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Is the fossil fuel narrative simply too convenient?

The impact of climate change and the need to move away from fossil fuels is infinitely nuanced. In the 2022 Federal Election, there was a swing to a faster climate change agenda with strong support for The Greens and 'teals'. Then AGL, the country's heaviest carbon emitter, was prevented from demerging its power generation assets by the judgement of Mike Cannon-Brookes and other shareholders that the move would slow the closure of its coal-fired sites. Into this mix comes a $100 billion fund manager, GQG Partners, saying the energy transition may take up to 60 years and it is immoral to underinvest in fossil fuels.

Many portfolio managers privately believe their businesses are too extreme in their anti-fossil stance. In the investment industry where everyone seems to fall over each other to show their green credentials, it is a refreshing change when someone is willing to go on the record to put the other side, not simply whisper in the corridors of their offices.

GQG has some support in Canberra and Perth. Both the new Resources Minister, Madeleine King, and Western Australian Premier, Mark McGowan, are backing the $16.5 billion Scarborough gas project. King said gas has an “important role in the transition to a decarbonised world” and the Government will not support a ban on fossil fuel projects.

It's all about the timing

The prevailing view is that immediate action is needed to prevent catastrophic climate change. The majority of fund managers have adopted strong ESG (Environment, Social and Governance) principles front and centre, and large superannuation funds compete to divest from fossil fuels the quickest. No doubt a motivation is to satisfy their investors and members, as most surveys show climate change is a major issue Australians expect leaders to act on.

An example of the policy intensity on fossil fuels soon surfaced after the election. Dr Monique Ryan, the conqueror of Treasurer Josh Frydenberg, said she wants a 60% emissions reduction target by 2030, much higher than Labor’s current 43% level. She said Anthony Albanese needs to be “… prepared to come to the table on effective and immediate action”. Maybe Mr Albanese is not quaking in his boots now he has a majority in the Lower House.

The reality of a long transition from fossil fuels

GQG Partners held its first Annual General Meeting on 27 April 2022 following its listing on the ASX in October 2021. Rajiv Jain is the Executive Chairman, Chief Investment Officer and Portfolio Manager at GQG. At the AGM, leading activist Stephen Mayne asked the following question:

“Executive Chair Rajiv Jain made some very strong comments at a forum in February saying that reducing investment in fossil fuels was elitist and immoral because of the impact it could have on developing economies ... can Rajiv update shareholders on what responses to these comments have been from stakeholders?”

Good question, so what exactly had Jain said? Speaking at a Portfolio Construction Forum on 23 February 2022, in a presentation with the provocative title of ‘Growth managers that lack energy may be left out in the cold’, Jain said (with some paraphrasing):

“We believe that investors have always made a bit of an ideological call not to invest in fossil ... Like so many times, there's a narrative that is convenient, but most of the time, the narrative takes a life of its own and becomes too strong a belief which ultimately tends to negatively impact returns. And I think if you look at the energy side, we believe that the narrative seems to be way too convenient.”

The devil is in the detail, said Jain, as the transition is much longer and more complex.

“Because if we choke off capital to fossil, whether it's oil and gas, coal, and so on, the narrative is that we would be better off. Well, it's ideological, there's no commercial merit to it. And the reason is that if you don't do anything with demand, choking off or reducing supply will only create a crisis ... The biggest problem on the energy front is capex, as the vast majority of banks are under pressure not to lend to the oil and gas industry. And capex has gone down by almost 40% over the last seven or eight years, which is very different to 2010 when everybody believed in the commodity supercycle, Chinese urbanisation and emerging market growth.”


(Published with the permission of GQG Partners and Portfolio Construction Forum)

Jain explained how the free cash flow from many high-quality energy companies, such as Exxon, has risen rapidly, but investors are missing the opportunity that will last a long time.

