Sunday, November 08, 2020

Why the next financial crisis could be green

Green finance. Climate finance. Sustainable finance. These phrases no doubt fill most people with a kind of existential dread, but I fear we will all have to learn a lot more about green finance in the years to come.

For one reason why, take a look at Elon Musk’s electric-car venture, Tesla. In just the first nine months of 2020, it received a whopping $1.2 billion in regulatory credits – from California and other states in America, from the US federal government and even from the European Union.

That’s $1.2 billion without making a single extra car – just for making cars that aren’t based on fossil fuels. Mr Musk sells his credits to Honda, General Motors and Fiat Chrysler (FCA) – car giants that haven’t got out of gasoline and into electric fast enough, as far as the US authorities are concerned.

In a 21 October earnings call to Wall Street analysts, Tesla’s chief financial officer, Zachary Kirkhorn, conceded that much of the company’s success was due to its regulatory credits business being ‘stronger than expectations’ and ‘tracking to more than double this year compared to last’. In 2019, Tesla’s credits business was only worth 2.4 per cent of its revenues. But, more vitally, between 2018 and 2020, regulatory credits added between two and five percentage points to Tesla’s gross profits. Indeed, as the US business editor of The Times observed after Kirkhorn had made his call, although Tesla had been profitable for five consecutive quarters, ‘it would have lost money in the last four had it not sold hundreds of millions of dollars’ worth of “green” credits to other car manufacturers’.

If elected president, Joe Biden plans to raise federal penalties on conventional carmakers. But with or without this policy, it will still take a very long time to really displace the internal combustion engine from the roads. That means that old Elon will go on enjoying state subsidies for his cars – which are sold for a whopping $38,000 to $200,000 each – for years and years to come. Meanwhile, the US state gives buyers of many other, rival electric cars a $7,500 tax credit for each that they purchase.

Green finance is conquering all before it. At the start of this year, I noted that ‘the woke war on fossil fuels’ had ‘reached central banks and financial regulators’. But in the same nine months that Musk got his payoff for not using gasoline, things have gone much further than that. As spiked contributor and financial journalist Daniel Ben-Ami tells me, green finance is ‘no longer a niche proposition’. ‘Finance is redefining itself as a key institution with which corporations and governments can pursue the agenda of ESG’ (environmental, social and corporate governance policies), the successors to our old friend, corporate social responsibility.

These ESG policies have been adopted by the car industry and many others. They are shaped by the United Nations Sustainable Development Goals and the World Economic Forum. They are tracked by ratings agencies, institutional investors, asset managers, financial institutions and other stakeholders, as well as by Bloomberg, Thomson Reuters and the Dow Jones Sustainability Index. There are also special ESG funds and portfolios offered by BlackRock, BNY Mellon, Fidelity, JP Morgan, Prudential and others. Their structures and their language are impenetrable, but these big names confirm that green finance is no longer the tail wagging the dog of mainstream finance: it is the dog.

What these big banks really know about the tugging, durability, insurance and disposal of offshore wind turbines, for instance, is anybody’s guess. But it’s the same with all the global great and the good. The EU now seems to consider sustainable finance on a par with consumer finance, while at the prestigious OECD, the Centre on Green Finance and Investment boasts countless green-finance initiatives.

From green bonds to feed-in tariffs for consumers, from capping, taxing and trading CO2 to offsetting it – you name it, green bean-counters will want a percentage of it. Green finance is also running amok with dubious financial instruments such as derivatives – remember those from the 2008 crash? There are even specialist ESG-friendly derivatives. Green finance is also ‘making tracks into the wonky world of foreign-exchange markets, highlighting the lengths Wall Street will go to broadcast an environmental angle on investments’, writes the Wall Street Journal.

Just as with the rest of the City of London, green finance comes with plenty of funny money attached. The European Union’s €14 billion Emission Trading Scheme (ETS), which the EU Parliament now wants to extend, has lost at least €5 billion through fraud.

On a lesser scale, the specialist crime unit at the UK’s Environment Agency’s (EA) has secured custodial sentences for £1.5million of fictitious claims for the recycling of electronic waste. The EA is also concerned that its Packaging Recovery Note (PRN) system for tracking plastics waste is vulnerable to false paper trails and ‘carousel’ frauds.

Led by the stock market hubs of Amsterdam, Zurich and London, green finance shows what one expert calls a marked ‘dependence on public policy and regulation’. Too right. The byzantine world of green finance is just the ticket for underwriting obscure, ‘build back greener’ state policies, which have become all the rage in the wake of Covid-19, despite repeated failures in the past, like Green New Deals, Green Recovery Plans, green jobs and all the rest.

