Price the E in ESG otherwise its one more climate con
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imagine
climate change impacts
pommels
indonesia tsunamis
drought floods landslides
sea level rise hundreds
then thousands of indonesians
start leaving then
millions right now
20 million on makeshift boats
are right outside
singapore seeking
shelter food
and water
millions more are heading towards
australia the same scene
is unfolding in the mediterranean sea
at the gates of europe and
on the u.s mexico border
where tens of millions of latin
americans
africans south asians arabs
climate refugees all of them
are seeking refuge on makeshift boats
and on foot what
exactly are singapore
australia europe and the united states
going to do
are they going to shoot them
are they going to let them in
or are they going to complete trump’s
wall
except this time take it all around
their countries
but what happened you might ask
what happened was we delivered progress
without sustainability
that’s what happened the progress that
we delivered
in large part powered by
burning gas and coal and
oil was amazing for 200 years
we doubled global life expectancy
we cut infant mortality from 50 percent
to 2.9 globally
we pretty much conquered illiteracy
and every one of you right this second
has
in their pocket more information
than abraham lincoln or
louis xiv ever had access to
in their entire lives
but we delivered that progress
in large part burning called
oil and gas while
cooking the books
how bad is it every single earnings
number
of every single company in the world
is actually wrong
now at the beginning obviously we did
not know that we were cooking the books
so when the first coal plant opened in
london in 1882 it was a beautiful site
it lit up a part of the town it powered
the telegram
and we then built a global
infrastructure
burning oil gas and cold
but at least 40 years ago
we should have known
and must have known that we were cooking
the books
as a matter of fact according to united
nations body called
the ipcc we have known
that humans have an impact on climate
through burning
oil gas and coal for about 100 years
but let’s be generous and call it 40.
because 40 years ago
exxon scientists had scientific papers
that predicted pretty much exactly
where global warming was going to be
today and that’s all public information
but what did we do about it
we pretty much did nothing
about it and the data is very clear
emissions are still rising
now we came up with very creative ways
to do nothing about it first we said
collectively governments companies
lobbyists think tanks that in fact
humans don’t cause an impact on the
climate through burning fossil fuels
so we just denied it then
we buried the evidence after that
companies became more creative
and said things like oh my god how can
you possibly
have me estimate my impact on the
environment if you government
don’t give me a carbon price or you
government don’t force me to clean up my
water discharge full of chemicals
or you governments don’t force me to
take responsibility
for the plastic that i’m dumping
everywhere to an extent that
every single one of us today is eating
drinking and breathing plastic
but recently we came up with an
even more fantastic way to
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cook the books and it’s called
e s g
esg stands for environmental
social and government risks and
governance risks
that a business runs
into and it’s about cataloging these
risks
so that investors take them into account
when looking at the performance of a
company now
esg is a beautiful thing because
hypothetically if you’re looking at a
portfolio of buildings for example
which you want to buy today financial
statements only show you how much money
these buildings make
and how much it costs to run them
they do not show you for example the
emissions that went
into building that building the
emissions that the building
is emitting today the deforestation
impact if any of that building and the
sea level rise
protection investment that needs to be
made to defend that building
so esg is at the moment
basically a lot of blah blah blah to say
i’m gonna take this big bucket i’m gonna
put in it everything i
don’t want on my balance sheet
and in my earnings and then i’m gonna
just forget about it in computing my
profits
it’s actually very elegant as a way of
continuing to do nothing
and esg took off because of its feel
good factor so 10 years ago
esg was pretty much zero in terms of
global assets under management
today it’s already one out of
three dollars that are professionally
managed
in other words one out of three dollars
professionally managed
pretends that it’s being managed taking
into account
esg factors and
soon it’s going to be a hundred percent
of assets under management because it’s
just
very elegant and because we citizens
want clean investment products
but there’s at least four
problems with esg and that’s at least
four problems
the first one is there are no
standards for disclosing
environmental social or governance risks
