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by David James

Western governments and many corporations are working hard to create the impression that the climate-change debate has been resolved and that now it is just a matter of working out how to get to net zero.

Behind the scenes, however, something very different is occurring that may lead to a geopolitical and geo-economic split between the United States and Europe. In the US, many of the biggest investment managers are backing off from the climate-change agenda. Europe’s leaders, meanwhile, are going in the opposite direction, positioning to use climate change as an excuse to restructure their continent’s political and economic system.

“Climate change”, a deliberately vague phrase, is actually a battle over political systems rather than a debate about the science of global warming. That political contest is entering a new phase.

Much of the impetus for zero carbon came from the financial sector’s support of what is called “environment social governance” (ESG), a metric used to evaluate large corporations in order to force them to comply with the climate-change agenda. That is also true in Australia. Broker reports constantly refer to ESG ratings on most stocks on the Australian Securities Exchange.

Backing Out

There has been a change in sentiment. BlackRock, JPMorgan Chase, and State Street recently exited from Climate Action 100+, a coalition of the world’s largest institutional investors that pledges to “ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.”

The passive fund Vanguard, the world’s second-largest, exited over a year ago because any bias undermines its neutral offering; it simply allocates according to size. Together these four fund management companies oversee about $US25 trillion, a quarter of the entire funds under management in the world.

The change of direction is happening for two reasons. One is that there was an implicit bargain with ESG. Companies would not only be “saving the environment”, but they would also get stronger relative share prices because they would receive support from the big financial institutions. That is not what happened, however. Better returns have come from investing against ESG-compliant companies.

Even more threatening, 16 conservative state attorneys-general in the US have demanded answers from BlackRock’s directors regarding Climate Action and ESG initiatives. The other fund managers have also attracted unwanted scrutiny.

Nothing concentrates the minds of fund managers more than the prospect of clients withdrawing their funds. BlackRock chief executive Larry Fink is now saying he does not like the term ESG. In his 2022 “letter,” he issued veiled threats to companies not complying with ESG. In 2024, he omitted the term entirely.

When the big money changes course, corporations eventually follow.

What seems sure to happen in the US – and possibly Australia – is that there will be a belated embrace of reality about the practicality of moving entirely to renewable energy, something that cannot realistically be achieved.

In some ways, it is a simple recognition of arithmetic. Energy expenditure represents more than an eighth of the world’s GDP. Oil, natural gas and coal provide 84 per cent of the world’s energy, down just 2 per cent from 20 years ago. Oil powers 97 per cent of all transportation.

Across the Pond

In Europe, meanwhile, there is a very different political dynamic. The European Union (EU) is looking to aggressively impose sustainability reporting standards on all medium and large businesses. The aim is that, by the end of the decade, European companies must set up a new accounting system. Rather than recording financial transactions, it will instead aggregate data related to climate, pollution, biodiversity and social issues. The main focus will of course be carbon-dioxide “pollution”.

This is not only an extraordinarily onerous bureaucratic load, it entails what seems to be deliberately vague compliance requirements. It is not clear what the standards will be or what is the punishment for non-compliance.

As one (anonymous) analyst writes:

“It is a very detailed control system for European companies where the European Commission can, in the future, dictate anything it wants – and punish for any violations any way it wants. Apart from the crazy regulatory load, this initiative can only be seen as a direct seizure of operational control of European companies, and thereby the European economy.”

If this is carried through, it is likely to drive a financial wedge between Europe and the US. The EU plan seems to be to eventually direct their banks’ lending, which would be an extreme centralisation of power.

In the US that is not possible; the banks are simply too dominant. Even the central bank, the US Federal Reserve, is owned by private banks, not the government.

With characteristic hubris, the Europeans are warning that their sustainability initiative will be applied worldwide. Non-European companies, so they believe, will have to comply if they want to deal with the European market.

Such confidence seems hardly justified; the European economy may be large but its prospects are dreadful, especially as Germany, the key economy, is rapidly de-industrialising because of the loss of cheap Russian energy.

It is putting the EU’s survival in question, particularly if the German banks, which are key to the whole zone, start to fail.

In 2007-08 the Greek economy was crushed in order to save the German and French banks, the financial core of the EU. What happens if it is the German banks this time? Power-hungry EU bureaucrats may relish the prospect of taking over the banking system but the disruption would be catastrophic.

Money Matters

Another development driving a financial wedge between the US and Europe is what is happening with interest rates. Until recently, almost all global interest rates were set by the London Interbank Offer Rate (LIBOR). But in January 2022, the US moved to a different domestic benchmark called the Secured Overnight Financing Rate (SOFR). That means that the US gets cheaper interest rates than Europe.

That was not significant when interest rates were close to zero, but as they rise to over 5 per cent, European financial markets are suffering more than the US markets, something some analysts believe is a deliberate strategy by the US to attack the European Central Bank.

The EU does not have the capacity to tax or issue bonds; that capacity still lies only at the national level. That means that its aggressive climate agenda will not be underpinned by financial strength – and the US is applying the squeeze.

The situation can be summarised as the US restoring an unsteady version of capitalism based on energy realities while Europe heads towards some kind of delusional, climate-driven socialism.

True, the climate agenda will continue to be pushed in the US, as will the “diversity, equity and inclusion” (DEI) agenda – the “social” part of ESG. A court case brought by the City of Honolulu, for example, is one of several attempts to bankrupt the energy industry. But as finance website ZeroHedge opines: “Both the DEI and ESG gravy trains on Wall Street are finally coming to an unceremonious end.”

Inadequate market demand for supposedly climate-friendly products is another reality threatening the climate push. This can best be seen in the electric vehicle (EV) market.

EVs are not doing well. Rental car company Hertz sold off a third of its electric cars, purchasing internal-combustion engine vehicles “to meet customer demand”. Volvo is selling off much of its stake in the electric vehicle maker Polestar. Ford is making substantial losses in its EV division, as is General Motors. Meanwhile, Toyota, which was sceptical of EVs, is doing very well with its hybrid offerings.

So, when US President Joe Biden mandates that 67 per cent of new cars and light-duty trucks will be EVs by 2032, up from 7.6 per cent in 2023, there is little likelihood it will happen that way.

Shifting Balance

The climate-change picture is made more complex by the emergence of a more multipolar financial terrain, one not always dominated by the US dollar or the euro.

When the West failed to destroy the Russian economy by taking the rouble out of SWIFT, new possibilities emerged. Russia has thrived – its GDP is over 6 per cent – and it has led to an expanded BRICS alliance, which is adding Saudi Arabia, United Arab Emirates, Ethiopia and Egypt to the original group of Brazil, Russia, India and China.

Those BRICS countries are working on an alternative financial system to SWIFT. As the BRICS countries grow in strength, efforts by the West, especially Europe, to dictate what they do in relation to climate change will be weakened.

The BRICS nations will not allow the self-destructive climate-change agenda to reshape their polities. Most of them are either sellers or heavy consumers of fossil fuels. Both India and China are increasing their use of coal, for instance, which makes Western attempts to reduce emissions largely pointless.

America’s change of direction is yet to be picked up in Australia; but when it is, a choice will have to be made. Do we follow the emerging trends in the US towards some sort of energy realism, or do we follow Europe into centralised tyranny and economic dysfunction?

Many left-wing governments in Australia are more inclined towards the latter option, but there is now hope that sanity will prevail in some form. The inconvenient truth is that, if we pursue zero carbon, we won’t even be able to turn the lights on.

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Republished with thanks to News Weekly. Photo by Andrea Piacquadio.