Climate change and ESG woke capitalism

Dan Rochefort

2022-11-30 09:26:00 Wed ET

Climate change and ESG woke capitalism

In recent times, the Biden administration has signed into law a $375 billion program to better balance the economic costs of both climate change and extreme weather. In accordance with the December 2015 Paris climate change agreement, the U.S. federal program helps reduce carbon emissions worldwide and the average global temperature by at least 2 degrees Celsius in the next few decades. Also, this U.S. federal program aims to reduce American carbon emissions by up to 44% by 2030. Specifically, this new legislation offers tax incentives for U.S. companies to invest in renewable energy. This new legislation further provides tax rebates for American consumers who buy electric cars and energy-efficient home improvements. Over the next decade, the non-partisan Congressional Budget Office expects this new legislation to save at least hundreds of billions of dollars for U.S. consumers and companies. To the extent that the new federal investment program can help reduce the economic costs of both climate change and extreme weather, this program can help the Biden administration better tame inflation with higher real GDP economic growth in the medium term.

In light of the new Biden federal program on climate change, we focus on the recent climate technological advances and their broader implications for Environmental, Social, and Governance (ESG) investment strategies. Most economists expect the fresh climate technological advances and disruptive innovations to reduce carbon emissions worldwide via electric vehicles, nuclear power plants, and other net-zero targets in the real boom-bust business cycle. This macro trend has profound public policy implications for several American tech titans Meta, Apple, Microsoft, Google, Amazon, Nvidia, and Tesla etc (MAMGANT).

World Economic Forum now expects the economic costs of climate-driven natural disasters to reach $2 trillion by 2035. Global climate change can cause an adverse impact on long-term real GDP economic growth. University of Southern California climate economist Hashem Pesaran and his co-authors analyze the panel dataset of 174 countries for the years from 1960 to 2014. The empirical punchline suggests that persistent changes in the global average temperature above its historical norm often lead to negative real output growth ceteris paribus. Specifically, a persistent increase in average global temperature by 4% of 1 degree Celsius reduces global real GDP per capita by at least 7.22% by 2100 once the econometrician controls for all the other relevant covariates and endogenous effects.

However, if all the sample countries abide by the Paris climate agreement to limit the temperature increase to only 1% of 1 degree Celsius per annum, this climate policy coordination can help reduce the economic output loss substantially to less than 1.1%. Canada, India, Japan, New Zealand, Switzerland, and the U.S. tend to experience 10% larger losses of economic output growth. Further, climate change can cause a long-term adverse impact on economic output, labor productivity, and employment across at least 48 U.S. states and industrial sectors from 1963 to 2016. This landmark study corroborates the progressive agenda that climate change can cause a first-order adverse impact on economic performance.


Electrification can help substantially reduce carbon emissions worldwide.

In the green energy transition, electrification helps solve the current climate crisis by substantially reducing carbon emissions all over the world. Broad electrification has now become a fresh opportunity for climate control experts who seek to reduce carbon emissions and other technical obstacles across the board. The recent war between Russia and Ukraine can cause a first-order impact on both opportunities and obstacles in climate technology worldwide. The baseline logic of post-Ukraine energy security is to rely as little as possible on many flows of hydro-carbons from geopolitically dodgy sources such as Russia, Turkey, and the middle east. At one level, this energy security involves a new goal of adding renewable capacity to the power grids as fast as possible. A kilowatt-hour from solar panels or wind turbines can help reduce reliance on the traditional forms of energy such as oil and natural gas.

Increasing renewable capacity faster is already a top priority for climate technology experts and partners. Yet, renewable energy cannot eliminate Europe’s essential need for natural gas. In practice, natural gas is vital to Europe’s industrial heartland. For this reason, energy security hawks want to increase greatly Europe’s capacity to import natural gas.

A low-emissions to no-emissions future is not just a matter of reducing fossil-fuel use in extant infrastructure. This future is about establishing system-level changes through a once-and-for-all replacement of extant infrastructure. It takes substantial investments in alternative sources of hydro-carbons to replace Russian natural gas supplies within the next decade. Climate hawks expect to see new hydro-carbons as part of the U.S. and E.U. electricity system for the next several decades. In this positive light, the current global electricity system pivots from new green energy to no new gas.