and so what companies do is they
arbitrage between them
they find kind of the best standard to
get the best
governance grade and then they go to
that one and it’s frankly
the standardization is a complete zoo
but hopefully
something is going to be done about it
the the second problem
is that abuse is rife
we all know that deforestation is a
major driver of climate change
78 of mutual funds offer
esg investment products how many would
you think
actually filter their investments for
deforestation risk the answer is zero
zero also price climate risk
and take it into account when investing
the third problem is
epic green washing and i mean epic
green washing it’s almost too beautiful
to
describe but i’ll give you one one of my
favorite examples
in 2020 253 funds
in the united states switched to an esg
focus
253 funds out of these
87 percent modified their name
by adding things like climate or
sustainable or green
or esg guess how many
changed their underlying portfolio
initially zero
and the fourth problem regrettably
is actually bigger and more
lethal
g governance is about how well a company
is managed social
or s is about human capital
and how you deal with your stakeholders
i can accept i can accept that these two
can go in a bucket which hopefully
investors would read
but e is about environmental destruction
it’s a completely different thing and it
has to be priced
then flow through earnings and impact
executive pay which at the moment it
does not do
and we’re not talking small numbers
companies worldwide
in 2019 were responsible for
7.6 trillion dollars
of environmental destruction that they
did not pay for
that’s one and a half times
the gdp of france
and the uk combined 7.6 trillion dollars
and if you look at climate change
as a subset of that
7.6 and take
a few companies as an example just to
get our head around
the issue let’s start with
exxon the oil company exxon
by its own account discloses that it’s
responsible for
730 million tons of co2 of
emissions per year
now the social cost of carbon
in other words the destruction
of each ton of carbon from a climate
change
and environmental perspective
is anywhere between fifty dollars per
ton of co2
to two hundred dollars per ton of co2
depending on which study you look at
if you look at the biden administration
at the moment their tentative number
which undoubtedly is going to go up is
51
so let’s be generous to exxon and take
50
if you take 50 and you multiply that by
the 730 million tons
you get 36 and a half
billion dollars that’s 36.5
billion dollars of climate impacts
which exxon is responsible for
but are nowhere to be found on its
financial statements
or in its earnings and are nowhere taken
into account
in its executive pay
and it’s not just exxon by the way it’s
every single company
in the world with no exceptions
none and what that means is that
for 40 years because we have
buried that environmental destruction
outside the financial statements
what we’ve done is we’ve literally moved
tens
of trillions of dollars to the wrong
place
we sent them to search for more
oil more gas more coal more plastic
more polluting products
instead of having done the right thing
sending them to the right place which
would have meant that today
we would have been done with that
climate change
challenge already so
exxon in a good year makes 20 billion
dollars
its earnings are therefore misstated
by something like 200 basf
the german chemical group
their earnings if you do the very same
math based on
their numbers are misstated by 67
percent
67 toyota makes
also about 20 billion dollars a year but
if you take
its emissions multiply that by 50
you get 20 billion dollars which means
that toyota actually has never been
profitable
and all that money has been diverted to
petrol cars
when it shouldn’t have this is hugely
meaningful
because if we weren’t cooking the books
your electric boiler right now would
instantaneously be
cheaper than your gas boiler green
hydrogen would
already be with us we would be flying
electric
planes we would be sailing electric
boats bill gates talk of a
talks about of a green premium which
according to him
is the premium you have to pay for a
zero carbon product compared to
a fossil product of the same type so a
plastic straw versus
a biodegradable straw but in fact
the green premium would instantly
disappear and would never have existed
if we weren’t cooking the books and
looked at a different way there is no
green premium
unless you are cooking the books
this cooking the books thing is a
pandemic
attacking it is probably the most
effective lever
to change the world and move it to a
safer place
immediately and in the fastest possible
way therefore merging
progress and sustainability
and i’ll finish by saying this
indonesians
and latin americans and africans and
arabs and south asian
do not want to move to sweden
they really don’t or denmark
they want to stay at home but to do that
their home has to be climate safe
thank you
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