BlackRock’s Fink proposes a ‘bad bank’ model for fossil fuels

Whether you love or hate vegan “milk”, you cannot ignore it this week: Oatly, the Swedish non-dairy company, has just announced plans for a $10bn IPO. A victory for the sustainability cause? Perhaps. But the Oatly IPO may also fuel concerns about green froth, as we write below.

Plus it shows the challenge of judging what is ESG: some activists are sour about the fact that Stephen Schwarzman, the Trump-supporting private equity billionaire, has a stake in Oatly. And if it is hard to judge whether vegan milk is as virtuous as it seems, Larry Fink threw out new questions out about carbon divestment this week too. Read on.

Moral Money

Click here if you’d like to receive Moral Money every Wednesday and Friday. And we want to hear from you. Send any thoughts to moralmoneyreply@ft.com.

Larry Fink: ‘Full divestiture of hydrocarbons’ is ‘greenwashing’

With investment in green energy accelerating, and alarm bells sounding about stranded assets, the future is looking undoubtedly bleak for fossil fuels. However, here in the present, the energy crisis in Texas has provided a stark reminder of how reliant the economy is on high-carbon energy sources such as natural gas.

In countries such as the US, the technology and infrastructure are not yet in place to enable a wholesale switch to green energy, and there are a lot of open questions about how companies and investors should deal with the fossil-fuel assets already on their books.

Some power producers, such as Denmark’s Orsted, have been successful in ditching fossil fuels altogether. But BlackRock chief executive Larry Fink warns that divestiture by individual companies is not an effective way to solve the problem.

“I don’t want to see . . . a full divestiture of hydrocarbons,” he said, speaking at last week’s Institute of International Finance climate summit. “To me, that’s greenwashing because . . . if a public company sells off a lot of their hydrocarbon business to a private entity, this world doesn’t change.”

Environmentalists who have been calling on BlackRock to divest from fossil fuels, will surely be rolling their eyes at this point. But it is worth listening to the rest of Fink’s comments.

Instead of dumping fossil-fuel assets with little regard for how they might be managed, Fink suggests that companies should emulate the “bad bank” model utilised in the finance industry, where a company creates a separate entity that holds its most toxic assets and works to wind them down.

Given that Fink wields significant power with public companies as the head of the world’s largest asset manager, it is easy to see why he is wary of fossil-fuel companies going private. If the highest emitters were to be held by private investors, it would undercut his (and other investors such as his compatriots in the Climate Action 100+) ability to push companies toward net zero.

It wouldn’t matter much who owned those assets if governments across the globe were to divert massive sums of money towards green infrastructure and crack down meaningfully on emissions. And on the flipside, if the world has indeed reached peak oil demand, as BP chief executive Bernard Looney suggested last year, the market should eventually take care of things on its own.

But it is unlikely that either of those scenarios will stop climate change before it is too late. And that makes it worth at least considering Fink’s suggestion.

It is anyone’s guess how the model would work in practice. It might go a long way to clear up some of the conflicting interests within oil majors that are starting to embrace clean energy. But how would those companies that are staking their future on ever expanding fossil-fuel usage fit into the equation? And how would the market react if, say, the “good” side of a business foundered, while the “bad” side was significantly more profitable? We’d love to hear your thoughts. Email us at moralmoneyreply@ft.com. (Billy Nauman)

A call for business to aim higher on racial equity

US companies’ newfound commitment to diversity, equity and inclusion (DEI) continues to generate headlines. Last week alone, McDonald’s tied part of its senior executives’ pay to DEI targets, and Carlyle announced a credit facility in which the debt’s price was linked to the private equity company’s goal of boosting board diversity at the companies it controls.

But in a report out today, Deloitte argues that most companies are not going far enough. Business leaders’ response to the Black Lives Matter movement following the police killing of George Floyd has focused largely on internal matters such as equitable recruitment, advancement and pay of non-white talent. But focusing solely on a company’s workforce ignores the other spheres of influence in which it can drive change, according to the report.

Companies have “a really important role to play in dismantling the systems that have led to these inequities,” Janet Foutty, executive chair of the Deloitte US board, told Moral Money. That means extending their commitment to equity to their customers, suppliers and the wider societies in which they operate, added Joanne Stephane, the report’s lead author. “[T]he power to spend is the power to change,” the report reads.