The issue is not unique to Europe. In America, California indicates that there would be an important role for natural gas in a new $5.2 billion strategic reserve capacity for the state to ensure its ambitious expansion of renewable power for no blackouts. Many climate hawks expect the other U.S. states to follow the Californian approach. The essential climate technology further complicates the trade-offs between green energy and climate security.

The American Pacific Northwest National Laboratory puts numbers to some of the possibilities. One of its recent studies uses dynamic price signals to automatically coordinate a variety of energy resources on a theoretical power grid in the size of Texas. This operation helps reduce electrical loads. As a result, household power prices decline by 10% to 17%. In effect, this theoretical operation helps lessen the essential need for power transmission and distribution across each U.S. state.

In Britain, a new regime for power distribution operators means that utilities solicit energy resources via open and transparent markets. In Australia, the green power charity Energy Web works with the energy market operator, a big distribution utility, and several local aggregators of energy resources in order to develop a transactive energy market with wholesale bids. In sum, these worldwide developments show an active interest in green energy.


The deep decarbonization of power grids heavily relies on renewable energy with long-duration power storage.

The deep decarbonization of power grids can often require renewable energy with long-duration power storage. Many CO2 batteries can store natural gas under high pressure when electricity is plentiful. Each turbine absorbs such gas to generate electricity on demand. The main advantage of CO2 batteries is that these batteries can take on a dense liquid form at room temperature. Just like windmills and solar panels, the U.S. and E.U. power domes can become new icons of the green energy transition.

Long-duration energy storage can provide large amounts of electricity on demand for hours, days, or even weeks. Without any fossil fuels or nuclear power stations, long-duration energy storage allows electricity to boost from 60%-70% renewable energy to 100% on the power grid. These storage systems can deliver power in a multiple of watts, and these storage systems keep the amount of power storage in a multiple of watt-hours. When electricity is cheap and copious, these new systems pump up water into a high-level reservoir with full hydropower. When electricity is scarce, the water runs back down to a lower level to spin a turbine for better energy storage. These long-duration energy storage systems alternate between these 2 modes to provide electric power on demand through each week.

The size of the turbine sets the power measurement of each long-duration energy storage system. For the world’s hydropower systems, the total power is about 165 gigawatts. The energy storage capacity determines the amount of water that each system pumps into the top reservoir in the first place. For the current hydropower systems, the total electric power storage capacity is about 9,000 gigawatt-hours or 9 terawatt-hours.

The long-duration energy storage council models the most cost-effective path to a brave new world with net-zero carbon emissions by 2040. The global system must deliver top electric power of about 2.5 terawatts with long-duration power storage of 140 terawatt-hours. We put these numbers in the broader context of both extant electric power consumption and storage worldwide. For America, the total electric power generation is about 1.1 terawatts, and 5% of the European annual electricity consumption is about 140 terawatt-hours. These technical numbers are huge but quite achievable with sufficient capital investments around the world.

Elsewhere in the green energy transition, global wind capacity has increased by a factor of 4 to 5 in the decade to 2020. Solar capacity has increased almost 18-fold over the same period. By comparison, increasing hydropower capacity by a similar amount sounds quite reasonable. However, wind turbines and solar panels benefit from the increasing returns of mass production. Often times, hydropower systems are one-offs, and many hydropower systems have been built in North America and Europe. Hydropower development times are long; capital costs are high; and local environmental objections are common. Hydropower power capacity can increase by 50% in the next decade. In reality, a tenfold increase looks quite implausible in the next 20 years.

Lithium-ion batteries have become substantially more cost-effective due to a sound mixture of both disruptive innovations and economies of scale. Grid-scale electric power storage has provided by far the greatest recent advances in global climate technology. After a 90% decline in the average cost of battery packs between 2010 and 2022, America now aims to add more megawatts of electric power capacity to the grid in the form of lithium-ion batteries (than in the form of natural gas turbines). Nowadays, electric vehicles that make use of lithium-ion batteries can substantially reduce carbon emissions worldwide.