As we enter the first recession since the crash of 2007 / 2008, which was in the first instance a financial crisis, what could possibly go wrong?

Oregon Supreme Court Rejects Youths’ Climate Lawsuit Claims

The Supreme Court of Oregon has rejected claims brought on behalf of youth plaintiffs that the state’s public trust doctrine imposes broad duties on it to protect the environment from greenhouse gas emissions.

In the case is Chernaik v. Brown, brought on behalf of Kelsey Juliana and Ollie Chernaik, among other youths, by the climate litigation group Our Children’s Trust, six of the seven justices of the state Supreme Court ruled Oregon’s public trust doctrine applies to navigable waters and submerged lands under those waters, but not to wildlife or the atmosphere.

“In this case, therefore, we do not impose broad fiduciary duties on the state, akin to the duties of private trustees, that would require the state to protect public trust resources from effects of greenhouse gas emissions and consequent climate change,” the court said in the October 22 opinion.

Affirms Lower Court Ruling

In 2011, teenaged plaintiffs Juliana and Chernaik sued then Governor John Kitzhaber in Lane County Circuit Court, claiming Oregon had a legal duty to protect “vital natural resources,” such as land, water, and the atmosphere, which they argued the state holds in public trust,. As with other public trust obligations, they argued, the government has a fiduciary duty to protect those resources for the use of current and future generations.

The plaintiffs argued Oregon’s fiduciary obligation extends to protecting natural resources for “conservation, pollution abatement, maintenance and enhancement of aquatic and fish life, habitat for fish and wildlife, ecological values, in-stream flows, commerce, navigation, fishing, recreation, energy production, and the transport of natural resources.”

The county court which initially heard the case rejected plaintiff’s claims, as did a three judge panel of the state Court of Appeals on appeal.

“We conclude that the public trust doctrine does not impose a fiduciary obligation on the state to take affirmative action to protect public trust resources from the effects of climate change,” wrote Judge Rex Armstrong on behalf of the Appeals Court panel. “The Oregon public-trust doctrine is rooted in the idea that the state is restrained from disposing or allowing uses of public-trust resources that substantially impair the recognized public use of those resources.

“We can find no source under the Oregon conception of the public-trust doctrine for imposing fiduciary duties on the state to affirmatively act to protect public-trust resources from the effects of climate change,” Armstrong ruled.

Oregon’s Supreme Court has now affirmed the determination of the state Court of Appeals that state has no duty to protect natural resources from climate change as part of a public trust.

Follows Previous Loss in Federal Court

The Oregon Supreme Court’s ruling represents the second loss this year for the youth plaintiffs. On January 17, a three judge panel of the federal Ninth Circuit Court of Appeals, based in San Francisco, rejected a climate lawsuit filed against the federal government by Our Children’s Trust on behalf of the same group of youths.

In that case, Trump administration, as had the Obama administration before it, argued that the plaintiffs lacked standing to sue the federal government for climate harms. Going further, the Trump administration said, even if the court determined the youths had standing to sue, the legislature and the executive, not the courts, were the appropriate branches of government for determining the nation’s energy policies and responses to climate change.

In a 2 to 1 decision, a three-judge panel of the Ninth Circuit Court agreed on both points.

The youths lacked standing to sue the federal government, and the court didn’t have the authority to dictate climate policy, wrote Ninth Circuit judge Andrew Hurwitz, an Obama administration appointee, in his majority opinion.

The plaintiffs lacked standing to sue, said Hurwitz, because their injuries were not “concrete and particularized.”

“The central issue before us is whether, even assuming such a broad constitutional right exists, an Article III court can provide the plaintiffs the redress they seek—an order requiring the government to develop a plan to ‘phase out fossil fuel emissions and draw down excess atmospheric CO2,’” Hurwitz wrote. “Reluctantly, we conclude that such relief is beyond our constitutional power.

“Rather, the plaintiffs’ impressive case for redress must be presented to the political branches of government,” wrote Hurwitz. “[A]ny effective plan would necessarily require a host of complex policy decisions entrusted, for better or worse, to the wisdom and discretion of the executive and legislative branches.”

Sorry, Google and World Bank, but Middle Eastern Crops Keep Thriving

Google News today is promoting articles about a speculative World Bank “study” claiming climate change is threatening crop production in the Middle East. The World Bank study is full of speculation but short on facts. Real-world data show crop yields per acre and total crop production are consistently and dramatically rising in each of the Middle East countries examined by the World Bank study.