“We feel that investors are making non-commercial decisions, because these energy transitions last, if you look at human history, they last decades. And in those transitions, you need companies that are part of the solution, not part of the problem. So we should squeeze out bad players, bad actors, but some of the good actors are needed because otherwise you'll get an energy crisis. In fact, you're seeing demand for coal going up and coal prices have gone up because ironically, there's a gas shortage when the wind didn't blow (in Europe), and we were having power shortages. They've been forced to actually import more coal and so we might be having a perverse outcome if we're not careful. Our job is to find companies that are good that are truly part of the solution, which will allow us to make the transition to clean a better world. We feel a lot of growth managers have become too complacent. In fact, 65% to 70% of global growth managers have no energy.”

Jain argues that forcing fossil fuel companies into private equity hands is the worst outcome as their business practices will move away from the gaze of active managers in the listed, regulated space. Aspirations for 2030 are ahead of what is technically possible to meet energy demand.

“I think that's the sad part, that it'll take a long time to truly transition. This transition could last 40, 50, 60 years. And the question is, to what extent will it be successful, because we need to find a lot of other commodities to make that transition. As you know, electric vehicles are six times more copper-intensive. Well, we need to find a lot of copper to be able to make the transition. We feel buying better companies, trying to lean on management to get their act together and be better corporate citizens, we actually can make a much bigger difference.”

What about the morality?

In what started as a potential ‘gotcha’ question, Jain was asked, “Taking this position in energy, do you feel it's morally the right position to take?”, he replied somewhat indignantly:

“Look, I think it's actually immoral not to invest in energy. Unless we're willing to live by burning candles or willing to walk rather than drive. In fact, one could argue that reducing supply is a bit elitist with a third of the world still making the transition from wood to something else. We need cheap enough energy for the world to make the transition to get a certain level. You know, 25% of the world doesn't have a power supply yet. If you raise prices too much, you'll have perverse outcomes. I believe it's morally wrong to reduce supply. Go to India, go to Africa, go to parts of China, and saying the oil price should double is not a realistic argument.”

Would Jain duck the issue in a more public forum? No, as he expanded at the AGM.

“If you stop producing fossil fuels, 80% of the world will not be able to drive a car. So I think if you look at it realistically, globally, we do need fossil to make the transition to a greener, better world and from a client perspective, our clients understand and appreciate our investment processes and I think we feel pretty comfortable in terms of our core investment proposition.”

Jain answered the question about whether institutional clients are moving away from GQG.

“There’s not enough copper for Europe to switch to EV, let alone the world to switch to EV. It’s kind of fascinating, in fact, we are getting quite a bit of interest and attraction because the majority of global managers have decided not to invest in fossil, which is why a lot of them are struggling. In fact, one could argue the problem with aggressive growth managers is they have no energy … I think there’s always two sides and look, the world is a big enough place. I’m sure some investors don’t want to invest in fossil while others do want to invest in fossil. Our job is to find like-minded investors who agree that for the world to transition to a greener world, we need energy to allow us to transition.”

ESG definitions and principles are far from settled

It would fair to expect that a company such as Tesla, the market leader in electric vehicles and the move away from gas-guzzling internal combustion engines, would be a priority name for ESG investing. However, Standard & Poor’s Dow Jones recently removed Tesla from the S&P500 ESG index while oil companies remain. Hector McNeil, co-CEO and Founder of HANetf, explained why this happened:

"On the surface, Tesla’s deletion from the S&P500 ESG index looks shocking. Tesla is a real pioneer of climate solutions. Meanwhile, big oil names like Exxon are in there ... If you read the reasoning of SPDJI, it’s quite clear why Tesla was excluded. It doesn’t have a low carbon strategy and has questionable labour practices ... But the key is that there’s no inherent right of Tesla or other EV or battery makers to be in the index.”

Not surprisingly, Elon Musk was unimpressed, tweeting:

The investment industry and regulators are still attempting to define ESG principles, with the US Securities and Exchange Commission announcing proposals to manage the trend to ‘greenwashing’ to take advantage of ESG demand. Investors struggle to know whether a company or fund really values ESG principles, or treats it as ‘table stakes’ to win money. The regulations extend to the ‘Names Rule’, or what a fund or fund manager can call itself. SEC Chair Gary Gensler said,

“A fund’s name is often one of the most important pieces of information that investors use in selecting a fund.”

