Market Thinking

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Trojan Horses and Slippery Slopes

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An under-rated risk for western economies is that in pushing back against the centralisation of state power under the Health Crisis, voters will unintentionally now allow an even greater grab of power by different parts of the state under the guise of A Climate Crisis. President Biden’s announcements this week and the pronouncements ahead of the upcoming June summit in the UK demonstrate an alarming extension of ‘command and control’ over economies, while the seemingly unstoppable ESG bandwagon may well represent a Trojan Horse through which ideologues can effectively control the allocation of trillions of $s in personal savings in accordance with their own opinions.

Trojan Horse by Henri-Paul Motte 1874

In recent (and not so recent) discussions about ESG, we noted that, once Investment Managers went down the ‘approved company’ route, they effectively hand over a considerable part of their portfolio construction process to whomsoever constructs the selection process. In the sense that the over-whelming part of ESG and ‘Sustainability’ at the moment is based around the notions of Climate Change and in particular the ‘prescription of a proscription’ of Carbon Di-Oxide, most of the companies currently excluded from ESG funds are done so on the basis of their ‘carbon footprint’. (As we noted in an earlier post this is supremely ironic given that the concept of the Carbon Footprint was originally weaponised by big oil as part of their, ultimately highly successful, campaign for a switch from Coal to Natural Gas, which of course they supply).

The high priests in the EU are set to pronounce on what is known as the taxonomy of sustainable finance intended to cover 40%(!) of the EU economy, but, unsurprisingly perhaps, many ‘Zero Carbon’ campaigners are still not happy. What is happening now of course was entirely predictable in that an almost quasi religious fracture is already emerging in the new system between the different factions of the doctrine of sustainability. Some are demanding that even Gas is not Green enough. Nor nuclear. These disputes will run and run, but what is interesting is that the notion that these campaigners have any authority over the allocation of other people’s savings appears to go unchallenged. That war seems to have already been lost – or won, depending on your viewpoint.

Thus as QE, with its distortion of markets, fades as an influence, greater state interference takes its place and as with QE there will be underserved winners as well as undeserved losers. Thus, while some companies are being steadily ‘de-platformed’ for non compliance to the sustainability agenda, other companies are now benefitting from ultra cheap capital thanks to more focused ESG funds and many are there accidentally or else on account of their ability to ‘teach to the test’. We noted in the FT last week that these Stewardship campaigners are now seeking to not only limit access to capital markets but also to try and force banks to cease to lend to any projects that are not deemed sufficient to meet zero emissions Paris Accord targets. Naturally there is an acronym, GFANZ as the (ex) Central Bankers like Mark Carney and Janet Yellen get involved with the announcement of the Glasgow Financial Allianz for Net Zero along with politicians like John Kerry, whose aim is to hold the Financial sector to account for its ‘pledges’ already made to the green energy lobbyists. Like modern day Danegeld, the financial sector is discovering that paying the activists to go away only brings them back for more. All this at a time when politicians are seeking to compete to declare even more extreme restrictions – almost as zealous in Zero Carbon as they are in Zero Covid. Indeed some might say that while some politicians see the latter as a route to the former, others see a renewed zeal for Zero Carbon as a means to obscure the mistakes of Zero Covid.

Neither type of state interference is good and the big risk now for economies and growth is that it is likely we will see a swing in upcoming elections to ‘Green’ Parties, not so much because they have a good manifestos, but because they represent ‘none of the above’, especially for younger people. An early warning of this appeared in the the UK last week when Sir Keir Starmer, leader of the Labour Party, was visibly shocked to be admonished by a lifelong Labour supporter for failing to provide any democratic opposition to the autocratic tendencies of government – revealing the gap between the country at large and the opinion pollsters in metropolitan centres. There will undoubtedly be more of this as countries move away from lockdown – which is probably a major reason why many politicians are so reluctant to do so.

There is a risk that upcoming elections across Europe will reject incumbents, but in doing so give unintended power to Green ideologues

As such there is a broader risk that pushback against totalitarian Covid measures may in fact lead to an increase in totalitarian Green policies instead. Just as a swing to UKIP in the European elections of 2015 -intended to encourage UK Prime Minister to have some resistance to the EU – at least subconsciously, instead panicked him into a referendum on the EU, so rejection of the status quo may be misread as a mandate for more extreme Green. Germany is probably the biggest issue here, with the Green Party highly likely to hold the balance of power when Merkel finally retires this autumn. An unhealthy combination of Green fundamentalists (Fundis) sometimes known as Watermelons – Green on the outside, Red on the inside – who are seeking to tear down capitalism and a newly emerging rent extracting Green Financial/Industrial Complex eager to exploit the ‘desire’ for carbon taxes, and other financial instruments designed to promote Zero carbon, now threatens a major disruption to not only Germany but also to the wider European economy.

