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The unsustainable secret of almost half of Australia’s ‘sustainable’ funds

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There are three possible explanations for why investment managers would stack ‘sustainable’ funds with uniquely unsustainable energy sources.

At this rate, it seems almost anything can be called sustainable. And that’s simply not sustainable.

The first two are rooted in the idea that investing in fossil fuels is, in fact, a sustainable practice. While this may sound counter-intuitive, it’s worth considering.

Exploring, extracting and exporting fossil fuels is a capital-intensive business. The divestment movement has worked to push up the cost of capital, making it harder for these companies to access both debt and equity to finance new projects. The Russia-Ukraine war and the resulting new focus on energy supply constraints and dependency on producers such as Russia might change this.

But ‘engagement’ via investor activism has increasingly become the strategy du jour, with the aim to use the power of the dollar to agitate for change. This has seen fossil fuel companies pen ‘climate plans’, setting out the blueprint for how they will survive in a green energy future.

The question is – can you really engage a pure-play fossil fuel producer into changing its stripes?

There are few precedents for whole-of-company strategy overhauls. These tend to take decades and require enormous planning, investment and, crucially, an acknowledgement of the need to change.

But such acknowledgements don’t always seem to be genuine: Last week, Australia’s largest oil company Woodside was exposed to have buried research contradicting its key climate claim that increasing gas exports reduces global emissions by displacing coal in Asia. At the same time, a trade publication, Energy News Bulletin, revealed its emissions reduction ‘targets’ are merely aspirations.

Climate scientist Lesley Hughes says the fossil fuel industry is using the playbook of the tobacco industry from the 1960s. When scientists began linking smoking to cancer, large tobacco companies launched sophisticated public relations campaigns, weaponising market research to undermine science, confuse the public and influence government policy.

“These industries know their days are numbered, they wish to extend the life of their business as long as possible. And they will use whatever tactics they can to do that,” Professor Hughes says.

A second reason for ‘sustainable’ investment managers to hold fossil fuel stocks could be that they view those companies as vital to a socially cohesive society.

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Let’s face it. There is oil in almost everything we use, from solar panels to lipstick and essential medical devices. Wind power relies on coal needed to make the steel to build the turbines. Some Australian manufacturers say they will collapse without cheap gas. Fossil fuel bulls say without ongoing investment in the sector, energy prices will become unaffordable, leaving society’s poorest without power.

However, the third reason is more simple. It’s greenwashing – an attempt to cash in on the lucrative sustainable investment trend by tricking clients into a false sense their money is being used for good. Corporate regulators have vowed to address this, but we’re yet to see any real action in penalising offenders.

Whichever answer is correct, it is clear that fund managers need to do better at explaining their strategies. Because at this rate, it seems almost anything can be called sustainable. And that’s simply not sustainable.

The Morning Edition newsletter is our guide to the day’s most important and interesting stories, analysis and insights. Sign up here.


There are three possible explanations for why investment managers would stack ‘sustainable’ funds with uniquely unsustainable energy sources.

At this rate, it seems almost anything can be called sustainable. And that’s simply not sustainable.

The first two are rooted in the idea that investing in fossil fuels is, in fact, a sustainable practice. While this may sound counter-intuitive, it’s worth considering.

Exploring, extracting and exporting fossil fuels is a capital-intensive business. The divestment movement has worked to push up the cost of capital, making it harder for these companies to access both debt and equity to finance new projects. The Russia-Ukraine war and the resulting new focus on energy supply constraints and dependency on producers such as Russia might change this.

But ‘engagement’ via investor activism has increasingly become the strategy du jour, with the aim to use the power of the dollar to agitate for change. This has seen fossil fuel companies pen ‘climate plans’, setting out the blueprint for how they will survive in a green energy future.

The question is – can you really engage a pure-play fossil fuel producer into changing its stripes?

There are few precedents for whole-of-company strategy overhauls. These tend to take decades and require enormous planning, investment and, crucially, an acknowledgement of the need to change.

But such acknowledgements don’t always seem to be genuine: Last week, Australia’s largest oil company Woodside was exposed to have buried research contradicting its key climate claim that increasing gas exports reduces global emissions by displacing coal in Asia. At the same time, a trade publication, Energy News Bulletin, revealed its emissions reduction ‘targets’ are merely aspirations.

Climate scientist Lesley Hughes says the fossil fuel industry is using the playbook of the tobacco industry from the 1960s. When scientists began linking smoking to cancer, large tobacco companies launched sophisticated public relations campaigns, weaponising market research to undermine science, confuse the public and influence government policy.

“These industries know their days are numbered, they wish to extend the life of their business as long as possible. And they will use whatever tactics they can to do that,” Professor Hughes says.

A second reason for ‘sustainable’ investment managers to hold fossil fuel stocks could be that they view those companies as vital to a socially cohesive society.

Loading

Let’s face it. There is oil in almost everything we use, from solar panels to lipstick and essential medical devices. Wind power relies on coal needed to make the steel to build the turbines. Some Australian manufacturers say they will collapse without cheap gas. Fossil fuel bulls say without ongoing investment in the sector, energy prices will become unaffordable, leaving society’s poorest without power.

However, the third reason is more simple. It’s greenwashing – an attempt to cash in on the lucrative sustainable investment trend by tricking clients into a false sense their money is being used for good. Corporate regulators have vowed to address this, but we’re yet to see any real action in penalising offenders.

Whichever answer is correct, it is clear that fund managers need to do better at explaining their strategies. Because at this rate, it seems almost anything can be called sustainable. And that’s simply not sustainable.

The Morning Edition newsletter is our guide to the day’s most important and interesting stories, analysis and insights. Sign up here.

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