In Australia, Dugald Higgins, Head of Responsible Investment & Real Assets at Zenith, said:

“We are essentially at the point where any company or fund that cannot demonstrate deep environmental, social and governance credentials, which naturally spans a wide range of sustainability and social issues, will simply be ‘uninvestable’ to institutional investors.”

Try telling that to Warren Buffett. In 2022 to date, Berkshire Hathaway has acquired 14.6% of Occidental Petroleum costing US$10 billion and invested US$26 billion into Chevron, making it one of his Top 5 holdings. Analysts say Berkshire has placed a US$40 billion bet on the oil sector.

This article will not venture into the vexed questions of whether adoption of strict ESG principles enhances portfolio returns or the anthropogenic contribution. People want action and ESG investing clearly has a strong future. However, uncertainty about definitions, voluntary nature of ESG disclosures, limited enforcement and need to allow the underprivileged of the world a chance to access cheap energy show the debate about speed of reducing fossil fuel use is far from settled.

In the meantime, some fund managers are benefitting from fossil fuel companies enjoying a surge in prices, and every investor needs to decide whether this fits with their personal morality and understanding of the broader issues. 


Graham Hand is Editor-At-Large for Firstlinks. This article is general information and does not consider the circumstances of any investor.


Sandeep S
June 06, 2022

This article by Graham is well written and addresses the 'elephant in the room". It is disingenuous to castigate the fossil fuel industry on one hand and pretend that total demand is not going up. No one argues that renewables should not be accelerated but it has to be recognised that the process will take time. At present these technologies are substitutes for the electricity sector, which is less than 50% of the total energy requirements. Choking off funding to transition fuels without a plan is going to lead to supply shocks and more misery than the ideologists are recognising.
The best for us would be if a properlt thought through transition plan emerges from Chris Bowen and Madeline King.

June 05, 2022

Wanting a liveable planet is not ‘ideology’, it’s a matter of survival. We don’t have 60 years to transition to a low carbon economy when climate change is already disrupting our life support systems

Carlo Bongarzoni
June 05, 2022

A more than timely article Graham - about common sense matters that we all need to be debating. Our world is probably facing its greatest social, energy and risk issues ever? But the climate warming risks constantly thrown at us are readily refutable! We just don't have enough people with the guts to try. And it takes immense guts to face loss of contacts and so many denigrations - too formidable for most! But first, proof of high CO2 measures causing environmental and climate damage lack evidence and scientific proof. Few claims have been proven; the supporting measuring omits known climate-influencing variables; and historically far higher CO2 levels have not perished the world. But now let's examine the practical approach assuming we are facing dire perils from CO2 levels - in this case apparently from fossil fuels?
The sanest alternative would surely be the optimum? Sane meaning that the source is proven reliable, affordable, plentiful, safe to use with units flexible to requirements. Only nuclear power offers that right now and current renewables wind and solar are unreliable, costly, environmentally space spoilers, and need subsidisation. Their replacement ie longevity costs are also more frequent and expensive. A truly objective business assessment would surely choose nuclear - as many first world countries are right now!
Nuclear is also the only energy source (bar coal) capable of safeguarding supply of the extremely intense energy vital to supply 4 materials underpinning the modern world - steel, plastics, ammonia and cement. What price sustainable living minus those essentials? And how immoral that we prevent poorer countries from reaching our modern living standards? So let's stop ESGing and moralising and get real! regards carlo

June 05, 2022

What is immoral is a rich fund manager pretending to care about poor countries, extract their fees and talking their book. If you understand the science and understand that climate change will irreversibly screw all countries (and poorer countries much more than rich countries) then the decision to keep polluting is literally shitting in your own nest. Nobody said it was easy to solve but continuing to pollute aint the answer. Read the IPCC Report(s). Maybe get some real climate experts to write about this issue.

