Treasury’s Warmists Chill the Prospects for Growth

We have seen big government and woke financiers working hand in glove over recent years to advance the cause of environmental, social and corporate governance (ESG). Superannuation funds have been increasingly orientating their investments towards ESG. The governance part involves avoiding firms with boards and senior executives containing too many white males and, therefore, inadequate ‘diversity’. The environmental and social parts once meant avoiding firms in the defence and tobacco industries, but the pariahs in our modern woke world are avoiding hydrocarbons – coal, gas, and oil.

When the Bank of England released its support package for firms facing difficulties due to the Ukraine war, it insisted that firms looking to take advantage of this must disclose whether they have a Net Zero transition plan and, if so, deliver it to the Treasury within six months of the drawdown of funds or before termination of the guarantee!

Here in Australia and no less in support of ESG, Treasury is proposing to make it mandatory for firms to report on what it regards as being climate change risks. This shifts Treasury from its traditional role in seeking to combat politically motivated cost impositions on productive enterprises. Abandoning market capitalism, Treasury is adopting the same interventionist policies as its US and UK counterparts.

Treasury’s Climate-Related Financial Disclosure consultation paper — read it and weep here —  concedes there are financial risks associated with ‘the transition’ to net zero emissions, but nevertheless prods companies to reformulate their inputs to avoid carbon emissions. These are policies that, if applicable, are the bailiwick of other arms of government, certainly not that of Treasury. According to an estimate by Peter Wells, a former UTS professor of accounting writing in the AFR, the regulations will apply to over 23,000 entities of which a mere 51 account for 80 per cent of net energy consumption. Hence 99.8 per cent of entities that potentially will be forced to report comprise a very minor component of what is said to be a problem. Moreover, the highest emitters are already obligated to detail their emissions under the National Greenhouse and Energy Reporting Scheme.

Some advocates of the policy will claim that it is a path to allow greater uniformity and combat “greenwashing” deceits, hence offering greater scope for investors and others to judge where to allocate their funds. This is a veneer covering the true intent – and in any case such matters should be left to those firms seeing merit in promoting their carbon-light credentials doing so without government compulsion. The regulations would impose needless cost on other entities, costs that must be reflected in the prices they charge, with adverse implications for their customers and on their competitiveness and productivity. In this respect, there is no attempt to estimate the costs of compliance and any benefits that might emerge, a shortcoming that is contrary to government policies regarding new regulations.

The tentacles of the ESG reporting system create a parallel network that firms must administer. That involves — in addition to selecting their inputs on the basis of price, quality, and availability — also ensuring the provenance of their chain of suppliers. This seriously distorts the efficiency that capitalism generates through the price system. With grim effect, its impact is forcing firms to engage in wasteful activities.

Funds in general – including those like BlackRock – have moved from traditional investors, seeking out firms with strong future values, to active investors counselling company managements to mend their ways and genuflect before the current fads. Above all, these involve combating anything perceived as contributing to the fabled global warming. Productive businesses have to heed such pressures, since the unloading of shares by major institutional investors not only depresses company value but also lowers the ability to attract funds.

It is seldom that sentiment will prevail in the longer term over genuine returns on investment. For most of us, most of the time, cupidity trumps a general disposition to sacrifice income, and this has been the driving force behind the income growth that capitalism has delivered.

For many years the ESG funds, which own roughly a third of all global shares, claimed they were outperforming regular funds. And yes, it’s true Australian ESG funds comprised nine out of the top ten performers as measured by returns over the past ten years. To a major degree this has been due to the carbonphobic funds being overweight in tech shares, which have performed well above the market. Those funds may also have benefited from a herd effect causing a bubble in favoured ‘ethical’ stocks.

Last year things came down to earth. Australia’s top 200 shares were down 8.6 per cent while the energy index is up 38 per cent – and coal shares have actually doubled. One outcome is that two of the most anti-coal funds, Future Super and Spaceship, saw the largest falls in value, 11.5 per cent and 18.5 per cent respectively. By contrast, four of the best five performers, including numbers one and two, Perpetual Wealth Focus Super Plan and Australian Retirement Trust Super Savings, have no climate protection policies.

While virtue signalling is a powerful force, there are limits to which people will tolerate decisions by their savings’ custodians that diminish their wealth. In addition, recognising the detrimental effect of such funds on their economies, several US states are cutting BlackRock, the largest and most vocally pro-ESG investment fund, out of government business. Such factors have caused analysts to downgrade BlackRock’s stock, bringing about a change in the firm’s public stance on energy. BlackRock CEO Larry Fink, long regarded as the most woke operator on Wall Street, has now sworn off using the term ESG, saying it has been “weaponised”. (As Reuters reported, however, the world’s largest asset manager hasn’t actually repudiated its stance on ESG issues, just the way they are mentioned) The same pushback on net zero insurers has forced the collapse of arrangements to which they agreed as recently as 2021 to collapse. Bowing to reality, Shell has abandoned its pledge to reduce oil production by 1-2 per cent a year.

It should not need saying that companies are best left to their own volition in submitting material that will help investors better understand their operations and prospects. The nation will be ill-served if enterprises are forced to engage in the costly reporting behaviour Treasury is promoting and, still more, distorting their operations in order to accommodate forces that are not conducive to maximising the wealth of their shareholders. In this respect, we are seeing widespread concerns about flagging levels of productivity. This outcome is surely a result of the mounting regulatory interventions by government agencies that impose the sorts of costs and inflexibilities to which Treasury’s proposed regulations would add.

Alan Moran, of Regulation Economics, wrote the chapter “Current trends and perspectives in Australia” in Local Energy Markets edited by Tiago Pinto et al and published in 2022 by Elsevier