It Won't Go on Forever: The Inevitable ESG Rhetoric Flip
Preparing for the Shifting Investment Landscape Using Predictable Media-Policy Cycles
It’s no secret that public opinion is a powerful force in shaping policy decisions, and the media is often the driving force behind that influence.
But what happens when these ideas perpetuated by the media stem from ignorance or are influenced by vested interests?
Today we take a step back to examine and discuss the biggest bull case for energy stocks – the inevitable shift in ESG rhetoric.
We dive into the Frist Principles of media-driven policy by looking at some historic parallels, one of which being the War on Drugs policy enacted in the 1970s.
Through examining these historic parallels, we’ll unearth policies that were initially popular but ultimately overturned as unintended consequences began to penetrate the public psyche. Then we examine the policies being enacted today and uncover the UNCANNY similarities between the two.
These parallels are truly striking and will have an immense impact on future capital flows.
Historic examples of drastic policy shifts driven by the media
A policy enacted by public opinion can sometimes result in unintended consequences. But once these consequences become apparent, it takes time for the public psyche to shift.
However, once the tide turns, policy changes are inevitable and sometimes drastic.
In the case of ESG, the unintended consequences of the aggressive push for sustainable investment have already emerged, as it restricts capital from key infrastructure projects needed to satiate demand.
History has shown that misguided policies drive by public opinion are not destined to continue in perpetuity. It’s only a matter of time before the inevitable shift in rhetoric leads to drastic policy changes.
Let’s look at historic precedents that have led to these changes, driven by the public. From the War on Drugs, Antibiotic use in Livestock, to the Inflation Reduction Act, we’ll see how once public opinion is swayed by the media, policy changes are soon to follow.
The current rhetoric pushing misguided ESG policies is not here to stay.
It cannot be the case.
The War on Drugs
The policy enacted in the 1970s was heavily influenced by media coverage and public opinion, which perpetuated high-profile drug busts and focused on drug-use and drug-related crimes that concerned the public greatly.
The rise of cable news helped raise (hyper) awareness of the issue, leading to the emergence of advocacy groups, protests, letters sent to representatives etc. The public voice could no longer be drowned out - and policymakers had to listen.
The War on Drugs policy was the result, enacted to address the public’s concern about rising drug use and related crimes. It’s important to note this was a bipartisan policy aimed at portraying a tough stance on the issue (for re-election purposes).
The parallels with today’s fossil fuel demonization rhetoric are striking.
However, as we all now know, unintended consequences of the policy arose. Mass incarceration, INCREASED violence, racial disparities, overcrowded prisons and so on. It wasn’t until the 1990s that the media began to shift its focus towards outlining the negative impacts the policy was having. Journalists reported:
The disproportionate impact the policy was having on minority communities
High rates of incarceration for non-violent drug offenses
Policymakers’ failure to address the root cause of drug addiction.
As the media’s changing focus reverberated through the public psyche, perceptions of the issue flipped. Activists and advocacy groups rallied around the cause, leading to policymakers taking on a more evidence-based approach to addressing the issue.
States began to focus on rehabilitation and treatment rather than punishment, and the rise of marijuana legalization began, among other things.
The shift in policy took several decades to take shape as the data became increasingly apparent. But in the end, it was public opinion, influenced by the media, that played the primary role in affecting the original policy enactment and the inevitable shift.
Antibiotic use in Livestock, the Affordable Care Act, No Child Left Behind, and many others all have the same thing in common:
The media perpetuates an issue to the public, leading to raised (hyper) awareness of the issue. Policymakers attempt to address these concerns. Unintended consequences arise, exacerbating the initial issue. The media reports that the initial policy is not working as intended. Public perception shifts. Activists and advocacy groups rally around the cause. Policymakers iterate on the policy, using more robust and educated inferences and data to re-evaluate the initial policy.
For the visual learners:
Unintended Consequence of ESG Mandates: Global Energy Crisis
Let’s be realistic. There were many factors contributing to the global energy crisis - the unexpected resurgence of Chinese demand, Putin’s invasion of Ukraine, abnormal weather conditions, among others.
