The ESG Dilemma

In this issue:

  • The ESG Dilemma
  • The moral case for fossil fuels in Colorado part 2
  • How to think about China’s air pollution
  • Best of Power Hour: Richard Salsman on waste and pollution
  • The Human Flourishing Project: Lessons from fasting

The ESG Dilemma

I just finished a four-page mini-white paper to briefly capture my analysis of how ESG (Environmental, Social, Governance) investing is impacting fossil fuel companies, and what companies should do about it. 

From the intro:

Oil and gas companies are increasingly being asked by investors to improve their ESG (Environmental, Social Governance) ratings. The problem? Some of the things that will improve a company’s ESG ratings are toxic: they reward companies for statements and commitments conceding that we should and rapidly will transition from oil and gas to renewables. 

As ESG ratings company Sustainalytics puts it, “[I]investors are increasingly interested in how oil and gas companies plan to address [energy transition] risks. . . . While fossil fuels may continue to meet the bulk of the world’s energy demand over the short run, changing patterns of energy consumption, driven in part by carbon regulation, are likely to significantly affect the profitability of oil and gas firms.”

While companies can improve their ESG ratings by disclosing impacts on things like safety, water use, leaks, and spills, other ESG requests are designed to have companies explain how they are coping with the oil and gas industry’s alleged “transition to extinction.”  

For example, one of the most common ESG demands is for companies to discuss the impact on their business of a so-called “2 degree scenario”—a (highly unlikely) scenario in which there are radical restrictions on fossil fuels and/or major breakthroughs in competing technologies that, according to some climate models, would limit emissions to the extent needed to keep global temperatures from rising beyond 2°C. Companies either have to acknowledge a major threat to their business, or argue that they’ll somehow prosper while the rest of the industry dramatically shrinks. 

Companies that want to become leaders in ESG have to go even further, making bold commitments to reduce GHG emissions, supporting anti-fossil fuel agreements like the Paris Climate Accords, endorsing anti-fossil fuel policies like a carbon tax, and investing in fewer oil and gas projects and more solar and wind projects. 

BP, for example, received high marks from S&P Global on its ESG Industry Report Card because “it is one of the leaders in the global energy transition and is committed to reducing carbon emissions in line with the Paris Climate Agreement, as its CEO has recently reiterated. This is reflected in BP’s higher share of natural gas in its portfolio than the other majors. BP is also investing in renewables, similar to its peers, but so far these investments have not exceeded 5% of total capital spending.”

The problem with these kinds of statements and commitments is that, while they can have the short-term benefit of raising companies’ ESG scores, they leave oil and gas companies at the mercy of shareholder activists who want to saddle the industry with constantly shifting goal posts. Once a company concedes the “transition” narrative, shareholder activists can go on to pressure it to act consistently with that idea, such as by:

  • Setting GHG reduction targets that will hurt your bottom line
  • Tying executive compensation to those targets
  • Supporting carbon pricing
  • Cutting ties with associations that oppose carbon taxes
  • Adding hostile members to your board

We call this the ESG dilemma. If you don’t comply with ESG requests you can see your ESG score suffer and make it harder for investors to support you. 

But if you do comply, you can reinforce the belief that your industry is a bad long-term bet and leave yourself vulnerable to shareholder activists who say that your commitments to reducing your impact on the planet can’t be squared with your continued expansion of oil and gas projects. 

The good news? There is a way to address investor concerns about the future of your industry and protect your ESG score without conceding that your industry is rapidly transitioning to extinction—and without becoming a lightning rod for controversy. 

Eventually, I’ll make the entire document publicly available. But for now, if you work with a company facing ESG challenges, reply to this email with the subject “white paper” and I’ll send it to you.

