Lonely FANZ

.On the cost of capital and energy scarcity

Tomorrow,¹ Mark Carney is (apparently) going to annouce his intention to run for the leadership of the Canadian Liberal party. This is not unexpected - but IMHO is odd. By winning the leadership race, whoever wins will also become Prime Minister (rather like the British system). That will look good on the CV of even an ex-Central Banker.

However, the Liberal party is running a very unpopular minority government - propped up by an unofficial coalition with the NDP. This is likely to collapse days after the Liberal Party leadership race - because Parliament has been prorogued (suspended) to allow them to have their little internal pageant. The timing of which sucks, what with Trumps inauguration and the threat of recession inducing tariffs - but why worry about that when there is a party leadership dance-off?

AI Generated image

Odd that anyone would want the job… but who am I am to question this.

Talking of timing - this week has also seen a avalanche of headlines on major finance companies running from the Glasgow Financial Alliance for Net Zero - which is a sprawling alliance linking banks, asset managers, asset owners, insurance, VCs and export credit agencies - it was launched i 2021 to huge fanfare in that post-COVID “the world has changed” zeitgeist.

The $130 trillion sticker-shock was palpable.

Only just 3 years later a trickle of quitters turned into a flood - and that despite the GFANZ relaxing many of the founding Net Zero “commitments” it required of its members.

Between December 6 and January 7, Goldman Sachs, Wells Fargo, Citigroup, Bank of America, Morgan Stanley and JPMorgan Chase – the six largest banks in the United States, with vast operations around the world – announced departures from the Net-Zero Banking Alliance (NZBA), the banking network affiliated with GFANZ. According to NZBA’s website, U.S. participation in the banking alliance is now down to three explicitly sustainable and responsible banks: Amalgamated Bank, Areti Bank and Climate First Bank. (source)

These departures were followed on January 9 by BlackRock’s departure from NZAM. Many small and medium-size U.S. asset managers remain at NZAM. However, BlackRock’s departure is a big loss. The asset management industry is dominated by three companies internationally: BlackRock, Vanguard and State Street. Only State Street remains from these three companies after Vanguard left the alliance in 2022. (idem)

To be fair, most of those leaving claim that this won’t change their approach to Net Zero. But you know, words are cheap, and this sounds like a hedging strategy as the winds of ESG change.

The Tragedy of the Commons

Whilst a lot of “Peak ESG” was self-important, self-congratulatory conferences and sycophantic newspaper articles - there was a real-world effect. Funding for coal, oil and gas projects became scarcer - which translates to more expensive. As the cost of capital went up for “the dark side” so it decreased for anything that could remotely claim a “green” hue. This was indeed the plan. There are, however two unintended consequences.

1. Project Selection. When capital is expensive, companies choose very carefully where to deploy capital - and only those with solid returns get green-lighted. Legacy energy has for a decade been characterised by capital discipline - imposed from above. Conversely, “green is good” has had a metric shit-tonne of cheap financing - which has allowed for many sub-economic projects to get funded. This would be the subject of a VERY long post - but the planned allocation of capital has a very poor historical record. I would say “caveat emptor” - but since much of that misallocated capital is tax money - everyone is on the hook.

2. The Rest of the Economy: This one is harder to grasp - so I’ll try an analogy. Suppose capital was withdrawn from the food sector - meanwhile consumer tech and travel are booming. Any smart asset manager would put their money in tech and travel - because there is always food on the shelves right? Fast-forward and quickly the shelves empty and chaos breaks out (“ we are nine meals from anarchy..”²). At which point those tech and travel investments are looking like bad choices.

And that is the Tragedy of the Commons that I started to notice in about 2015 onwards. Investment managers and bankers were sure of the moral high-ground in declining funding to oil and gas - plus they were making hay in tech and green-tech. Yet, there was an implicit assumption that the world would continue just as before - the energy needed (at a price that maintained growth and support all that consumerism) would magically appear. Part of this was The Big Lie - that green energy could replace fossil fuels and be cheaper, part of this was the wilful blindness that “if I don’t fund it, someone else will”³. Luckily, to a considerable extent - the latter was true.

Because, Economics

If you make the cost of funding higher, fewer projects get done and globaly we end up with less energy - which tips the supply/demand balance and energy prices go up - which in turn has a negative effect on the “rest of the economy”.

Despite the 2021 GFANZ momentum, we are fortunate that

(a) capital deployed in the oil and gas sector has had increasing productivity. and that

(b) the world is a big place and even using $130 trillion as a WMD doesn’t catastrophically affect the global supply (most of which is state managed), and

(c) GFANZ was short-lived.

Post Script

As a separate thought - the deflation of the GFANZ bubble is not by any means a return to normal. The financing of legacy energy is now hobbled by regulations and incresaingly REPORTING requirements - which serve a very similar effect and are more powerful, more limiting and ultimately much harder to undo than a GFANZ.

1. Jan 16th 2025

2. In 1906, Alfred Henry Lewis stated, “There are only nine meals between mankind and anarchy.”

3. The Tragedy of the Commons is also “the Free-Rider” theory