[Ryan Reynolds voice] Stuart Kirk really said that, 2 years ago he was on a Financial Times conference about ESG (Environmental, Social and Governance) and he really said that. [Exit Ryan Reynolds]
The former Head of Responsible Investment at HSBC was suspended and left the bank in 2022, due to the backlash. But… was his speech that bad? Honestly, as someone new to ESG, it was probably one of the most realistic and significant pieces of information shared. This was our first contact with ESG research and so, it was a wild ride. What started as “What drugs might this sir be on?” intuitive assessment, became a “Oh uau, he is actually right” reasoning.
Mr. Kirk shed light in the data and numbers not for the sake of proving everyone wrong (although that was fun to watch) but to build transparency on how sustainability is viewed from an economic perspective on the private sector and why target measures of ESG lose their brim once they hit where it hurts, the pockets of big corporations.
A couple of facts given on the speech:
Every time “Climate change” hits the news, the markets are agnostic or go up.
Valuation models on stranded assets (assets that have significantly devalued because the market around them has changed. Think DVD players after Netflix) do not take in consideration anything happening after year 20.
The average length of personal loans at big banks is 6 years.
Climate stress tests from Central Banks are taking in consideration a huge loss on GDP (Gross Domestic Product - the total monetary value of all goods and services produced within a country's borders during a specific period) that have never happened, and assume the financial sector would crumble.
Large temperature rises of 3.6 degrees Fahrenheit (2 degrees Celsius) predicted by 2100, means a loss of 2.6% of global GDP. But most models assume an average annual growth of 5%.
Habemvs light!
All this time we have been trying to understand the reason behind the slow action of big corporations, only to discover that the valuation models under which they take action have an inferior timeline.
A point could be made that auditors should be demanding the models of climate impact to be considered/necessary on stress test analysis, but we will leave that to another article.
Big question time: Mitigation or Adaptation?
At no point of the speech was the science behind climate change doubted, called a hoax or any of the sorts. The question or should we say, statement, was that we spend too much time and money on mitigation financing instead of adaptation financing on the private sector. Shame on you..
Or shame on us?
To put it in layman’s terms, should we be focusing in preventing temperature rise, or should we be adapting our cities for the extreme heat and possible increases of natural catastrophes. The tension and discomfort you are feeling is palpable, it is a not so moral question. However, if we look at the data (we love data, data is great), at the time of the speech, the CPI (Climate Policy Initiative) published their 2021 report (and we will add the latest data from the 2023 report for comparasion).
Total climate finance in 2019/2020, present on the 2021 report: USD 632 billion (vs USD 1.3 trillion in 2021/2022 [2023 report]).
Adaptation finance share of the total: USD 46 billion (vs USD 62 billion in 2023 report).
98% of the adaptation finance is coming from public funds which Mr. Kirk was alluding to since he was representing the private sector. It is hard to look at the data and not feel slightly anxious that only 0.4769% is getting invested in the Human race adapting given the odds of us actually achieving the Paris Accords objectives.
Not to start a fan club over here or anything but let us fast forward a year. On a TEDx speech with 4,500 views, Stuart Kirk strikes again with another pearl of wisdom. Let us focus in financial literacy since it is such a hot topic.
We have a flair for drama and scandal as much as anyone, so seeing Portuguese candidates getting thrown paint at them or huge manifestations at J.P. Morgan headquarters always raises our eyebrows and we try to see it from a lens of awareness rising.
Question remains. How effective is it? JPM stock is up 80% in the last 5 years, and public opinion in Portugal seems to be siding with the candidate being assaulted. (Relaying facts here, don’t paint the messenger!)
Coming back to the TEDx speech, there was a really good metaphor for beginners in the finance world. If you buy a car from Volkswagen, new, and then sell it on the secondhand market, Volkswagen is indifferent to your sell. They already got the money. That is a simplistic yet accurate way of describing the stock market, a secondhand market.
Let’s break this a part and keep it simple.
How do public companies raise money:
IPO – Initial Public Offering – When a company enters the stock market. Usually not open to retail or individual investors.
Secondary Offering – Releasing new shares into the market. Usually not open to retail or individual investors.
Debt Raise – Usually in the form of bonds.
PIPEs or Private Deals – Injection of capital like bonds. Usually not open to retail or individual investors.
Loans from banks.
No stock market there... Buying a stock on the stock exchange does not give money to the company directly, so to speak.
If you read or watch a show about startups, you always see terror in the founders eyes when shareholders come into play. That is because when you own a stock, you own a part of the company (bet you have been hearing that soundbite for a bit). Now, obviously the company itself also has some degree of shares in their pocket and they also give or award high bonus to their executives in the forms of lock up shares (to be discussed at a later stage) but they have a responsibility to their shareholders and the shareholders have voting rights. Yes, voting rights aka proxy season. You can drive change.
An argument could be made that this would require tremendous amount of money that the average individual investor does not have, but that was before the Meme Stocks. We all saw retail investors full power in GameStop, causing the price to go from $17 to $500 in January of 2021. #diamondhands
We get it.. You hate the system and you are still having doubts. But oof, did we not just receive the juiciest of news.
Fresh out of the printer, kind of, Exxon Mobil published a lawsuit February 29th, 2024!
Exxon is now suing Arjuna Capital and Follow This, investment funds/agencies highly focused in sustainable investing that had or acquired voting rights and proposed, again, very aggressive climate change action from the oil titan on the proxy season. This is an unprecedented move and looks a little like a cry for help on Exxon’s part.
According to the podcast “ESG now” (16 minutes episodes and informative, highly recommend), SEC data says it can cost 100,000 dollars to review a shareholder proposal, but companies estimate that to be much more. To mitigate this, Exxon is now trying to go straight to litigation to put the burden of fees and expenses on the individual investor that is asking for change.
We are closely following the litigation to see how that impacts the world of shareholder rights. We have no direct view on how radical the proposal actually was, although according to Exxon’s website it seems it was not a sustainable one (pun intended).
So, questions for you:
Should we be doing more adaption vs mitigation finance?
Is divesting the stock market the real answer, or investing in low to none ESG compliant companies to push for change?
Is Stuart Kirk mean, or just a realist that we should hear more often?
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