Jan H
June 05, 2022

All of you would do well to read Geoffrey Parker's "Global Crisis - War, Climate Change & Catastrophe in the Seventeenth Century". Parker examines the link between climate change and worldwide catastrophe in the 17th century. and its global impact on humans-- millions perished. His extensive research has important lessons for us today. It is quite clear that we are utterly unprepared for the catastrophes that climate change is already bringing.
BTW, there is a big difference between climate variability which relates to weather and long-term trends in climatic changes. Of course, melting Antarctic and Artic ice, thawing Tundra permafrost and soaring temperatures over 45 degrees, cumulative floods and wildfire --California now has a permanent fire season-- stronger and more frequent cyclones, rising sea levels and an alarming extinction of biodiversity and ecosystems are all perfectly normal signs of weather variability! Just who is kidding who?
Those who ignore the lessons of history are compelled to repeat them.

June 05, 2022

That chart on energy investment is why I am big in Woodside & BHP. When the inevitable shortfall of energy hits, reality will bite. The new Labour government has already stated only days after the election that "coal must be used to avert the current crisis". Global warming, oh sorry, climate change (now its not warming) is not a moral issue as claimed by the dooms-dayers, it is a transitional engineering issue with social & economic issues as well. ESG investing will hit a culture shock in the not too distant future. When its minus 10 degrees outside and people have no gas or oil for heating, lets revisit the morality of ESG

Graham Wright
June 05, 2022

Most writings have been about the energy sources driving our productive and living world significantly impacting climate change. The use of energy radically increased when we learned to create plastics to replace many uses for metals. This enabled and encouraged the manufacture of mass goods of low necessity but high aesthetic value in our society, driven by capitalism creating wealth rather than needs of society. Cheap manufactured plastics fully replaced recyclable paper and cardboard used for the masses of packaging needed in daily commercial transactions and general life. Paper and cardboard as an industry could quickly be resurrected to replace a lot of plastic. Then there is the energy and materials used in manufacturing processed foods from sugar that are nutritionally detrimental to our society and adding to our health system costs.
In short, capitalism is and has been a major driver of fossil fuel use, creating a lot of unnecessary products which, if lost to the world, would cause little loss of real life value, reduce economic waste and reduce need for fossil fuels while we transition to maximising renewable energy use.
A good recession to wipe out the unnecessary waste in our society would be a god-send.

June 05, 2022

well said

June 06, 2022

Hear hear! Although power prices in poor countries are a genuine issue, for the rest higher energy prices mean that better decisions will be made as so much of what we do is just wasteful not vital economic activity. For the average person it means they will have to cut a few centimetres off the size of the next TV, or cut back spending on one of four different streaming services. Most people probably spend more on chocolate (& equivalents) than they do on power in the course of a year.

June 05, 2022

I recently had a look at temperature data for 20 sites throughout Australia (BOM website) which had near 100 years of data. I could see no rise in temperatures over that time period except in capital cities where there are heat island effects. Also check out the latest satellite temperature data showing little or no change in the last 15 years. Over 300 climate models have been developed and most have proven useless in predicting future changes. I wish people and scientists verify all data instead of selecting data to fit a narrative. Check out the data for yourself.

Andrew Smith
June 04, 2022

Even those who claim the science is not settled, whatever that means e.g. science that fossil fueled influencers do not appreciate using NRA type arguments?

Australia a small medium nation is not in a position to dictate energy policy to others, but can be subjected to sanctions if avoiding transition away from fossil fuels. For example, the EU 'Brussels Effect' where policies and financial penalties for fossil fuels can flow all the way down and/or across global supply chains that trade into the EU; Australia has to conform if it wants to participate.

Further, an old ideology has reemerged in the Anglosphere as a stalling tactic i.e. 'steady state economy', promoted through the fossil fueled Club of Rome, calling for closed borders, no migration, tariffs, withdrawal from trade agreements & blocs etc. aka Brexit & Trump; allowing global fossil fuel, auto and finance (with pre-existing infrastructure) to continue unhindered; presented as a 'liberal & environmental' solution but in fact 'greenwashing'.

June 04, 2022

Was nuclear energy mentioned?
Batteries, solar, wind & hydro aren't going to allow us to maintain society as we know it.
Either we revert to a low energy economy/ society, or we go nuclear.

