Meinung

Eco-Barbarians at the Gate

ESG is a dream come true for moral busybodies. Never were there so many in the developed and rich world who glorified nature and simple lifestyles, without actually wanting to live in nature and conduct a simpler lifestyle.

Alexander M. Ineichen
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Remember the 1970s? OPEC extorted the West by cutting supply of oil and Abba did Waterloo:

«The history book on the shelf,
Is always repeating itself.»
— Line from Abba's Waterloo song

One of the lessons from the two oil crisis in the 1970s was related to energy dependence, i.e., Western governments became aware that energy dependency is a risk. The risk needed tackling.

Margaret Thatcher, who became PM in 1979, two years before Reagan became US president, had tackling energy dependency on her agenda. Next to de-unionising the energy and mining sectors, one idea at the time was that energy independence can be achieved with nuclear energy, as oil and gas are imported from politically «rough neighbourhoods». The IPCC, the UN’s political lobby for man-made climate change research, was supposed to educate the people of the land for nuclear energy to become politically palatable. It did not quite work out as planned. Past events suggest that little has been learnt from history. That’s a shame:

«Those who cannot remember the past are condemned to repeat it. In the first stage of life the mind is frivolous and easily distracted; it misses progress by failing in consecutiveness and persistence. This is the condition of children and barbarians, in whom instinct has learned nothing from experience.»
— George Santayana (1863-1952), Spanish-American philosopher 1

ESG (environmental, social and corporate governance), a moral compass for some investors, a marketing gimmick for others, is a dream-come-true for omnipotent moral busybodies. (And makes business sense in the current political correctness, cancel culture, compliance craze too.) And who doesn't want to do good? However, one of the many sad parts of history is that good intentions can cause malinvestment, suffering and harm. Good intentions are not enough. The road to hell is paved full of them. Reason should be applied too. It's as if Santayana was right: it is children and barbarians who are currently doing the disruptions of public transport in London and Zurich.

One worrying aspect is that many grownups are playing along, rather than exercising some skepticism—rooted in lessons learnt from history—towards the environmental alarmist movement. If children and barbarians cannot see the humanist gains from cheap, readily available, and independent energy, that is one thing. However, grownups, jet-setting royals, jet-chauffeured politicians, and more sadly, scientists, joining the anti-humanist, anti-business, and infantile chants for unreliable energy is more serious.

James Watt (1736-1819), the Scottish inventor who turbo-charged the Industrial Revolution, already knew that reserves of coal were essential for Britain’s economic ascent. Cheap and reliable energy remains a key input factor for economic prowess, wealth creation, prosperity, the mitigation of human suffering, and the expansion of human life expectancy to this day. Humanists see what barbarians don’t. The recent malinvestment in renewables, and underinvestment in reliable and locally available energy sources, caused a new form of dependency in addition to the old ones: government subsidies and a steadily breeze.

The ESG movement has joined the civil disruption and malinvestment by association, thus causing harm. Believing one occupies the moral high ground and monopolising the moral high ground are not the same as occupying the moral high ground. Causing human suffering is immoral by almost all standards, not just Judeo-Christian ethics.

«Morality doesn't mean 'following divine commands'. It means 'reducing suffering.»
— Yuval Noah Harari (b. 1976), Israeli historian and author 2

It could be, and this is pure speculation, that the current apocalyptic environmental activist movement is the greatest act of hypocrisy ever. Never, possibly, were there so many who wanted to roll back the achievements of civilisation while enjoying the benefits of civilisation. Never, possibly, were there so many, in the developed and rich world nota bene, who glorified nature and simple lifestyles, without actually wanting to live in nature and conduct a simpler lifestyle themselves. It is, possibly, the greatest act of preaching water while drinking scotch ever. The hypocrisy among our leaders has become disturbing as it implies delusion on the part of the hypocrite:

«The true hypocrite is the one who ceases to perceive his deception, the one who lies with sincerity.»
— André Gide (1869-1951), French author 3

Who is to blame for the current energy shortages in the West? In the 1970s it was easy. It was OPEC. Everyone knew that the free-capitalist world had an addiction: fossil energy. It was the proverbial Achilles heel. And still is. OPEC cannot be blamed this time around though.

From the perspective of those who have been promoting nuclear energy since the oil crises of the 1970s for energy independency reasons, the blame goes to all those who oppose nuclear energy. «The West» is still addicted to fossil energy. The addiction problem could have been solved in the 1980s but wasn't. Windmills are to nuclear energy what candles are to LED.

Cucumber greens, i.e., people who believe scarce natural resources should be used efficiently to the benefit of humans, can blame watermelon greens for the current misery. Watermelon greens, i.e., people who seek centralised economic planning to save the planet, in effect, promote the inefficient use of scarce natural resources to the benefit of nature, not humans. Cucumber greens promote an adaption strategy to climate risk while watermelon greens seek mitigation, i.e., a bit less of everything.

