Thank you very much, sir.
Financing the energy transition can be broken down into two capital flows: increased capital into renewable energy generation and capital outflows from sharply reduced investment in the oil and gas sector. Much of the purpose of transparency and disclosure of climate-related metrics is with a view to influencing these two flows. As Mr. Mark Carney has put it, “What gets measured gets managed. That's why reporting climate-related financial info is critical if we are to achieve #netzero.”
Although the inflow of capital into renewable energy does not depend on the outflow of capital from the oil and gas sector, this capital outflow is seen by many as a key component of the energy transition.
If I may, I'd like to confine my comments to the second of these; that is, the curtailing of investment in oil and gas output.
This view was given added authority in May 2021 when the International Energy Agency published “Net Zero by 2050: A Roadmap for the Global Energy Sector”. Its headline statement was “no fossil fuel exploration is required [in the net-zero scenario] and no new oil and...gas fields are required beyond those that have already been approved for development.”
The timing of this statement was strategic in that it occurred in the run‐up to the delayed Glasgow COP26 climate conference. If that conference was about anything, it was about finance. That conference, as we know, saw the formation of the Glasgow Financial Alliance for Net Zero. As Rishi Sunak, who was then chancellor of the exchequer, explained, the Glasgow Financial Alliance for Net Zero is about bringing together “financial...assets worth over $130 trillion of capital”. He went on to say, “So our third action is to rewire the entire global financial system for net zero.”
This raises an important philosophical or, perhaps, ideological question, as it implies the socialization of private savings and the deployment of private capital for public policy ends. One way around this has been to claim there is no conflict or tension between delivering public policy goals and fiduciaries' duties to maximize risk-adjusted returns for beneficiaries, because ESG investing delivers higher returns. As Wall Street has it, “doing well by doing good”.
However nice-sounding this might be, it does, however, conflict with modern portfolio theory; and earlier this year it was rejected by Tim Buckley, the chief executive of Vanguard, the world's second-largest asset manager. Buckley's words were matched by action. Vanguard also quit the net-zero asset managers initiative, part of GFANZ.
In the case of ESG investors taking up the IEA's view of no investment in new oil and gas fields, we don't have to decide that philosophical question, for the reason I will now explain.
The first thing to understand is that the IEA's view on no investment in new oil and gas fields derives from its assumption that the superiority of renewable energy reduces the demand for oil and natural gas. This assumption is reflected in the IEA's net-zero forecast of low and falling oil and gas prices. To be clear, the IEA did not advocate a path to net zero based on constraining the output of oil and gas and destroying demand through stratospheric price increases. Yet, data in the IEA net-zero pathway demonstrates the inferiority and the inefficiency of renewable energy as substitutes for oil and gas.
By 2030, the IEA says the energy transition will be employing nearly 25 million more workers and using an extra $16.5 trillion of capital to produce 7% less energy. The inefficiency of the energy transition implies a fall of 33% in energy output per employee in the energy sector—more land, labour and capital to produce less. This is the antithesis of growth economics. Indeed, the IEA's own analysis contradicts its presumption of the economic superiority of renewable energy.
In 2022, the IEA issued a warning in its “World Energy Outlook” that cutting the supply of oil and gas is not a substitute for cutting demand. It says:
Reducing fossil fuel investment in advance of, or instead of, policy action and clean energy investment to reduce energy demand would not lead to the same outcomes as in the NZE Scenario. If supply were to transition faster than demand, with a drop in fossil fuel investment preceding a surge in clean energy technologies, this would lead to much higher prices—possibly for a prolonged period—