The moral case for fossil fuels in Colorado part 2

Last week I wrote about my experience speaking at Colorado Mesa University (CMU) on Thursday, February 20. This week I want to share my experience speaking the next night to the Colorado Oil and Gas Association, West Slope.  But first, a note I got from one of the attendees of the CMU event. It was an honor having you present at Colorado Mesa University regarding the importance of fossil fuels and the benefits they have brought to mankind. I believe it was beneficial to bring someone, such as yourself, who is levelheaded about the issues surrounding the energy industry. You have supplied our club, the students of Colorado Mesa, and the community of Grand Junction with a wealth of unbiased knowledge that will aid in ending the stigma surrounding fossil fuels. Your presentation was refreshing compared to the typical politicized debate on the subject heard today. I believe your stance on weighing both the positives and negatives of any situation has taught everyone who attended the event a valuable lesson they can apply to various aspects of their lives.Thank you so much again for presenting at our school. Our program and club are very grateful for the chance to learn from you.  The WSCOGA event audience was primarily employees in the Colorado oil and gas (mostly natural gas) industry. I got the opportunity to interact with many of them before and after the event and I have to say it was very motivating. These are hardworking people who are producing the lifeblood of modern, machine-driven civilization—and yet they are demonized and increasingly criminalized by their government. The goal of my presentation was to give the audience a very different narrative of the role of fossil fuel fuels in our future. From my talk: From the age of 0 to 22 I heard something like the narrative that we all hear today, which is often called the “transition” narrative, but which I often call the “extinction” narrative. This is the idea that we are, we should, and likely will rapidly eliminate fossil fuel use over the next several decades. The argument for this narrative has a couple of stages to it. One is that fossil fuels are causing an imminent environmental catastrophe. Two is that renewables are readily available to replace them. And three is that therefore governments and markets around the world are going to rapidly eliminate fossil fuels. I’m going to be talking about what I call the expansion narrative. This is the narrative that the world should and likely will continue and expand fossil fuel use over the next three decades. . . . I’m going to say something very arrogant right now in support of the “expansion” narrative. I’m going to give you three undeniably true ideas that almost no one believes. The three ideas are: 1. Despite claims that we are destroying the planet, Earth has been becoming a better and better place to live. 2. Low-cost, reliable energy empowers us to transform our naturally dangerous and deficient planet into an unnaturally safe and abundant planet. 3. Fossil fuels are the only energy production process that can provide low-cost, reliable energy for the billions that have it and the billions that don’t. Near the end of the speech I focused on my outlook for the future of the industry: So I mentioned at the outset my expansion narrative, which is that the world should continue and expand fossil fuel use. Now there’s one more question, which is will that happen? Even if fossil fuel use should expand you could ask legitimately, “So many people believe the transition narrative, aren’t we going to get regulated out of existence?” I can’t say for sure that you won’t, but there are some really positive factors in our favor. And then if you know how to champion what you’re doing, you can really increase the odds of success. In terms of the bad things that could happen, there are two possibilities. The thing that I’m confident will not happen is a global rapid elimination of fossil fuel use. And the reason is because there are not that many stupid people in the world who will do that. But what can happen and what may happen is what I call unilateral disempowerment. And what this means is that somebody who thinks that they’re being a leader, but they’re actually being a sucker, will implement one of these horrific green energy policies and ruin the lives of their citizens. Unfortunately, one of the candidates for this is Colorado. And unfortunately, one of the candidates for this is the United States of America, depending on who we vote for. Directly after my keynote we were treated to a high energy (in every sense of the word) speech by CO Senator Cory Gardner. Senator Gardner has an unusually deep understanding of the virtue of the fossil fuel industry, and it was great to hear him give this audience the thanks and encouragement they deserve. Thanks to the WSCOGA team, especially Chelsie Miera and Cheyenne Ward for putting on an amazing event.

How to think about China’s air pollution

During a recent speech to the industry I was asked, “How do you answer critics who point to the pollution issues that China has as a reason not to use coal and other fossil fuels?” Here’s a (lightly edited) transcript of my answer:

The first thing to keep in mind is the fact that fossil fuels can be misused doesn’t mean that they shouldn’t be used. 

For example, in the era where fire first gets discovered, they had to make a trade-off: they had to accept a certain amount of soot and smoke in exchange for the benefits. You couldn’t say then, “Let’s outlaw fire because there’s too much smoke.” That would mean giving up on the irreplaceable benefits of fire.

So if you take a modern society, the fact that coal can be misused doesn’t mean that it should be banned. It should be used in the ways that are the most beneficial to human life. And part of that means having in place the right government policies.

The government has to protect our right to produce and consume energy, and it also has to protect us from the dangerous production and consumption of energy. There are certain situations, as with coal, where there are trade-offs that communities have to make.

In a free society that values the rights of individuals, these decisions about tradeoffs should be made democratically by the affected population. How much more are they willing to pay for energy in order to reduce pollution by a certain amount, say by using different pollution control technologies? 

For obvious reasons, that’s not what happened in China. They use coal in incredibly irrational ways. Now, note that even though they’ve used coal in ways that led to unnecessary pollution, the value of that energy still has increased lifespans in China dramatically. But if they valued the individual, they could have used coal in a cleaner way without significant cost increases. 

Ultimately, the lesson is that we need to be thinking about these questions from a human flourishing perspective. Because coal opponents don’t really care about the health of Chinese people. If they did, they would recognize how vital coal energy is for their health. They just want to use China as a reason to stop everyone from using low-cost energy. 

Best of Power Hour: Richard Salsman on waste and pollution

On this week’s Power Hour “best of” episode, I interview economist Richard Salsman. We get into an in-depth discussion on the issues of waste and pollution.

The Human Flourishing Project: Lessons from fasting

On the latest episode of The Human Flourishing Project, I discuss what I’ve learned in the attempt to incorporate more fasting into my life.