For its many vocal critics, environmental, social and corporate governance investing is a fraud that enriches only its financiers and achieves precious little in the way of good outcomes.
You might have thought ESG’s hour had come after Russia’s invasion of Ukraine woke us up to the very real risks of fossil fuel dependence.
That and a baking summer in Europe that has dried up rivers like the Po in Italy and seen water shortage warnings here in Ireland, but no.
The green agenda has been sidelined in Europe’s rush to coal to offset Russian gas losses and as governments seek to protect people from surging energy prices and to keep the lights and heating on over the coming winter.
The solutions grabbing the headlines here in Ireland all seem to centre around more carbon.
These range from understandable short-term fixes – keeping the Moneypoint power plant burning coal for longer and substituting fuel oil for gas at some generating plants this winter – to longer term plans such as a €650m LNG facility on the Shannon that would extend our dependency on greenhouse gas-producing fuels.
This kind of infrastructure will increase carbon emissions for decades and would have the side effect of pricing poorer developing countries out of LNG purchases, something that is already happening with Pakistan and Bangladesh.
Put beside these issues, the optics of ESG begin to look less awful. If we have learned anything from climate change, there’s always an excuse to delay – and that tardiness is why the bill is coming due so quickly and why it is now so expensive.
Ireland’s own emissions reduction path to 2030 – yes, the one that flunked the emissions test over farming the other week – envisaged €125bn in spending, half of which comes from redirected existing spending and the remainder from new spending. The total works out at €14bn a year on average from 2021-30.
Clearly there’s no way the State budget is going to fund that investment which would swallow up most of the annual corporation tax take that keeps finances here afloat.
The spending increase is equal to half of global corporate profits, or a quarter of global tax revenues
If you think Ireland’s numbers are big, estimates from the McKinsey consultancy put the global cost of getting to carbon neutral – where we stop adding greenhouse gases to the atmosphere, which is the step beyond the cuts planned to 2030 – at around $275trn (€270trn). That works out as investment spending of more than €9trn a year, an increase of $3.5trn on current capital spending.
The spending increase is equal to half of global corporate profits, or a quarter of global tax revenues.
Luckily, there’s a deep and growing pool of capital that could be deployed if the incentives are right.
And by incentives, that’s not just profit but also regulation and standards to ensure that the money that is invested is more than just “greenwashing”. Bloomberg Intelligence, the analytical arm of the news and data organisation, estimates that global ESG assets under management could exceed $41trn by 2022 and grow to $50trn by 2025.
There’s another source of capital for the green transition – those cash-rich oil giants like BP which has just recorded its biggest second quarter profits in 14 years at $8.45bn.
Top Western oil and gas companies – the likes of BP, Shell and Exxon – made a combined $59bn in the second quarter, according to Reuters, much of which is being returned to shareholders.
There is plenty Ireland can do to boost green energy, by reforming planning, cutting transmission costs and boosting storage.
As well as the highly visible big ticket items like turbines, we need to retrofit hundreds of thousands of houses.
Financial markets and governments do have the power also to deliver green finance. Even in the absence of formal regulations as to what ESG is, there are examples, notes Humzah Yazdani, an energy specialist at the law firm Shearman & Sterling.
In a posting for the World Economic Forum, he cites Chile as a sovereign leader in green bonds and two companies – Italian utility Enel and Brazilian pulp and paper company Suzano, both of which have raised money with the caveat that they face financial penalties if they fail to reach their green goals.
“Linking an ESG bond with quantifiable and verifiable goals and imposing a penalty for the issuer’s failure to meet those targets ensures discipline on the issuer’s end and provides an antidote to greenwashing,” he writes.
With $100 a barrel crude oil and European natural gas prices at record highs, those investments in infrastructure to get to net zero now have faster payback times.
A prime example is Denmark where a $34bn project to build an offshore energy island that has ambitions to deliver energy to 10 million homes is now in train.
Germany, the Netherlands, Belgium and Denmark have pledged to install at least 65GW of offshore wind capacity in the North Sea by 2030 and 150GW by 2050
It is planned as a public-private partnership and will initially produce 3GW of electricity with plans for 10GW and the export of “green hydrogen” produced from seawater.
Together, Germany, the Netherlands, Belgium and Denmark have pledged to install at least 65GW of offshore wind capacity in the North Sea by 2030 and 150GW by 2050.
In Ireland, there is just one installed offshore wind project with 25MW capacity – compared with more than 4GW of onshore wind power.
The offshore sector was dealt a huge blow when Norway’s Equinor pulled out last year.
The Government’s plan is to increase the proportion of renewable electricity to up to 80pc by 2030, including up to 5GW of offshore wind.
You can have growth and falling emissions if you deliver on your green objectives. A government that has to make a choice between keeping the lights on in schools or in workplaces won’t survive.
There’s plenty of wind here, and plenty of capital and expertise in the huge financial centre.
It just requires the right incentives to get the infrastructure built rather than listening to the siren call of carbon dependency, which is what got us here in the first place.