Companies have increasing motivation to take DEI seriously, argue former Delaware judge Leo Strine and Georgetown professor Chris Brummer in a February 18 paper. The duo say that companies failing to take diversity seriously are vulnerable to investor challenges under the Delaware Caremark case, which states board directors are liable when a company fails to comply with laws.

“Corporate law of fiduciary duty does not constrain directors and managers from promoting DEI,” Brummer and Strine said. “If anything, fiduciary duty pushes corporate managers legally, financially, and reputationally to focus on these important issues as part of their duty to promote
the best interests of the corporation.” (Andrew Edgecliffe-Johnson and Patrick Temple-West)

Tips from Tamami

Nikkei’s Tamami Shimizuishi helps you stay up to date on stories you may have missed from the eastern hemisphere.

Myanmar’s military coup has set up a difficult balancing position for foreign companies as they weigh their commitment to ESG standards against their commitment to the one-time nascent democracy.

Days after the coup, the Japanese brewer Kirin Holdings announced that the company would end joint ventures with ties to Myanmar’s military.

The decision was a welcome surprise for human rights activists after the company failed to act on the results of a six-month independent investigation into the joint ventures’ ties to Myanmar’s military, saying the report didn’t lead to “a definitive conclusion”. The country’s military has been accused of human rights abuses.

But following the coup, the reputational risk of maintaining ties to Myanmar’s military became a potential financial liability. “Popularity is vital for the beer business,” Kirin’s chief executive Yoshinori Isozaki said in an interview with Nikkei, in which he vowed to resolve ties with the military as early as this spring.

Kirin has asked a military affiliate to sell its shares of joint ventures to Kirin or its new partner, so the brewer can continue its business in the country without a military connection. But if the demand was rejected, Izosaki said that Kirin would have “no choice but to leave”. Many human rights activists warn that a withdrawal of foreign investments will cause a negative impact on Myanmar socially and economically.

Despite Kirin’s swift action, other Asian companies that run businesses in Myanmar, such as Korean steelmaker Posco, remain quiet on the issue. Posco’s top shareholders include large US institutional investors, including BlackRock and Citigroup. With the US sanctions on Myanmar’s military leaders, Montse Ferrer, a business and human rights researcher at Amnesty International, argues that these shareholders are also facing reputational risk.

“Are these shareholders aware of Posco’s operations in Myanmar — are they concerned?” Ferrer asked.

Chart of the week

Line chart of Forward price-to-earnings ratio showing Valuations on clean energy stocks have soared since the pandemic

With investors pouring money into ESG funds, analysts are warning about a green bubble.

Grit in the oyster

At the start of the week, both Goldman Sachs and Morgan Stanley forecast oil prices to hit $70 before October — a value not seen since September 2018. Limited global supply and a booming economy once the pandemic subsides prompted the banks to reassess their oil price forecasts.

What does this mean for renewable energy, a sector that soared in the past couple of years as businesses lost money on oil? Renewables will still have increasing government support as countries race to meet their Paris Agreement targets. But as oil prices rise, investors might wade back into the black, sticky stuff rather than increase their bets on untested renewable projects.

And higher prices could mean more of that black, sticky stuff to go around too. The recent price surge is likely to tempt oil producers to open the taps and begin increasing production again after it tamped down during the pandemic, our Energy Source colleagues pointed out earlier this week.

Smart reads

The Keidanren, the Japan Business Federation, will be working with California and other US states to attack global warming, the head of the organisation said in an interview with Nikkei. “The current course of climate change is destructive and threatens to destroy the economic ecosystem,” Hiroaki Nakanishi said. Read the full Q&A here.

The world’s wealthiest countries should do more to fully finance Covid-19 vaccinations with a mix of federal funding and new vaccine or social bonds, almost 150 big investors said on Tuesday. If Covid-19 continues to spread in low- and middle-income countries, nearly twice as many deaths could occur and trillions of dollars in economic output could be lost, the investors warned. They called for fully funding the ACT (Access to Covid-19 Tools Accelerator), which the FT’s Martin Wolf wrote about earlier this month, and has a $27.2bn funding gap today.