary Fund and the UN Intergovernmental Panel on Climate Change (IPCC), the paper notes that global heating is on course to hit 3.5C above pre-industrial levels by the end of the century. It says most estimates of the likely economic and health costs are far too small because they fail to account for the loss of wealth, the discount rate and the possibility of increased natural disasters.

The authors say policymakers need to change direction because a business-as-usual climate policy “would likely push the earth to a place that we haven’t seen for many millions of years”, with outcomes that might be impossible to reverse.

“Although precise predictions are not possible, it is clear that the Earth is on an unsustainable trajectory. Something will have to change at some point if the human race is going to survive.”

The investment bank says climate change “reflects a global market failure in the sense that producers and consumers of CO2 emissions do not pay for the climate damage that results.” To reverse this, it highlights the need for a global carbon tax but cautions that it is “not going to happen anytime soon” because of concerns about jobs and competitiveness.

The authors say it is “likely the [climate] situation will continue to deteriorate, possibly more so than in any of the IPCC’s scenarios”.

Without naming any organisation, the authors say changes are occurring at the micro level, involving shifts in behaviour by individuals, companies and investors, but this is unlikely to be enough without the involvement of the fiscal and financial authorities.

Last year, analysis compiled for the Guardian by Rainforest Action Network, a US-based environmental organisation, found JP Morgan was one of 33 powerful financial institutions to have provided an estimated total of $1.9tn (£1.47tn) to the fossil fuel sector between 2016 and 2018.

A JP Morgan spokesperson told the BBC the research team was “wholly independent from the company as a whole, and not a commentary on it”, but declined to comment further. The metadata on the pdf of the report obtained by Read said the document was created on 13 January and that the author of the file was Gabriel de Kock, executive director of JP Morgan. The Guardian has approached the investment bank for comment.

Pressure from student strikers, activist shareholders and divestment campaigners has prompted several major institutions to claim they will make the climate more of a priority. The business model of fossil fuel companies is also weakening as wind and solar become more competitive. Earlier this month, the influential merchant bank Goldman Sachs downgraded ExxonMobil from a “neutral” to a “sell” position. In January, BlackRock – the world’s biggest asset manager – said it would lower its exposure to fossil fuels ahead of a “significant reallocation of capital”.

Environmental groups remain wary because huge sums are invested in petrochemical firms, but some veteran financial analysts say the tide is changing. The CNBC money pundit Jim Cramer shocked many in his field when he declared: “I’m done with fossil fuels. They’re done. They’re just done.”

Describing how a new generation of pension fund managers was withdrawing support, he claimed oil and gas firms were in the death knell phase. “The world has turned on them. It’s actually happening kind of quickly. You’re seeing divestiture by a lot of different funds. It’s going to be a parade that says, ‘Look, these are tobacco. And we’re not going to own them,’” he said. “We’re in a new world.”

The Guardian

£60m for wind farms… to close

Wind farm operators have been handed nearly £60 million to shut down turbines in Scotland since the start of the year.

This happens when it is too windy – or the creaking National Grid cannot absorb the amount of energy they generate.

The farms received almost £22 million for switching off their turbines for 13 days during Storms Ciara and Dennis, Renewable Energy Foundation (REF) analysis found.

The payments were meant to fall and eventually end with the opening of the £1 billion Western Link interconnector, which takes Scotland’s excess energy south of the Border. But the subsea cable between

Hunterston, Ayrshire, and Deeside in north Wales, tripped on January 10, meaning the National Grid had to ask for turbines to shut down – leading to millions in constraint payments to wind farms.

Even after the cable was operational again on February 7, the National Grid could not deal with the energy and asked for turbines to shut down between February 8 and 20.

Since the start of 2020, there have been 24 days when constraint payments topped £1 million. Although it is the National Grid that forks out, the sums are added to consumers’ electricity bills.

REF Scottish policy adviser Helen McDade called the payments a ‘perverse incentive’, adding: ‘There is growing concern about the value for money of the Western Link.’

Industry body Scottish Renewables said the payments are a ‘normal part of the overall efficient management of our electricity system’. Director of policy Morag Watson said they were a result of the ‘limitations of the UK’s ageing energy infrastructure’.

A Scottish Government spokesman said: ‘Grid investment has not yet been able to fully deliver where it is needed.’

The Scottish Daily Mail

Bank of England under pressure over board member’s oil links

Environmental groups have called into question the Bank of England’s commitment to tackling the climate emergency while it retains one of Britain’s most senior oil company executives on its governing board.

Greenpeace joined with Friends of the Earth and the campaign group Oil Change International (OCI) to condemn the role played on the Bank’s board of directors by Dorothy Thompson, the executive chair of Britain’s largest independent oil company, Tullow Oil.

Thompson was appointed to Threadneedle Street in 2014, when she was the head of power station operator Drax Group. She is a senior non-executive on the Bank’s board, known as the Court of Directors, and chairs the audit and risk committee.

