Green stick or green carrot. Or neither.

A headline caught my attention recently, which means a lot because of the sheer number of headlines I see on a daily basis. Those that draw my attention are the ones that, taken together over time, reveal a pattern or a trend and this one was just that kind of headline.

“Influential fund manager Green Century tells big insurers to drop Big Oil”, MarketWatch reported on February 16. It’s not a rare headline but it got me thinking. Perhaps just ten years ago such a headline would have been unthinkable—after all, investing used to be plain enough in those days: you put your money into a company or a project and you expect this company or project to make you more money. Yet things are changing and now investing is, at least according to entities such as Green Century, not just about profits but also about morality and values.

The Green Century fund itself says it’s been doing moral and value-aligned investing for 30 years and markets its services as a mission to help investors make an impact through their investments (while, assuming, they also make a profit on these investments). And it has demanded from Chubb, Travelers, and The Hartford that they “adopt and disclose new policies to help ensure that its underwriting practices do not support new fossil fuel supplies, in alignment with the International Energy Agency (IEA)’s net-zero emissions by 2050 scenario.”

The message here is pretty clear and echoes messages by many big asset managers and some banks to their clients: drop oil and gas or we’ll make you drop them. More and more investment funds are taking it upon themselves, it seems, to rid the world of the oil and gas industry by cutting — or rather trying to cut — its access to funding and, now, insurance. At the same time a growing volume of noise is being made about the benefits of ESG investing and pressure is being applied on businesses to embark on something called climate disclosure.

Climate disclosure basically means companies having to report on how badly they are doing on emissions and how they plan to “align” their business plans with the IEA net-zero roadmap. Since I will never get tired of repeating it, this is the very same IEA that has repeatedly urged OPEC+ to produce more rather than less crude oil, as its own roadmap stated.

The pressure for climate disclosure comes from both activist investors, institutional investors and, most recently, regulators, to make things a tad more interesting. This Reuters report notes that a climate disclosure rule that is being currently drafted by the Securities and Exchange Commission for some reason* may force businesses to report not only their own emissions but the emissions of their suppliers and business partners. This is what environmental activists and activist investors are demanding, apparently. (*the reason probably goes like this: emissions cause climate change causes potential systemic risk to the financial system, because computer models say so.)

Meanwhile, across the Atlantic, the International Capital Markets Association, an industry group, has warned that the EU’s green energy taxonomy may effectively become too complex for practical use. I can hear some of you snickering here, so shame on you. The EU is trying its best to set clear rules on what is and isn’t green energy. It’s just overdoing it a little bit.

So, this is what we have: first, activist investors demanding that companies they’re invested in green up right now; second, environmental activists demanding that everyone spurns oil and gas; third, IEA which has no problem with calling for the end of oil and gas exploration only to later call for more oil production; fourth, regulators eager to make their own significant contribution to the crusade against emissions; fifth and last, we have a growing class of investors who believe in the alignment of profits and values, meaning you can do good for the planet and still benefit financially from it.

A big part of the financial world, then, has whipped itself into a frenzy of so-called responsible investing in things like solar power companies and EV startups. Of course, few think about the dark side of these “green” investments, which involves things like child labour in the DRC, which supplies two-thirds of the world’s cobalt and cobalt is very important for EV batteries, and a lot of coal power to produce solar panels, among many others.

But this is not the worst part. The worst part is that all those bright-eyed activist investors and fearless taxonomy developers are basically setting themselves up for failure. What I gathered from the ICMA paper is that the EU green energy taxonomy will basically create chaos in the business world as companies scramble to comply with its requirements. What requirements, you ask? Emission-reporting, of course.

Going back to the U.S., Reuters reported that business groups have cried out against the SEC proposal for all-out emission reporting, asking for a rule that would not be as expensive and difficult to implement. I’d say they have a point. Imagine, for example, Amazon having to report on the emissions its own many businesses produce but also the emissions of all its suppliers and all the people who sell things on Amazon. The very idea is enough to give anyone a headache.

“Investors are demanding that insurance companies stop supporting the rampant expansion of fossil fuels that is driving the climate crisis,” a senior energy campaigner from an organization called Rainforest Action Network told MarketWatch for its report on the Green Century resolutions.

Anyone with an ounce of healthy wariness would immediately ask “Which investors?” because judging by the stock price movements of Big Bad such as Shell and BP, there are still plenty of people willing to give them money in exchange for, you know, more money.