June 04, 2022

Australia's task is to be able to profitably de-carbonise its exports - as de-carbonised products are what will be in increasing demand. Nothing Australia does or does not do will have any measurable effect on GLOBAL climate - so there is no rush except to be able to produce in demand exports which can at least pay for imports. The technology to do so would proliferate through the economy de-carbonising it - profitably. If all the world were like Australia there would be no man made carbon dioxide induced climate change for hundreds or thousands of years.

June 03, 2022

Ravid Jain is basically saying it'll take to long to get to our targets. Certainly it will if we decrease investment in renewables and sustainables, green tech if you like, and divert cash into fossil fuel industries.

Ravid claims we'll start to run out of cheap energy, affecting the poor most of all. We're missing out on opportunities for profit. We can't reach these targets for another 60 years. The climate change deniers, refer to the science as a scare campaign. They claim the science is not settled, pointing to some disagreement in pockets of the scientific community.

I'll address these points in reverse order

1. Disagreement in the foundation stone of science. Scientists often have different viewpoints. To gain overwhelming consensus they would need to publish their findings in scientific jourmals for by their peers. Normally they would include methods and sufficient data for others to attempt to repeat the findings. In other words, scientists are free to hold any view, and sadly many take payment from fossil fuel interests to try to convince their peers or at least sow doubt upon the popular consensus. The man-made climate change hypothesis has been tried and tested, challenged by many over the years. Small changes are made to the overall consensus as new data is uncovered but the overwhelming consensus in the scientific community remains supportive of the conclusion that man-made greenhouse gases are accelerating climate change and we have little time to act.

2. We simply don't have 60 years We can reach the ambitious climate targets if we're prepared to go without. There is no version of humanity that survives otherwise.
3. The very poor will be first affected by the lack of climate action and the emissions of a global few developed countries that continue to consume the lion's share of fossil fuels. The very poor require little energy and can normally make do with sustainable micro generation.

June 04, 2022

Well said Ant

June 03, 2022

It does appear that we are rushing the transition, racing towards emissions reduction in the 21st century using predominantly 20th century renewable energy technology. A net-zero emissions policy on a global scale when as yet, there is no large scale alternative efficient energy systems, is a blinkered concept when 3 billion of the almost 8 billion people on the planet have next to no energy for their daily needs, 3 billion have some energy but not yet enough to pull themselves out of poverty, and the remaining 2 billion can't comprehend the difficulties we will face in trying to achieve net-zero without a substantial increase in technology. Yes we need to clean up the planet, but we should do it with nuance in an orderly fashion, technology permitting, and without the panic. Climate policy is built off the back of climate modelling, and most of the IPCC’s models do not do natural variability in climate that well. The climate is a complex beast. And the extent of natural variability is important. Even if substantial emissions reduction do occur this century, modelling suggests the impacts won’t be felt until the next century and beyond that. As for warming itself, the incidence of it is never discussed, but it is highly possible that most of it could occur in colder climates, in colder seasons, and at night. It may not be Armageddon. As we move through this century, the demand for reliable energy will only increase. And if we are to continue to flourish as a people, we should hasten slowly with energy transition, while backing ourselves to come up with solutions to a complex problem.

Nick Callil
June 02, 2022

Great article Graham. I assume that in the quote from Dugald Huggins , 'investable' should read 'uninvestable".

Graham Hand
June 02, 2022

Hi Nick, yes, good pick up, we've changed it to 'uninvestable'.

Glynn Blackwood
June 02, 2022

I wish your article could have wider distribution to raise the level of 'climate change' debate above the populist slogans of 'settled science', and 'how dare you'. Unfortunately the hysterical 'teal' left is in charge and the negativity policies will need to run their course before any sanity can be restored.

Geoff Rankin
June 02, 2022

There is an increasing assumption that the science is 'settled' by such commentators as Graham Hand and the rest of those who cannot, or will not, simply look at the basis of the hysteria over our climate. The alarmism is now chronic and not confined to scientists, many of whom do not necessarily understand the details of the myriad disciplines involved in the complexities of climate. Many 'climate scientists' rely on the ongoing fear campaign to attain funding for their next gig, whilst uninformed ideologues and the chattering class simply wring their hands in the morbid hope that we all begin living in caves with candle lights a-flicker.