In its study, titled “Water in the Balance,” the World Bank says, “[w]hile information about water scarcity at present and in the future is available there is little knowledge of what this increasing scarcity means for Middle Eastern … food security. Agriculture will suffer because of climate change and water scarcity….”

In particular the World Bank asserts water scarcity caused by climate change will reduce farm production in Iran, Iraq, Jordan, Lebanon, Syria, and Turkey. The available evidence strongly suggests that will not happen.

Had the study’s authors examined real-world data concerning crop production in the Middle Eastern countries, they would have found, even amidst substantial strife in the region, crop yields and overall production have increased dramatically. More food is being produced even as thousands of acres of agricultural lands have been abandoned during regional conflicts.

Data from the U.N. Food and Agriculture Organization show during the period of modest warming since 1989:

Cereal crop production in Iraq increased 91 percent, even as the acreage being harvested fell 5 percent.

Cereal crop production in Iran increased 187 percent, while the acreage harvested increased by just 2.6 percent.

Cereal Crop production in Jordan increased 15 percent, even as the acreage harvested declined 30 percent.

Cereal Crop production in Lebanon increased 115 percent, while acreage harvested increased 30 percent.

Cereal Crop production in Syria increased 22 percent, even as acreage harvested declined 66 percent.

Cereal Crop production in Turkey increased 46 percent, even though acreage harvested declined 19 percent.

It is clearly good news – and not a climate crisis – that Middle Eastern countries have increased crop production despite the fact that many them have been embroiled in internal political strife, outright civil warfare, and external conflicts. That good news is ignored in the World Bank’s doom-and-gloom report.

Global warming lengthens growing seasons, reduces frost events, and makes more land suitable for crop production. Also, carbon dioxide is an aerial fertilizer for plant life. In addition, crops also use water more efficiently under conditions of higher carbon dioxide, losing less water to transpiration. The latter fact should have allayed the World Bank’s concern about climate change induced water shortages leading to crop failure.

The benefits of more atmospheric carbon dioxide and a modestly warming world have resulted in 17 percent more food being available per person today there was 30 years ago, even as the number of people has grown by billions. Indeed, the last 20 years have seen the largest decline in hunger, malnutrition, and starvation in human history.

Sorry, World Bank, Google, and PhysOrg, but that does not equate to a climate crisis.

Australian superannuation fund commits to net-zero emission investments after Brisbane man sues

A 25-year-old man from Brisbane has successfully sued one of Australia's biggest super funds over its handling of climate change, forcing it to commit to net-zero emissions for its investments by 2050.

It's the first time a superannuation fund has been sued for failing to consider climate change

In 2018, Mark McVeigh sued Rest, his superannuation fund, in the Federal Court after it failed to provide him with information on how it was managing the risks of climate change.

Mr McVeigh alleged Rest had breached the Superannuation Industry Act and the Corporations Act by failing to manage those risks — which could include fossil fuel companies plummeting in value or infrastructure being damaged by extreme weather.

The law requires trustees of super funds to act with care, skill and diligence to act in the best interest of members — including managing material risks to its investment portfolio.

In an 11th-hour settlement reached on Monday while the case was adjourned, Rest agreed its trustees have a duty to manage the financial risks of climate change.

Because the case was settled out of court, the outcome doesn't carry the same weight as a legal precedent decided in court. But Mr McVeigh's lawyer, David Barnden, head of Equity Generation Lawyers, said the case still sets an important precedent globally.

"This outcome should represent a significant shift in the market's willingness to tackle climate risk — a shift which should set a clear precedent for the industry in Australia, and also pension funds around the world," Mr Barnden said.

Martijn Wilder, a lawyer at Pollination, another climate-focussed law firm, said the settlement meant the impact of the case could fall short of what some were expecting. "It has not [produced] a clear legal decision by a court which clarifies the obligations and duties of directors under the law," he said.

"However, there is widespread acceptance in the legal and business community that these obligations regarding climate clearly exist."

In a statement, Rest outlined the agreement it made with Mr McVeigh, and said: "The superannuation industry is a cornerstone of the Australian economy — an economy that is exposed to the financial, physical and transition impacts associated with climate change."

An historic agreement

In the statement, Rest said that "climate change is a material, direct and current financial risk to the superannuation fund".

Rest went further and agreed to manage its investments so they would be responsible for net-zero greenhouse gas emissions by 2050.

It also agreed to immediately begin testing its investment strategies against various climate change scenarios, publicly disclose all its holdings and advocate for companies it invests in to comply with the goals of the Paris Agreement, which aims to stop global warming at 1.5C.

The case was the first time an Australian superannuation fund had been sued for not doing enough on climate change.




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