This will only embolden political campaigners currently seeking the ability to ‘cancel’ the access to capital of any company they dis-approve of on sustainability grounds, much as those with dissenting opinions are cancelled on social media. To date, this has tended to lead to many Asian companies being excluded on the basis, say, that somewhere in their business portfolio is a coal powered power station. No account is taken of the alternative – that the residents of the country where the aforesaid power station is based are in urgent need of electricity for example -the rules based system shuts them out. (In fact it means they are now getting funding from Asian investors instead). Meanwhile the European company that has outsourced its production to polluting factories in Asia or Africa appears ‘clean and green’ and gets cheap capital from Sovereign Wealth funds and pension funds with ESG mandates. This is all part of the broader issue of capital apartheid that is emerging, where some companies have almost unlimited access to ultra cheap capital, while others have almost none. Meanwhile, the biggest and richest can afford to employ a lot of help to ‘Greenwash’ their activities. Investors meanwhile get sub-optimal returns.

Opening the door to more subjectivity and politics in investment

In recognising this dilemma, unfortunately the response of many activists is to extend the process rather than to amend it. Thus they now want to force companies to be responsible for their whole supply chain. Not only is this incredibly difficult, but it also opens the door to enormous amounts of subjectivity and politics – if there wasn’t plenty already. Take the example of workers in, say, Bangladesh making garments for $112 a month: this naturally sounds outrageous in $15 an hour minimum wage DC, or $13 an hour California (although probably not quite so bad in $7.50 an hour Georgia), but in a country where the average salary is $150 a month, this is actually not that out of line. Forcing up the wage would most likely simply force away the job, leaving them on $0 an hour, with no social security or other support. Indeed, thanks to Covid and the cancellation of orders from the west, many of the workers have not been paid for over a year causing real poverty.. However, even if the west imposing higher wages were to succeed as a policy, injecting that much cash into a system where the average basket of goods and services is priced to reflect the average income would simply cause ruinous levels of inflation.

The wider problem is, that according to campaigners, there are 167 countries in the world (out of 197) where the human rights of the population are being abused, particularly in the area known as modern slavery. Is a fund manager to not invest in any of these countries? What does this then mean for emerging markets? Indeed is there not an argument that by providing stable capital to a country it can achieve the economic growth that will allow it the power to deal with these issues internally? This is not an argument about moral relativism, but it is also important to note that the volume of the narrative of outrage tends rather to coincide with US foreign policy – lots currently on Russia, China, Syria and Iran, but little on Yemen, Saudi, or anywhere in South America or Africa. Given that the US State Department produces and promotes an annual report on modern slavery and human rights this is perhaps not surprising, but the key point is that on this basis the investment portfolios of millions of pensioners and others will be, to quite a large extent, determined by the US State Department.

In the longer term then, perhaps the bigger risk for Investors is that ESG presents a Trojan Horse for broader political interference. We are already aware of managers with ESG mandates being asked to complete detailed questionnaires on ‘Human Rights in China’ which is essentially the ‘cancel culture’ extending into investment portfolios. To be clear, there may well be human rights abuses taking place in China, or indeed many other places, but we, quite literally, have almost no evidence on which to make a balanced judgement. We know that a US NGO representative made an initial claim at the UN about internment camps based on ‘people she had talked to’ and that (irony alert) Chinese Whispers have now elevated this into the concept of ‘millions in concentration camps’ with highly evocative words like ‘genocide’ being casually thrown around in an echo chamber of outrage. We also do know that there is a long standing Chinese domestic terrorist issue and that several years ago there were a number of grisly attacks on innocent civilians at train stations, involving ‘separatists’ with razor sharp melon knives decapitating and disemboweling people including pregnant women, and that these camps are part of the Chinese response to that. We also know that a number of asylum seekers talk of their mistreatment, but logically all we can hope to do is follow the legal concept of burden of proof.

To conclude, the response to Covid has allowed for a massive increase in state interference in western economies and politicians have already demonstrated extreme reluctance to relinquish that power. It looks like it is already starting to transition to existing agendas on Build Back Better, which are focussing on everything ‘Green’ and that the same combination of lobby fuelled policy making, state intrusion, modelling and opinion presented as scientific fact, together with aggressive use of social media and propaganda to shut down dissent, will continue in this sphere instead. Meanwhile, the rapid emergence/dominance of ESG looks a worrying Trojan Horse for politicians and political campaigners to effectively seize control of the asset allocation of almost all the west’s institutional capital. As to symbolism, in the picture from Paul Henri Motte, we see the Trojan Horse at the top of the hill it was dragged up, on what looks like a combination of rollers and ice. A slippery slope indeed.

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