If there was clear evidence that an increase in atmospheric CO2 was a threat to life on Earth then there would be no argument - economic or scientific. However, there is plenty of dissents, even to whether CO2 is a villain gas amongst some of the highest credentialed astrophysicists on earth. Surely that should tell us something, but no. We (collectively) would rather listen to a few uninformed political zealots with questionable agendas or, worse, a bunch of privileged 'teal' politicians with absolutely no idea about the geological history of our Earth or the natural variability of our climate over millennia.

Graham Hand
June 02, 2022

Hi Geoff, how much do you think I can cover in one article? I'm not writing a book. I deliberately avoided the issue of whether the science is 'settled' by saying: "This article will not venture into the vexed questions of whether adoption of strict ESG principles enhances portfolio returns or the anthropogenic contribution."

Tom Taylor
June 07, 2022

Ah mate you are just like Galileo, the new church just like the Catholic Church will excommunicate you because you dared to question consenses. How dare you question the climate change religion, you heretic.

June 09, 2022

Thanks Geoff Rankin. And thanks to GH for letting us hear the arguments of Rajiv Jain; Jain and his perfectly logical comments would be banned from the ABC.

June 02, 2022

There's a good lesson for ESG investors here. ESG funds normally dislike bad energy and love good tech, and this has been precisely the wrong play for the last year. So you cannot simply say 'I'll go ESG' for the sake of the planet without knowing what you are getting into in your portfolio.

Jan S
June 02, 2022

People in developing nations are suffocating in toxic fumes burning coal and wood.

Leap frog adoption of new technology can unleash productivity eg India’s lower economic classes skipping costly landlines and going straight to mobile phones. Similarly, developed countries can bypass damaging fuels and adopt sustainable energy eg using small solar panels for cooking energy rather than burning dung or lumps of coal.

June 02, 2022

Given that the majority of Indian's population struggle to afford wood, and would obviously struggle to buy an electrical stove how are they going to afford solar panels and a battery? Your reply displays two key errors.

You assume that the sun will be shining when they want to cook, otherwise solar panels are useless.
You assume that everyone can afford to go green, which is both unrealistic and arrogant.

Graham W
June 02, 2022

Great article Graham, so much common sense that it should be compulsory reading by the vocal but misinformed green and teal brigade. GQG Partners, saying the energy transition may take up to 60 years and that is probably not far off the mark. To get 10% of the current Australian car fleet to EV's by 2030 would require us importing 250,000 of them a year .Currently the figure is well less than 10 % of that, and the carbon emissions from producing EV's is similar to our cars with ICE's. Dr Monique Ryan MP wants a 60% emissions reduction target by 2030.More on this topic please.

Ian Hunter
June 02, 2022

new Labour policy with FBT exemption gives a great incentive to go EV.

Ian Sillar
June 02, 2022

And to think paleoclimate science shows that, over geological time an elevated level of atmospheric CO2 has NEVER been a precursor to a rise in global temperature on planet Earth. Climate change is indeed "nonlinear, chaotic and complex"

June 02, 2022

Great article, thanks very much for exploring the less convenient side of the narrative!

Fran alt
June 02, 2022

Refreshing I agree, as winter rolls on, the tarnish may appear on the Greens and teals. I thought Cannon Brookes assault on AGL was an appalling display of arrogance by an elitists egotistical radical pursuing ideological ideas that the rich can afford

June 02, 2022

You will simply not get to a carbon free future by 2050, with reliable base load power, without fossil fuels AND miners digging up the very minerals necessary to decarbonise the world! Throw in "flight from Russia" together with massive free cash generation and rapid debt reduction, you can hold all the ESG concerns you like, but as an investor, I am ignoring them!

June 02, 2022

How refreshing to read such an honest and pragmatic article about someone who understands reality.

Mark M
June 01, 2022

Long commodities and short ESG since Nov 3 2020 .. #1 return out there last 18 months ..


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