Criticism of Thompson’s role is embarrassing for Mark Carney, who steps down as governor next month to become Boris Johnson’s special adviser for the crucial Cop26 climate conference in Glasgow in November.

Britain is hosting the climate conference as governments come under pressure to explain how they plan to cut fossil fuel emissions, especially from the widespread use of oil and oil products such as plastic.

Carney has also been appointed as UN special envoy for climate action and finance, replacing the billionaire Michael Bloomberg in the part-time pro bono climate action role.

Rosie Rogers, the head of climate finance at Greenpeace UK, said the Bank was “central to tackling the climate emergency” and that Carney needed to be “making the best decisions possible for the planet free from the influence of the fossil fuel industry”.

Hannah McKinnon, the director, energy transitions and futures programme at the OCI, said: “Central banks are charged with overseeing and regulating one of the greatest transitions of our time: the end of the fossil fuel economy. It’s a conflict of interest for the Bank of England to have fossil fuel executives on its Court of Directors.”

The Guardian

Coal and wet wood ban could cost households up to £469m

The ban on coal and wet wood could cost households up to £469m over the next ten years, according to government estimates.

The government has been warned that its commitments to policies to tackle climate change and pollution risk leaving people behind if they are not given help to adapt.

Sales of domestic coal and untreated wood will be phased out by 2023 as part of the government’s commitment to improving air quality.

Dry wood is estimated to be 60 per cent more expensive than wet wood per tonne, while alternatives to traditional coal are 38 per cent more expensive.

Up to 166,000 homes not on the gas grid rely on solid fuels, including 49,000 who rely on coal as their primary source of heating, with thousands of those thought to be in fuel poverty.

Households in rural areas are more likely to be off the gas grid and could face a “double whammy” because of poor energy efficiency in older, bigger homes, National Energy Action, which advocates for those in fuel poverty, said.

The government believes households could save more than £105m overall if they buy less fuel in weight terms, because the alternatives are more energy efficient.

But its impact assessment of the change says this may not happen, and estimates a cost of up £469.2m by 2030 if households continue to buy at the same rate.

Meanwhile, households in certain areas including Warwickshire and Harrogate will still be left with higher bills even adjusting for energy efficiency.

The government is thought likely to extend the ban on wood and coal as it seeks to tackle both air pollution and greenhouse gas emissions.

While smokeless fuels are much better for air quality, they produce more carbon dioxide than traditional coal.

Wood and coal stoves contribute 38 per cent of the most dangerous form of fine particle air pollution in the UK, which has been linked to strokes, asthma and lung cancer.

Defra calculates the benefits to health and the environment of the ban on wet wood and domestic coal to be worth £7,877.8m.

But NEA warned that thousands of low-income homes could be left without heating if they were forced to abandon coal and untreated wood, because alternatives are not always readily available, particularly in remote rural areas.

“We support the government’s broader effort to improve air quality,” said Peter Smith, NEA’s director of policy. “But we know that thousands of low-income households are reliant on those forms of fuel and they’ll need to be provided with alternative heating technologies so they can continue to heat their homes adequately.”

It called on the government to include its manifesto commitment for £2.5 billion to help people replace improve insulation or replace their boilers or energy systems, in the upcoming Budget.

The Telegraph

Monstrous’ run for responsible stocks stokes fears of a bubble

Companies with the best environmental, social and governance scores have opened up what one analyst calls a “monstrous” valuation premium, in a sign of rampant demand for the hot investment theme.

Investors last year ploughed a record $21bn into socially-responsible investment funds in the US, almost quadrupling the rate of inflows in 2018, according to Morningstar, the data provider. Now, companies with strong ESG credentials are starting to show the benefits of that surge of interest in a once-niche area.

Companies with the top ESG rankings now trade at a 30 per cent premium to the poorest performers as measured by their forward price-to-earnings ratios, said Savita Subramanian, head of US equity strategy at Bank of America.

“This is not just a function of growth stocks doing better than value stocks,” Ms Subramanian said, describing the dichotomy in US markets as “monstrous”. Inflows into ESG funds, she said, “are driving this valuation discrepancy”.

Some analysts welcome the price gaps, seeing them as validation of the idea that listed companies should pay attention to the needs of all stakeholders — including employees, customers and society as a whole. Others worry about a bubble in areas such as renewable energy, pushing prices to unsustainable highs.

Meanwhile, some note that the valuation gaps imply a lot of faith in the judgments of the likes of MSCI, Sustainalytics and RepRisk, which define the groups tracked by ESG funds by applying all sorts of screens to sift certain stocks from others. Companies have increasingly complained about the integrity of such scores, arguing they can be set arbitrarily.

Even so, the trend seems well rooted. Analysts at Bernstein wrote in a report this month that in Europe, too, there appears to be a link between ESG rankings and valuation discounts for “bad” companies. Usually, Bernstein said, such spreads disappear as investors scoop up bargain stocks, but with “the wall of money coming into ESG funds” as well as looming green regulations, “this time — in the dreaded phrase — it may be different.”