There are a wide variety of constraints on lithium supply, and there are real worries that the new electric vehicle industry may absorb most of the lithium supply. In fact, the technical improvements in battery technology for electric vehicles differ quite a lot from the improvements for grid-scale storage. Electric cars need batteries that store power in as small and light a form as possible across a broad range of outside environments. Power storage cares little for weight or volume. None of the lithium-ion systems can store the vast volume of electricity with the demand and supply imbalances that are likely to arise in the future as renewable penetration increases. Only novel approaches to long-duration storage can help fill the breach.

There are 4 main types of disruptive innovations in electric power storage. These 4 electric power storage systems include the mechanical, electrochemical, thermal, and chemical systems. Hydropower options almost always dominate mechanical storage systems. Storing natural gas and water under high pressure is one option. Another option involves big blocks of water pumps for hydropower storage. These big blocks lift up water high into the air with cranes when energy is cheap, and then lower water down with a pulley that acts as an electric power generator on demand. Mechanical hydropower storage has attracted a lot of capital investments around the world.

Electrochemical storage takes advantage of voltage differences between various kinds of chemical compounds and metals. Researchers apply artificial intelligence algorithms to sift through hundreds of thousands of lithium battery contents for new ideas in electrochemical power storage. Through electrochemical storage, lithium-ion batteries process chemical compounds and metals in external tanks. Moreover, electrochemical storage systems pump these chemical compounds and metals to lithium-ion batteries as they charge and discharge over time. Bigger external tanks help store more energy. When each lithium battery charges up, salts become iron deposits on the electrode. When each lithium battery discharges in due time, the iron dissolves to convert chemical energy to an electrical charge. This conversion fulfills electrochemical power storage with reversible rust in many electric vehicles for Tesla, Nio, Gogoro, Nikola, and Rivian etc.

Thermal electric power storage systems can heat up carbon blocks to as much as 2,000 degrees Celsius. The resultant energy can help heat steam or air in a pipe. The glow from the toasty blocks can turn photovoltaic cells to generate electricity. Thermal power storage systems operate as heat pumps to charge up electricity as heat in molten salts. These thermal systems can act as heat engines to discharge electricity through heat transformation. In essence, thermal power storage systems convert heat to electricity and vice versa. Both thermal and electrochemical power storage systems call for better technical checks and balances on heat control and air pollution.

Perhaps the most transformative climate technology is chemical power storage. In chemical power storage systems, a hydropower engine, a turbine, or a generator uses electricity to make chemical compounds. The simplest option is often to use renewable power to drive each electrolyser that helps split water into oxygen and hydrogen. Chemical power storage systems keep the hydrogen (i.e. hydropower) for energy conversion across different seasons. As the generation of renewable energy proliferates over time, chemical storage systems sustain more electricity in hydrogen for later use. This chemical transformation further helps make complex fuels such as synthetic diesel and ammonia.

These 4 main types of electric power storage systems continue to accelerate core disruptive innovations in climate technology. Long-duration power storage requires top electric power of 2.5 terawatts with sustainable power storage of 140 terawatt-hours. In this green energy transition, the earth can incrementally become a brave new world with net-zero carbon emissions by 2040. These disruptive technological advances can contribute to the Biden climate change agenda in accordance with the December 2015 Paris agreement on net-zero carbon emissions worldwide.


Substantially reducing natural gas emissions deals with its carbon contents either before or after hot combustion.

Insofar as methane losses in the journey from gas well to turbine are kept low, gas turbines are the most efficient way of producing electric power from fossil fuels on a large scale. After passing hot combustion gases through a primary turbine, these gases harvest the leftover heat to drive steam through a secondary turbine for an overall efficiency level of about 60%. On average, these gases produce only 350 kilograms of CO2 per megawatt-hour of electricity. Coal power stations can easily produce twice as much with much air pollution. Substantially reducing natural gas emissions deals with its carbon contents either before or after hot combustion.

With inevitable natural gas emissions, many power companies need to overcome at least 2 technical obstacles. First, it is more expensive for each power company to replace a current gas turbine with an Allam-cycle power plant than fitting the gas turbine with carbon capture storage systems. Second, each power company needs to displace CO2 contents and other carbon emissions etc. In Texas, there is much demand for CO2 from oil and natural gas companies such as Occidental Petroleum, BP, Exxon Mobil, and Shell. These companies pump CO2 down wells to flush out more oil. This alternative market is not available everywhere in the world.

