The inauguration of president Donald Trump has put the spotlight on environmental, social, and governance policies, or perhaps more precisely what ESG policies have come to mean. ESG, nothing could or should be better. ESG, a collection of tick boxes. Take your pick. Clearly the first proposition is sound, the second is open to the shifting fashions of time as the tick boxes change. Banks have been caught out defining what they don't do, but time does move on.
I was struck last Thursday by two events. Eco warrior Dale Vince told an audience on BBC's Question Time that Joe Biden had handed out a lot more oil and gas licences than his predecessor Donald Trump. And earlier on the train – yes I do go into the office – by an article in the left-leaning London Review of Books.
I quote. "When we look more closely at the historical record, it shows not a neat sequence of energy transitions, but the accumulation of ever more and different types of energy. Economic growth has been based not on progressive shifts from one source of energy to the next, but on their interdependent agglomeration. Using more coal involved using more wood, using more oil consumed more coal, and so on. An honest account of energy history would conclude not that energy transitions were a regular feature of the past, but that what we are attempting; the deliberate exit from and suppression of the energetic mainstays of our modern way of life is without precedent." So says French historian of science Jean-Baptiste Fressoz in his latest book More and More and More.
If we are to achieve an energy transition, it must mark a fundamental break with an otherwise irresistible logic of energy accumulation, Fressoz says. Indeed. He then goes on to say the transition concept is simply a way to put off meaningful change. Er, not so sure about that. Maybe we could use the word adaptation instead.
Into the breach has stepped BNP Paribas. Bank policies on issues such as ESG can be difficult to grasp, like a bar of wet soap. But the direction of travel over the last few years has been less oil and gas and more renewables. Well, to be more precise, less upstream oil and gas as we all use and utilise oil and gas-related products downstream, such as plastics. But pressure from certain US states and now the federal US government has, in the US at least, changed the direction of travel.
Constance Chalchat, chief sustainability officer for corporate and institutional banking and global markets at BNP Paribas, said the bank will now will focus on four themes: adaptation, transition, conservation and societal resilience.
This involves broadening the definition of sustainability to encompass efforts to decarbonise heavily emitting sectors such as cement and steel, increasing investment in areas such as water, agribusiness and adaptation finance while abandoning frameworks that exclude entire industries.
Chalchat said the bank wanted to stick with investment it linked to a sustainable future and help companies and societies adapt to climate change but it needed to ensure investor returns. "We want to remain relevant for the long run, even for US investors, and to realign profitability and sustainability," she said.
Adaptation is apparently the fastest-growing concern for the public and private sectors as natural disasters such as Los Angeles wildfires increase according to my colleagues at IFR. The sustainable finance market is likely to see different kinds of deals this year as a result, with more adaptation-focused KPIs in sustainability-linked transactions. New frameworks for use-of-proceeds bonds are also being developed.
So will we transition from sustainability to ESG and onto transition and adaptation? Or maybe we could stick to doing what makes sense. Building solar plants in hot climes, wind farms in windy areas with great wind yields, smaller nuclear reactors next to businesses needing lots of baseload, LNG and gas to provide reliable backup energy and so on.
That still leaves one open hole, incentives – that is incentives to push down the costs of clean energy in the way costs were forced down in the solar market. Green hydrogen has yet to move from its startup phase. Fortescue Energy has been a major player but its CEO Mark Hutchinson told Reuters last week the sector has been held back by high costs. "If you're waiting for someone to pay you extra because it's green, forget it ... at the end of the day, the economics have to work," he said.
"The green hydrogen, ammonia (sector) is not where we thought it would be. The demand hasn't emerged in the way it should but over the next few years we're hoping demand will rise as prices come down," he said.
Hutchinson told Reuters it is up to the industry to make it an economic discussion, not just "about saving the planet". One way forward ... the company's focus on green iron has risen significantly over the past year, despite the demand worries. Green iron is produced by reducing iron ore using hydrogen gas, which is then converted into steel in an electric arc furnace.
