By excluding polluting companies from its field of action, green finance works against its side. Refusing in principle to support any coal or oil producer would actually be counterproductive: this is what emerges from a study carried out by two researchers across the Atlantic: Kelly Shue, of the Yale School of Management, and Samuel M. Hartzmark , from Boston College. In summary, the two Americans demonstrate by A + B that refusing to finance the industries that emit the most CO2… increases emissions! Or how to sow doubt in this still young world of responsible investment.
To reach this surprising conclusion, the two professors analyzed data from 3,000 companies over a long period, from 2002 to 2020. Their analysis? At a crossroads, companies have the choice between sticking to their most harmful activities, or even developing them, and taking the turn towards cleaner production. This second option involves abandoning old habits for new equipment and new processes. A change of direction which mobilizes more investments, the fruits of which will be reaped later. Therefore, if the cost of capital becomes prohibitive, big polluters will be discouraged from embarking on the ecological transition. Cornered, they will favor quick and easy profits to survive and will continue their harmful activities at full speed. QED. Conversely, the study points out that financing targeted only at “green” companies generates only a meager positive impact, their room for progress being minimal, in absolute value. This is also an important point raised by researchers: it is better to think in tonnes of CO2 emitted than in percentage variation. “1% variation in the emissions of a high-emitting company is much more significant than if a green company modulates its emissions by 100%,” explains Kelly Shue. From there to saying that we must invest in TotalEnergies to save the climate, there is only one step.
Put the climate misguided on the right path
This research note rekindles another debate, according to Laurent Babikian, director of capital markets at CDP (formerly Carbon Disclosure Project). “If carbon had a price, the cash flow projections of these large emitters would be much lower. Their behavior would be modified, regardless of the cost of their financing,” he points out. Wishful thinking.
In the meantime, the analysis by Kelly Shue and Samuel M. Hartzmark supports the philosophy of certain asset managers, who are banking on the transition of economic actors towards a more virtuous model rather than the exclusion of some. With few exceptions, boards of directors rarely rise to the challenge of their own free will. Shareholders must therefore play their role, and put the climate misguided on the right path. “Fidelity made the choice from the start of fairly reduced exclusions in favor of shareholder engagement, in order to have a greater impact on these companies,” explains Aela Cozic, specialist on the subject within this American firm which manages more than $700 billion in assets worldwide. “We decided not to systematically exclude companies from our portfolios which were exposed to activities emitting CO2, including thermal coal, but above all to ask them for commitments for the future. Other investors have put in place exclusion policies. However, we can clearly see that this has no impact on the production and consumption of coal in the world”, she notes, pragmatically. In fact, according to the International Energy Agency, the world is increasingly fueled by this fossil rock. Demand increased by 3.3% in 2022, and is expected to grow further in 2023.
“Disinvestment is not the solution”
Excluding outcasts from the game also has side effects. To restore their virginity, some companies have cleaned their portfolios by selling their most polluting assets, like the mining giant BHP. A strategy that solves nothing on a global scale. If these assets are taken over by players not listed on the stock exchange, and therefore less transparent and less influenceable, the sleight of hand is even more disastrous. “Yes, disinvesting is not necessarily the solution,” says Bertille Knuckey, responsible for sustainable investment at the asset manager Sycomore AM. I am convinced that this practice, used in isolation, has shown its limits. Savers “More and more people are deciding not to invest their money in certain sectors for ethical considerations. But to have an impact, there is only a more muscular active shareholder commitment that will make it possible to move the lines.”
This pressure from shareholders today takes several forms: regular dialogues with companies, votes at general meetings of shareholders, approving or sanctioning management and its climate strategy, or even tabling resolutions, to shake up the agenda and shake up a management team that is too timid, or even ask for a seat on the board of directors. With, sometimes, encouraging results. “In 2022, we wrote to all companies, a few months before the meetings, to warn them of our new voting policy on climate issues, says Aela Cozic. In response, certain managements have committed to putting in place reports more detailed, new objectives, so that we opposed fewer resolutions than we originally envisaged. Fidelity continues to review its voting policy, in particular to include deforestation, and is now focusing its engagement efforts on the hundred companies in its portfolios which account for 70% of its emissions.
“Alone, we have no chance”
Bertille Knuckey nevertheless recognizes that “few resources are allocated to shareholder engagement. This practice is more widespread in countries where there is a funded pension.” Vincent Auriac, of the Axylia firm, confirms: “Alone, we have no chance of moving an oil group. All the managers would have to unite, French and American, and there, we are not there at all . They don’t agree among themselves and many are running out of time.” Due to lack of results, some have completely changed strategy. “Church of England, a very influential institutional investor in the area of sustainable development, announced that it would stop engaging with oil producers in order to focus on demand, that is to say their customers, in the chemistry, automobiles…”, illustrates Aela Cozic. With a team of around forty specialists in sustainable investment, Fidelity strives to influence regulations. Dialogue is established here directly with States, national or international organizations, for example to advocate for the establishment of a carbon price.
The big issue of avoided emissions
By basing their analysis on segmentation according to the greater or lesser level of CO2 emissions, our American researchers have avoided another avenue: that of companies that are certainly polluting, like any economic activity, but “whose products and services are extremely useful to the transition. They come from the industrial sector such as rail, waste treatment, water sanitation, etc. For us, they are real “green” companies, because they allow recycling on a large scale, improve air quality or even avoid CO2 emissions”, insists Bertille Knuckey.
Another bias: the study opts to only consider direct emissions (scope 1) and those linked to energy production (scope 2). This ignores many negative impacts: “Looking at the emissions of an insurer without scope 3, that is to say the emissions of the companies it insures, amounts to forgetting 93% of the problem”, underlines Vincent Auriac. Sycomore AM does not use the carbon footprint to make its investment decisions but another indicator, the NEC, which focuses on resources, biodiversity, air or water quality, and takes into account avoided emissions. When it comes to green finance, the truth is never black or white.