Negative-emission tech advances store the carbon that they sequester chemically in biomass, soil, or mineral contents. Some contenders need to bury carbon away underground in saline aquifers or play-out oil fields. With carbon capture storage systems, bioenergy burns biomass to drive turbines for electric power generation. At the same time, these systems dispose of CO2 in the process. Because carbon arises from the atmosphere by means of photosynthesis, this process reduces the atmospheric carbon-dioxide level. With chemical engineering methods, direct air capture storage systems use huge banks of fans to pull CO2 out of the atmosphere. In accordance with the Paris climate agreement, Allam-cycle power plants and gas turbines can help limit the global warming temperature to no more than 2 degrees Celsius in the next several decades.

The European Commission now takes the lead on cleaner climate technology and infrastructure. The European Commission seeks to eliminate methane leakage. In addition, the European Commission seeks to direct capital investments only in new gas power plants that emit no more than 270 kilograms of CO2 per megawatt-hour. These endeavors are reasonably consistent with the global mega trends of climate technology. Green energy helps substantially minimize carbon emissions and their economic costs in the form of natural disasters worldwide. The recent war between Russia and Ukraine can speed up the global market for green gases, derivatives, and most other alternative energy resources.


Green energy capacity is quite affordable in America and Europe.

Deep decarbonization requires applying new electric power generation to replace the traditional energy resources such as fossil fuels and natural gases. Should all of America’s cars be electric vehicles, the country’s total power consumption would rise by almost 30%. In America and Europe, green energy capacity is reasonably affordable. High-tech electricity storage systems gear up power grids with greater electrochemical contents and substantially lower carbon emissions. Global energy regulators need to make difficult decisions about the high-tech conversion of green hydrogen into electric power through new climate technological advances (such as carbon capture storage systems, power engines, wind turbines, and solar panels). These climate technological advances help substantially reduce carbon emissions worldwide for better environmental protection and long-run economic growth.

It can be expensive for electricity companies to generate hydrogen from renewable energy resources. The probable future decline in the cost of hydrogen arises from improvements in the climate-driven hydropower technology. This technology leads to energy-efficient electrolysers. In effect, these electrolysers are now ripe for both disruptive innovations and economies of scale. Just like solar cells and lithium-ion batteries, these electrolysers may well be the next big climate technology to shoot down a precipitous cost curve in the next decade. By the end of 2030, green hydro-power can become cost-competitive with hydropower from fossil fuels even without carbon capture storage.

In effect, electric heat pumps are air conditioners that often tend to run in reverse. This green technology does not heat up steam or water directly. Instead, this green technology moves heat from one place to another. To generate electricity, moving heat from one place to another is more effective than producing heat from scratch. A heat pump that heats up a house with the ground warmth can produce 400 watts of heat for every 100 watts of electric power consumption. Using these heat pumps to generate electric power seems more sensible than burning hydrogen.

In the baseline scenario of limiting the next increase in global average temperature to 2 degrees Celsius by the preindustrial level, the number of industrial heat pumps worldwide would have to rise from fewer than 1 million in 2020 to 25 million in 2030. For high-grade heat above 500 degrees Celsius, hydrogen probably has the edge. Specifically, the steel industry tends to fixate on fossil fuels because steel makers make use of chemical reactions between carbon and hydrogen. Making iron from iron ore and then steel from iron requires chemistry as well as heat. Thus, the steel industry has grown up substantially relying on fossil fuels for both. In the best-case net-zero-emissions scenario, about 67% of primary steel production relies on the hydropower route by 2050.

Like all the paths forward, the current climate tech agenda tends to reflect the post-industrial history of economic production. This climate tech agenda combines both technical expertise and statistical conservatism. In the next several decades, this climate tech agenda depends on the integration of new technological advances to control immense flows of electric power from hydrogen heat pumps, solar panels, lithium batteries, and wind turbines. In essence, this climate tech agenda remains a work in progress.


It is time for investors and economists to get real about what Environmental, Social, and Governance (ESG) can and cannot achieve in due course.