Many believe it was solely Putin’s Price Hike that drove us into this crisis.
After diving into price action before and after the invasion however, we realized that its impact on fossil fuel prices was only minimal compared to the historic run-up prior to the invasion. We concluded that “Putin’s Price Hike” was largely political spin.
You can check out our in-depth analysis on this topic:
For years now, U.S. shale companies have been the go-to global swing producer of crude oil, de-throning Saudi and Russia from the production throne. Post-COVID however, they ALL shifted capital allocation plans from “drill baby, drill” to “maintenance mode.” Why the shift in capital allocation? The reason is three-fold:
Investor Demanding Capital Returns
Avoid Inciting OPEC’s Emotional Response to a Loss of Market Share
Policy Uncertainty
Talking with management of some of the largest producers in the Permian, we found that Policy Uncertainty is the most, if not the only, highlighted reason behind decisions to hold back investment in the oil and gas space
This is especially true in the midstream space, where several pipelines such as Keystone, PennEast, Mountain Valley, and many others experienced cost overruns, political opposition, and outright bans.
It’s not just about pipelines. It’s also about export infrastructure.
Several LNG export projects were scrapped in the wake of COVID due to depressed gas prices. However, the resurgence of these projects took MUCH longer than it should have.
Why?
Because global buyers were reluctant to enter 20+year agreements to import LNG as they were uncertain whether or when policy changes would flip their PnL from black to red.
The consequences of this hesitation were felt globally.
A faster resurgence of these LNG facilities entering service would have significantly eased the pain Asia and Europe experienced these past 3 winters. It would have led to lower global gas prices, subsequently lowering prices for food, materials, refined products, and other goods that rely heavily on abundant and cheap natural gas
This perpetual inflation has led global central banks to tighten balance sheets and raise interest rates, reverberating throughout the lending economy and limiting investment in higher-risk ventures - which, due to policy uncertainty, now includes energy.
Without a shift in rhetoric, which drives policy, elevated levels of inflation are likely to persist, and energy infrastructure companies remain reluctant to invest in multi-decade projects that could provide the world with the much-needed affordable and abundant energy.
But there is hope.
We believe that the media, therefore public opinion, will catch on to the root cause of the unintended consequence – misguided and uninformed policies demonizing reliable sources of energy.
It was these same reliable sources that lifted 70% of the global population out of poverty in the past 300 years.
The Inflation “Reduction” Act
While we acknowledge that each policy has its own complexities and nuances, it’s quite clear that there are numerous instances of policies that were initially driven by media hype led to unintended consequences - which led to a subsequent re-evaluation of that policy, again driven by media.
The Inflation Reduction Act of 2022 will be remembered as one of these policies.
$738 billion.
One of the largest bills ever passed. It ranks behind the 2020 CARES Act, which allocated $2.2 trillion for economic relief to those affected by the pandemic. And the 2021 American Rescue Plan Act, which allocated $1.9 trillion for additional economic relief.
We all know the unintended consequences that followed these massive stimulus bills.
The Inflation Reduction Act will add significant stress to already-strained supply chains and won’t solve the problem of reducing Inflation.
In fact, like the many policies mentioned earlier, the issue will likely be exacerbated.
Similar policies are being implemented globally. Since it’s highly unlikely we’ll have the necessary materials needed to achieve full de-carbonization by 2050, the unintended consequences of higher prices will trigger a re-evaluation of these uninformed, misguided ESG policies to drive more sustainable, affordable solutions to curb elevated CO2 concentrations.
The ESG movement may be here to stay, but the aggressive, misguided policies restricting much-needed capital from reliable energy sectors will inevitably be re-evaluated. There’ll be a surge of capital flowing into reliable energy production, transportation, processing, refining, exporting, and other related supporting infrastructure. As these investments begin generating greater returns, Institutions will reallocate capital to rebalance their portfolios, leading to expanding multiples as well.
The eventual outcome will be a more sustainable and affordable solution to addressing elevated CO2 concentrations. The future belongs to those who can see beyond the present and learn from the past. It’s clear that the future of energy lies in a balanced, realistic approach that embraces and addresses the pros and cons of both renewable and non-renewable sources.