Sectors versus speculation
National emissions targets diverge; index providers face insurrection; Aramco wants to have its cake and eat it too. Plus, with a new $1trn valuation, is Tesla really a car company anymore?
View from the top
📃 A leaked document shows a number of oil, coal and meat producing countries lobbied to change a key report on climate action. Saudi Arabia, Japan and Australia are among those asking the UN to play down the need to move away from fossil fuels.
🎯 The FT released a dashboard of 193 countries’ emissions, targets, and renewable progress. NB: Of the five largest emitters, only the US has targets below current levels. While it must be globally coordinated, the transition won’t be uniform.
🛢️ Having long resisted calls to cut oil production, Saudi Arabia joined China and Russia in committing to net zero by 2060. The state will invest $180bn to hit its goal, which hinges on "the availability of technologies to manage and reduce emissions.”
🚀 Al Gore and ex-GSAM CEO David Blood launched a private-markets asset manager to tackle climate change. Just Climate aims to limit global temperature rise to 1.5°C by “directing and scaling capital towards climate solutions.” Well timed…
🏭 CDP analysis of 16,500 funds worth $27trn reveals a mere 158 funds/0.5% assets are aligned to the Paris agreement. Taking into account Scope 3, that figure drops to 65 funds/0.2% assets. Most investments are exposed to a pathway of over 2.75°C.
🇺🇳 Consider five dimensions through which to evaluate the E + S performance of investments, says the IMP: What, Who, How Much, Contribution, Risk. Since the last two concern real-world impact, it adds, what better lens to use than the UN SDGs?
🗳️ The IMP joins a growing swell of support for SDGs as a global standard. Their adoption threatens the monopoly grip of incumbent index and data providers, who set the agenda and discourage demand for index customisation and multiplication.
🔍 ETF Stream’s comments on the “problematic” relationship between index and ratings/data providers weren’t alone this week. An explosive NBER paper suggests firms buying ratings from S&P have a higher chance of being included in the S&P 500.
📊 Data is the biggest barrier to greater ESG adoption, finds Capital Group in a survey of 1,040 global institutional and wholesale investors. Of the respondents, 53% cited lack of consistency in ESG scores, and 27%, difficulties accessing information.
🧮 While few could have predicted the popularity of ESG in 2019, greenwashing—yielded by insufficient data and regulation—has halted wider adoption. FT Adviser cites Util’s latest research as evidence there’s more work to be done on the data front.
Chart of the week: Drill, baby, drill
Of the top 20 oil & gas companies in the world, Saudi Arabia’s Aramco accounts for 50% of total market cap.* That’s bad news if market cap is any indicator of share or influence, given Aramco scores an average Util score of -75.2% on the environmental SDGs.** It’s the worst score of all 20 companies: just ahead of the US’s ConocoPhillips (-68.6%) and Chevron (-67.2%), and legions behind France’s Total (-21.6%).
Then again, in a week where a SPAC surged 400% in one day on the back of a social-media deal with Trump, it’s probably naive to read valuations as a measure of fundamental value—or, by extension, an impact multiplier. (More on that below.)
Still, with Western companies cutting production to meet targets, NYT reports their state-owned peers in the ME, Africa and LATAM are poised to gain ground: a trend fuelled by the US’s reluctance to tax carbon to reduce demand in line with supply.
Recently, JP Morgan predicted Aramco’s market share will rise to 15% by 2030 from 11% in 2020. If so, either its product lines or emissions targets will have to change.
Story of the week: Tesla’s identity problem
Soon after Saudi Aramco hit a $2trn valuation in early October, Tesla overtook a $1trn valuation on Monday, making it the first carmaker to meet the milestone.
There’s a compelling, on-brand story we could tell around the share prices of the two corporate giants: one that speaks to a shift in the global economy.
Aramco’s success is symptomatic of the post(ish)-pandemic global economic rebound, as renewed demand for transportation and trade spark a boom in oil prices that feeds directly into Aramco’s bottom line. At the same time, Tesla’s record speaks to the pace of the transition to a low-carbon economy. It broke through the $1trn mark soon after striking a deal with Hertz, which put in an order for 100,000 EVs in response to faster-than-expected shareholder and regulatory pressure.
It’s a straightforward narrative: Structural economic transition meets short-term cyclical pressures in form of booming demand for/limited supply of hydrocarbons.
No matter how convenient or true on a macro level, however, that’s not the full story.
Can an order for 100,000 cars account for a share-price jump of 12%? Does low, and falling, market share in Europe and China support a $1trn valuation? And can slow relative sales (in Q3, General Motors sold 447k cars in the US alone; Tesla sold 241k globally) justify a market cap greater than every other car company combined?
Does any of that really matter to the bulls?
Tesla, like so many stocks in that other, digital, transition, is reaping the benefits of speculation. And not necessarily the bad kind. For years, Elon Musk has tried to make EVs ubiquitous. After years of missed production targets and lost money, you can now rent a Tesla from your local Hertz. Even bears have to admit, that says something.
The current transition—that to a low-carbon economy—is coinciding with a market in which valuations are increasingly disconnected from fundamental value: a market in which you might, if you were feeling generous, argue stocks are being evaluated in terms of what they could be rather than what they are. One where automakers are tech companies; fossil fuel extractors, the renewable champions of tomorrow.
As a result, companies are being appraised in silo and in the context of macro and thematic trends, rather than relative to traditional sector or industry peers.
Tesla’s eye-watering market cap is proof the economy is moving and, apparently, the market is catching up. Investors are betting on the future and on the future of companies, disregarding traditional sector characteristics as an anchor. If the way we evaluate stocks is changing, however, the way we classify them must change, too.
As the parameters between sectors begin to blur, the ramifications for data providers and index compilers—both the ESG and regular kind—loom large.