The 3 biggest global asset managers BlackRock, State Street, and Vanguard own more than 20% of the average public corporation in the S&P 500 U.S. stock market index. Their active ESG funds remain a relatively small part of overall assets under management. Net inflows into ESG have been like pixie dust to investment funds, and these net inflows into ESG help offset outflows in many other parts of the core active stock market investment portfolios. Many global asset managers now apply ESG criteria to decide how these asset managers vote trillions of dollars of passive funds. This new stock market investment approach adds to the importance of ESG woke capitalism.

In recent years, woke capitalism arises from the broader social awareness of world issues such as racism, inequality, and climate change among younger savers and investors. There are 2 key drivers behind this focus on ESG. First, the stock market investment industry competes to attract the growing wealth of younger savers by marketing each ESG fund as an environmental and social champion. The younger savers can often express their environmental and social preferences through stock market investments. Given that their pensions are likely to accumulate in the next several decades, these younger savers tend to be more sensitive to the longer-run risks of climate change.

Second, the sale of ESG funds helps global asset managers mitigate the 20-year curse of declining fees. For most ESG funds, there is a green premium: average annual fees for ESG sustainable funds (albeit modest at 0.6% to 1%) seem almost 50% higher than average annual fees for traditional non-ESG funds. In the global asset management industry as a whole, the interplay of values-driven climate risk aversion with a hunger for high fees raises fears of subpar longer-term ESG fund returns. These subpar returns result from the fact that ESG fund selection cannot lead to mean-variance efficiency in the core spirit of modern portfolio theory. Global asset managers may oversell the extent of their use of ESG in order to attract more customers.

As exclusionary funds, ESG workhorses aim to shun specific sectors such as fossil fuels, guns, or cigars either for ethical reasons, or because ESG investors hope to shame the industries into behaving better. Some ESG funds are in the spotlight as some formerly untouchable stocks have rallied sharply, partly as a result of the war between Russia and Ukraine. The recent ESG stock market rally encourages asset managers to reconsider whether it is right to keep these sin stocks at arm’s length. Regardless of whether asset managers tilt their stock market portfolios toward sin stocks, ESG stocks, or other socially responsible funds, the resultant stock market portfolios would become mean-variance inefficient with sub-optimal Sharpe ratios (of average returns to standard deviations).

Divesting from dirty industries simply shunts stocks around, and so creates no net benefit to anyone except those asset managers who are happy to hold sin stocks. ESG cannot meaningfully raise the cost of capital. A better alternative approach is for socially conscious investors to buy stocks with enough proxy votes to influence each company. A good example is Engine No.1. This activist hedge fund has won critical support from BlackRock, State Street, and Vanguard to help replace 3 main directors on the board of ExxonMobil in order to strengthen its response to climate risks. We expect to see more proxy contests and shareholder proposals in line with ESG criteria.


It is a common myth that ESG stock market investments inevitably outperform the market risk premium.

It may or may not be true that ESG stock market investments outperform the equity premium on a consistent basis. ESG sustainability has moved into the mainstream since the recent rise of woke capitalism for better stakeholder value maximization. There are at least 2 common beliefs in ESG stock market investments. First, long-term stock market investments are best-practice; ESG sustainability helps improve the real economy with better climate risk sensitivity and environmental protection; and ESG can be a useful tool for economists to understand business management. Second, ESG is hard. Although many business practitioners look for ESG win-win solutions, economists focus on the inexorable trade-offs between climate tech risks and ESG shareholder returns. Since 2010, ESG mutual funds have outperformed non-ESG funds in America and Europe. Yet, part of this outperformance arises as most ESG mutual funds invest heavily in big tech growth stocks in recent years. In 2020-2022, interest rate hikes and the war between Russia and Ukraine have hit hard these tech growth stocks.

Some recent empirical studies help demystify the puzzle that ESG stocks may tend to outperform the passive stock market index. In fact, companies with higher ESG performance scores may not produce better shareholder returns in the longer run. When companies focus their efforts on ESG issues such as carbon reductions and independent directorships etc in direct association with the bottom line, these ESG stocks often tend to consistently outperform the S&P 500 stock market index. For this reason, ESG causes a first-order positive impact on the bottom line, and this positive causal nexus can contribute to higher long-term stock return performance. In this new light, many economists call for the complete overhaul of highly relevant ESG criteria for better cash profitability and stock market performance. So it makes sense for corporations to link ESG to shareholder return materiality. For instance, each energy company’s carbon footprint is more material to the bottom line than a bank’s carbon footprint. As efficient-markets theory suggests, excess stock market returns are almost always transitory, especially when market information is widely available to investors, traders, and professional arbitrageurs.