ESG effects have been clearest in the energy sector where oil and gas stocks have faced big headwinds, given their carbon emissions. Conversely, a surge in renewable energy stocks in the last three to six months has prompted some analysts to question whether these assets are overheating.

“There appears to be a growing disconnect between operational performance and share price returns,” said Eugene Klerk, Credit Suisse’s head of global ESG research. “There is a growing awareness or nervousness around this particular topic.”

Solar stocks, poor performers in recent years, have roared to life recently. A good example is Enphase Energy, a California-based solar systems provider, which was trading at about $7 in February 2019. On Thursday it closed at $58.73, up about 45 per cent on the week, giving it a forward P/E ratio of a heady 57 times — more than double the benchmark Russell 2000 index.

Israel-based SolarEdge Technologies also leapt by more than a quarter this week, adding about $1.5bn of market capitalisation after a bright earnings report.

“We hear in passing many clients concerned about ‘ESG bubbles’ forming,” said the Bernstein analysts. “It certainly feels like there might be an ESG bubble forming.”

Last year the Nachhaltigkeit Plus I fund run by Green Benefit AG, a Nuremberg-based asset manager, ranked as the top sustainable fund in Europe with a 76 per cent return, according to Morningstar. The fund, which had just €8m in assets at the end of last year, was 40 per cent invested in solar companies and scored big wins with Enphase, SolarEdge and SMA Solar of Niestetal, Germany. So far this year the fund is up 29 per cent.

The Financial Times

The daunting task of decarbonising investment portfolios

Few countries are pricing carbon high enough to limit the increase in global temperatures to well below the 2C degrees by 2100 set by the Paris Agreement, according to the latest OECD assessment.

Covering its 36 members as well as the other G20 countries, which together account for 80 per cent of global carbon emissions, it warns that carbon prices, rising at a snail’s pace, are far too low to reduce emissions and speed up innovation in renewable energy.

At the current rate of progress, prevailing prices will only cover the real cost of emissions to our planet by 2095. Unless the pace accelerates, steep price rises will be inevitable before long, causing a disorderly revaluation of fossil fuel assets.  Investors are thus left to tackle two big unknowns as they seek to future-proof their portfolios against global warming: the timing of any draconian policy measures and the actual price level in the transition period.

This much is clear from a forthcoming paper from Alecta, the €90bn Swedish pension giant. Taking a 20-year forward view, the paper shows that projections of the price level required by the Paris Agreement vary markedly between two authoritative sources: the International Energy Agency and the UN-sponsored Intergovernmental Panel on Climate Change.

Under the IEA scenario, the price of carbon dioxide per tonne needs to rise from $30 in 2019 to $140 in 2040 in Europe; and from $5 to $140 in the US over the same period.

In contrast, under the IPCC scenario, in both regions, it needs to rise to $230 per tonne by 2040, from 2019 levels. Indeed, under a more restrictive scenario that limits the maximum global temperature increase to 1.5 degrees above the preindustrial level, the required increase in both regions spikes at a staggering $870 per tonne by 2040.

For investors, climate change remains an inexact science.  Such marked divergences reveal the daunting task they face as they seek progressively to decarbonise their portfolios. The task becomes even more intractable as they seek to ascertain the carbon footprint of their investee companies.

Currently, they use the so-called GHG Protocol for converting a company’s greenhouse gas emissions into carbon dioxide equivalents and divide them into three categories: Scope 1, measuring direct emissions from the company’s own operations; Scope 2, measuring indirect emissions from energy purchased to support its operations; and Scope 3, measuring the remaining indirect emissions in its supply chain. In particular, Scope 3 data are replete with pitfalls, not least double counting: one company’s Scope 1 emissions may be another’s Scope 3.

Despite this limitation, investors are using the available data after the required judgmental adjustments. “The reporting of Scope 3 data will remain plagued by uncertainty for the foreseeable future, and if we wait until it is perfect, it will take too long. When capital starts to move, we want to make it move in the right direction,” says Alecta chief executive Magnus Billing.

Alecta still prefers to use the data that are available in the belief that the revealed deficiencies serve to generate back pressures on data vendors for step improvements. The whole exercise is an adaptive journey of learning by doing. But it is not an easy one. It throws up big inconsistencies in data that conspire against long-range planning, if Alecta’s own experience is any guide.

Nevertheless, institutional investors are climbing a steep learning curve in the belief that perfection cannot be the enemy of progress. Importantly, they are also throwing down the gauntlet to policymakers who set carbon prices and data vendors who indirectly shape the associated investment decisions. Without solid progress on both fronts, markets will continue to tiptoe into a low-carbon future.

Financial Times

Utility Week’s weekend press round-up is a curation of articles in the national newspapers relating to the energy and water sector. The views expressed are not those of Utility Week or Faversham House