«The only economic concept that can reasonably be assigned to the environmentalists is negative growth.
Negative economic growth is the idea that we should not increase our economic output, but reduce it; not encourage trade, but reduce it; not improve productivity, but set it aside.»
— Drieu Godefridi (b. 1972), Belgian essayist and author 4

The practical relevance for investors is twofold. One is that parts of investment management is taking sides with the promotors of an inefficient use of natural resources on ideological grounds. The energy shortages, one could argue, are a function of ideology interfering with economics and reason. It’s a misallocation of capital, i.e., agents who manage OPM (other people’s money) not acting in the best interest of their principles, the «other people». ESG, therefore, and taking this argument a bit further, is causing harm to humans by picking ideology over reason. And winter hasn't even started: The ideological agents could be causing their principals to freeze. ESG, by association, has joined the environmental alarmist movement that carries known risks:

«[A] society which loses its identity with posterity and which loses its positive image of the future loses also its capacity to deal with present problems, and soon falls apart.»
Kenneth E. Boulding (1910-93), English-born American economist and peace activist 5

The spreading of fear by environmentalist ideologues, power-expanding bureaucrats, self-deceiving intellectuals, and media-savvy scientists (clerics and nobles in pre-enlightenment times) has as its ultimate aim the control of people and their belongings:

«Fear is a market… Fearful people are easier to govern.»
Gerd Gigerenzer (b. 1947), German psychologist and director of the Harding Center for Risk Literacy 6

The second aspect relevant to finance is, therefore, expropriation risk. The mitigation strategy cannot be done without seizing and controlling the factors of production. The principals won't hand over the wealth that has not yet been confiscated through inflation and negative interest rates to supra-national planning organisations voluntarily. More aggression, therefore, is required by the promotors of a mitigation strategy to tackle climate risk.

There might be a third aspect: the more foolish the energy policy in the West, the more power moves towards the East. Abba were right, history is always repeating itself. When the IPCC-sponsored, ESG-supported alarmism, disruption, and malinvestment will face its Waterloo is unknown to this analyst though. Probably not prior to COP26.

Alexander Ineichen

Alexander Ineichen is founder of Ineichen Research and Management AG, an independent research firm focusing on investment themes related to nowcasting and risk management. He started his financial career in the origination of risk management products at Swiss Bank Corporation in 1988. Before founding IR&M in 2009, he had various research functions in Zurich and London related to derivatives, indices, capital flows and alternative investments. Ineichen has written extensively on investment topics. He is the author of the two popular UBS research publications, «In Search of Alpha-Investing in Hedge Funds» (October 2000) and «The Search for Alpha Continues-Do Fund of Hedge Funds Add Value?» (September 2001). He is also author of three books, «Absolute Returns» (2002) and «Asymmetric Returns» (2006), the two books being his manifesto for active risk management, and «Applied Wisdom» (2021). He is also the author of AIMA’s «Roadmap to Hedge Funds» that has been published in 2008 and updated in 2012. Ineichen holds the Chartered Financial Analyst (CFA) and Chartered Alternative Investment Analyst (CAIA) designations and is a certified Financial Risk Manager (FRM).
Alexander Ineichen is founder of Ineichen Research and Management AG, an independent research firm focusing on investment themes related to nowcasting and risk management. He started his financial career in the origination of risk management products at Swiss Bank Corporation in 1988. Before founding IR&M in 2009, he had various research functions in Zurich and London related to derivatives, indices, capital flows and alternative investments. Ineichen has written extensively on investment topics. He is the author of the two popular UBS research publications, «In Search of Alpha-Investing in Hedge Funds» (October 2000) and «The Search for Alpha Continues-Do Fund of Hedge Funds Add Value?» (September 2001). He is also author of three books, «Absolute Returns» (2002) and «Asymmetric Returns» (2006), the two books being his manifesto for active risk management, and «Applied Wisdom» (2021). He is also the author of AIMA’s «Roadmap to Hedge Funds» that has been published in 2008 and updated in 2012. Ineichen holds the Chartered Financial Analyst (CFA) and Chartered Alternative Investment Analyst (CAIA) designations and is a certified Financial Risk Manager (FRM).

1 George Santayana, The Life of Reason (New York: Scribner, 1905).

2 Yuval Noah Harari, 21 Lessons for the 21st Century (London: Jonathan Cape, 2018), 201.

3 André Gide, The Counterfeiters (New York: Alfred A. Knopf, 1927).

4 Drieu Godefridi, The Green Reich (Texquis, 2019), 92.

5 Kenneth E. Boulding, «The Economics of the Coming Spaceship Earth», in H. Jarrett (ed.) Environmental Quality in a Growing Economy (Baltimore, MD: Resources for the Future/Johns Hopkins University Press, 1966), 3-14.

6 Gerd Gigerenzer, «Psychologe Gerd Gigerenzer: Angst ist ein Markt», by Angelika Hager, profil.at, 7 March 2020. Translation is my own.