Ever since the inception of the European Green Deal, ESG (Environmental, Social, and Governance) has been mired in a tangle of compromises, featuring arbitrary categories underpinned by a fundamentally incoherent, and likely counterproductive, concept.
From the outset, the preparatory stages were telling. The multitude of lobbying groups represented in various working groups meant that the only feasible way to placate all was to devise even more rules. As often happens with such processes, the core objective becomes obfuscated, replaced by a focus on inconsequential details.
The Green Deal represents a regression, at least for the Netherlands. Companies once deemed undeserving of a “sustainable” label are now categorised under Article 8 of the SFDR, colloquially termed the “greenwashing article”. Moreover, the SFDR was intended as the culmination of guidelines under the Green Deal, with the CSRD providing the necessary data.
There’s now an obligation to report on sustainability, yet only major European companies will disclose these figures by 2026, with their smaller counterparts following a year later. Subsequently, companies outside the EU generating at least €150 million in the EU, and those not operating within the EU, are exempt from reporting.
Amidst this flurry, it seems oversight has led to the neglect of the fact that these very companies are integral to a well-diversified investment portfolio. Consequently, achieving transparent reporting before 2030 appears unattainable. Such regulations do not enhance the appeal for sustainability.
SFDR’s murky waters
The primary aim of SFDR was to amplify transparency. However, many investors seem to have a tepid interest in sustainability. The predominant objective is compliance with laws and regulations. As a result, the SFDR was eagerly seized upon to differentiate between sustainable and non-sustainable investments. The labyrinthine, often cryptic rules coupled with the desire for compliance, creates an ideal playground for consultants, who, despite their hefty bills, often grapple with the intricacies themselves.
While some programs claim SFDR-compliance capabilities, the lack of actual data compels them to analogise non-data-providing companies with similar entities that do provide data – a clear instance of greenwashing.
The Green Deal’s implementation thus far seems little more than a costly pastime. Initial estimations placed Europe’s energy transition expenses at €5 trillion. But with soaring interest rates and burgeoning issues for sustainable businesses, the future looks shaky. Case in point: Siemens Energy, one of the world’s leading wind turbine producers, recently required a bail-out from the German government to the tune of approximately €16 billion.
Uncertain horizon
Germany’s hefty political and financial investments in renewable energy have rendered governmental support imperative. For context, Siemens anticipates a loss of around €4.8 billion this year, with financial issues potentially dragging on for years. Banks are wary of financing a struggling company, even one backed by significant government subsidies.
Several factors contribute to these subpar performances: brief learning curves stemming from the robust demand for new turbines, escalating developmental costs, and competition from China. To add insult to injury, most wind turbine projects are ceasing due to exorbitant interest rates, unless governments step in with further subsidies.
Siemens Energy is unlikely to be an isolated case. Losses in the electric vehicle domain are mounting. Ford, for instance, recently inked a deal offering employees a 25% pay hike, yet reported a staggering loss of $3.1 billion in electric vehicles for the first nine months of the year. Meanwhile, Tesla halted construction of a new plant in Mexico, and GM slashed its electric vehicle production targets.
Denmark’s Orsted is lobbying in Washington, hoping for 50% of future wind projects to be subsidised. The EU’s ambitious 2030 target envisages 42.5% of all energy being renewable. However, amid complaints of Chinese subsidies, potential tariffs loom, likely prompting China to raise prices on sustainable energy components.
Thus, the industry is pushing for electricity prices to soar by 50-64%. Besides interest rates, numerous other costs are on the rise. Absent subsidies, few sustainable projects make economic sense. Several US states are also clamouring for more subsidies for sustainable projects.
‘Bail-out’ effects
Proponents of sustainable energy argue that wind and solar are more affordable than fossil fuels. However, this holds true only with generous subsidies and zero-interest rates. Due to escalating prices sought by wind and solar providers, these energy forms could become two to five times pricier than natural gas-generated electricity. A recent surge in natural gas prices, a consequence of terrorist attacks in Israel, inadvertently provides a sort of “bail-out” effect.
The current trend of bail-outs in sustainable energy mirrors those witnessed during the Global Financial Crisis. These are exacerbated by financial institutions, like Silicon Valley Bank, which financed 1,550 companies in the climate technology and sustainability domains. Many of these recipients were cash-burning startups without actual products. Essentially, these are subprime loans.
In effect, we are witnessing a double bail-out: not only of the sustainable companies but also of their financiers. It’s the taxpayer who foots the bill.
Han Dieperink is Chief Investment Strategist at Auréus Wealth Management. Earlier in his career, he served as Chief Investment Officer for Rabobank and Schretlen & Co.