Woke capitalism defines corporate success in terms of not only shareholder wealth maximization but also much broader stakeholder value maximization for upstream suppliers, downstream customers, employees, and regulators etc.

ESG companies measure and disclose the adverse impact of commercial activities on the atmosphere, air, water, and biodiversity etc. Through carbon emissions and other civil damages, negative externalities can lead to high social costs. Mandatory regulation of ESG carbon footprint disclosures should tighten up climate tech uses and carbon reductions. Under core pressure from both investors and lenders, ESG companies increasingly make commitments to science-driven net-zero targets. In practice, these net-zero targets help limit the next likely increase in global average temperature to no more than 2 degrees Celsius in accordance with the December 2015 Paris climate agreement. In 2020-2022, more than 1,500 U.S. corporations have set science-driven net-zero targets for carbon emissions. These corporations include Apple, Coca-Cola, Ford, Google, Microsoft, Nvidia, Oracle, Pfizer, SpaceX, and Tesla etc.

Insofar as good climate behavior is in service to a robust business model, this good climate behavior can attract a high caliber of both board members and employees. Also, a good ESG climate protection record lets each company charge more for its products and services. ESG can even attract greater shareholder capital. Besides the active interest of ESG investors in the capital markets, many banks are under pressure to target lower carbon emissions in their loan portfolios.

Carbon taxes are on the rise to help price the adverse impact of business activities on environmental protection and social inequality. As of early-2022, carbon taxes cover 25% of global carbon emissions. Better carbon footprint disclosure can help internalize negative externalities in direct association with global carbon emissions. In this new light, ESG should not be an elusive ideal mission. ESG can contribute to better climate technology and long-term economic growth.


New corporate disclosure rules aim to better measure climate tech risks.

Financial markets are well aware of the long-term risks of climate change, but the current evaluation of climate risks looks low (as if some miracle climate technology might reverse the next increase in average global temperature). Climate change is not a tail risk. In fact, climate change is a real risk bound to occur in due course if we fail to take actions to prevent this risk.

In fact, it is worth doubling down on private-sector and bureaucratic efforts to push companies to reduce their carbon emissions. This approach may be a second-best solution. With the correct carbon footprint disclosure requirements and regulations, this approach directs capital to the most productive uses with better environmental protection. If governments can ever muster up the courage to beef up carbon taxes, good measurement would make these carbon taxes more effective.

ESG has been neither a good measurement tool nor an effective risk management tool. ESG aims to satisfy too many stakeholders that ESG information often bears little relevance to what each company preaches and performs in practice. ESG can be too imprecise to be a shadow tax on each company’s negative externalities. In this new light, ESG has created much confusion for many public corporations. It is hard for investors to work out what ESG means for stock market prices.

ESG standard-setters should not impose carbon footprint measurement thresholds to satisfy each social cause. Instead, ESG standard-setters should seek to ensure that non-financial disclosures are material to the respective industry. Corporations can voluntarily disclose carbon footprint measures of more general relevance. The asset management industry should customize ESG products to particular investor constituencies. For instance, climate funds can often serve investors who want to reduce carbon emissions; social funds serve investors who focus on human capital accumulation; and governance funds serve investors who express their concerns about mismanagement. ESG cannot be a panacea for climate protection, equality, and corporate governance.

It is better for investors, asset managers, and regulators to focus on the E side of ESG (but not the S and G sides of ESG). In numerous non-Anglo-Saxon countries, there are impediments to basing investment decisions on the latter 2 sides of ESG. With both quantitative and qualitative information controls, key regulators (such as U.S. SEC and European Commission) focus exclusively on climate-driven carbon footprint disclosures. Many investors continue to care about not only shareholder returns but also net-zero carbon commitments. In a new light, climate technological advances can help accelerate the green energy transition toward more sustainable economic growth.


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