Yet there is ample evidence that questions, especially questions that risk undermining the climate change messaging line are strongly discouraged. Media coverage of ESG investing is so abundant one begins to think there are no old-school, profit-focused investors left in the world. Of course, nothing could be further from the truth.

In fact, many so-called ESG investors are in it for the money rather than some high moral values. They are being told that there is a lot of money to be made in things like wind, solar and hydrogen because governments in Europe and North America (except Mexico) are all in on the energy transition.

This apparent state of affairs makes news like the following one a bit confusing. The Financial Times reported last week that an ESG-focused exchange-traded fund that enjoyed the backing of the UN itself had failed to raise even $2 million in assets and would likely be shutting down as soon as next month. Such lack of interest among investors who should be eager to put their money in an ESG fund especially now that ETFs are regaining popularity is surprising. Or, as the famous rhetorical question cliche would have it, is it?

I wrote about the FT report for Oilprice and did a quick check of the ESG ETFs on offer from the world’s biggest asset managers. To begin with, there are dozens, from just the big players. BlackRock alone has more than 30. To continue with, the portfolio of the several funds I checked more closely — including this BlackRock ETF, this Fidelity ETF, and this Amundi ETF —seems to be built on a very simple principle: “Anything but oil”.

There are bound to be ESG funds focused on things like solar panel developers and including stocks like Vestas or Orsted but clearly not all of them focus on low-carbon energy. In fact, somewhat funnily, the energy share on the holdings of the Fidelity ETF mentioned above is just 0.91% of the total. The bulk, it seems, is made from Big Tech, consumer product makers, and financials, probably because of their ambitious emission-reductions targets that they may or may not hit but it’s the pledge that matters.

Interestingly enough, retail investors who genuinely want to invest in things like solar and wind are getting disappointed when they discover their ESG investment is actually going into banks and consumer product makers. Here’s a highly informative FT report from the weekend.

So why would that UN-backed ETF, whose top holdings include Tesla, Apple, Alphabet and IHS Markit, fail? The simplest reason would be one of market saturation. There are already many ESG funds to choose from, and newcomers would need to be really impressive to draw attention. Of course, it could be the very fact its portfolio includes Tesla, Apple and Alphabet rather than SolarEdge, Vestas, and Fluence. A more speculative reason would be that the ESG investment trend is not as ubiquitous as it may seem.

I have no concrete evidence to support such speculation but I do have this: a recent report discovered that despite their climate pledges, many leading global banks had provided as much as $1.5 trillion to coal and coal-related companies in the three years to 2021. We are talking about HSBC, Barclays, BNP Paribas, and Mizuho. Most of the money was provided in the form of debt underwriting and the rest in direct financing. And that’s not all.

The report, by a German NGO called Urgewald, also found that institutional investors had total holdings of some $1.2 trillion in the coal industry including ambitious climate pledgers and prolific ESG fund creators BlackRock and Vanguard, with exposure of more thn $100 billion each. As Bloomberg notes, both asset management majors are members of the Net Zero Asset Managers Initiative.

The above, of course, is blatant hypocrisy of the sort environmental activist love to bash in public life disruption events. However, this hypocrisy speaks of a dissonance between the dominant narrative and the actual workings of the world. On the most fundamental level, things are pretty simple.

Asset managers — and banks — put their money where there is more money to be made. There is no morality in the financial world, there are profits to be made. So, if BlackRock, HSBC (which recently made a coal phase-out pledge, by the way), Barclays and Vanguard are putting billions into coal, then there is money to be made from coal. This means there is demand for coal, surprising as it may come to those believing coal was on its death bed.

This fact, taken together with the makeup of many ESG investment funds, seems to also imply that investing in wind and solar companies exclusively may not bring in the same profits as investing in top stock market performers like Big Tech would.

So, the carrot tactic seems to not be working well enough if so many investors are not fully committing to fossil fuel-free allocation of their financial resources, however reasonable their motivation may be. It’s time for the stick, then, in the form of activist shareholder resolutions and calls on insurers to ditch oil and gas clients.

Some would see this as strong-arming whole industries into directions that would affect their bottom lines and not in a favourable way. Others may see it as a belated and feeble attempt at erasing the oil and gas industry from the face of the earth this industry is destroying. Both may soon get a wake-up call in the form of three-digit oil prices. There will probably be a lot of confused ESG investors, I imagine.