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Why hate investors? (…it’s not their fault.)

15 March 2023

28th February 2023

Today’s Bloomberg Green Daily attacks the Net-Zero Banking Alliance in no uncertain terms.  “Still big on Big Oil” is the headline of the article.  The substance can be inferred.  All the evidence shows that the majority of the signatories to the NZBA are falling short of their commitments to shift the balance of their lending and investment from fossil fuels to renewables, the target ratio being 4 of the former to every 1 of the latter.

As Bloomberg tells us, at the end of 2021, their average ratio was 0.92 to 1.

The article in question is neither shrill nor strident in its tone, but it is nonetheless quite clear.  It attributes blame to the Banks for this failure, because the Banks in question had a choice.  They could have invested in a different ratio, closer to the target.  They chose not to.  (With some notable exceptions.  NatWest exceeded the target with a ratio of 5.5 to 1.  But their performance only serves to support the case Bloomberg is making that the Banks are to blame for this failure.)

When the issue bears on the future of the human race on the planet, the collective responsibility of the Net-Zero Banking Alliance to maintain its commitments does become a matter for criticism.  

Business: serving the community or doing a disservice?

But blame?  This misunderstands the role of business, money and investment.  Most of all, it misunderstands the psychology of the role undertaken by those who make the investment decisions.  Lest this sound like an elementary lesson in economics, remember that it is the psychology of this that really needs to be studied, not the economics.

Let’s start with the elementary economics.  The role of business is to serve the community.  Businesses have an organic life of their own, which, if it starts to threaten the interests of the community, tend to be regulated and sometimes eliminated.  The community has all sorts of levers to prevent business from exploiting a gullible society, which are error-prone and sometimes fail, but their purpose is clear.  Laws against monopolies, taxes on unhealthy products, limits on market exposure, and barriers to promotion, as well as outright bans on the sale of certain goods, are all familiar to all of us.  There are many other means of control at the disposal of those representing the community, designed to ensure that businesses do serve the interests of the community.

The role of money is to facilitate the exchange of the goods and services provided by the businesses, without which we would rely on barter.  If money did not exist, we would need to barter something in exchange for another thing, or a service in exchange for another service, or a thing in exchange for a service.  Barter economies are far from unworthy, and can still be found in remote rural communities.  But they became difficult as populations became more urban, and remote from the production of all the staples required for life, which caused the development of national and then international monetary systems in the 18th and 19th centuries. 

 

John Law, 21st April 1671-21 March 1729, was a Scottish economist who distinguished money as a means of exchange, from national wealth dependent on trade.  In 1716, Law set up a private Banque Générale in France. A year later it was nationalised at his request and renamed as Banque Royale. The private bank had been funded mainly by John Law and Louis XV; three-quarters of its capital consisted of government bills and government-accepted notes, effectively making it the nation’s first central bank.

So once again money exists, as business does, to serve the community.

And so the role of money used as a means of acquiring a part of a business – investment, in other words – is simple to understand.  It completes the circle.  If business serves the community and money serves the community, the role of money when applied to help the business is obviously also intended to serve the community.  If investment helps the business in question, which is serving the community, the investment itself is serving the community.

This basic view of the economics of investment would seem, at first glance, to reinforce the conclusion that the Net-Zero Banking Alliance is defeating its contract to serve society by doing something that runs counter to the interests of the community.  By investing more in “Big Oil” than in renewables, it increases the rate of climate change and the degree of harm it will do and is already doing to our global community.

It is not serving the community, it is doing the community a disservice.

 

But this completely ignores the psychology of investment.  Banks, like other professional investment operations, are themselves businesses.  In other words, they are subject to the same regulation and oversight by the community.  The psychology of a Bank is the same as that of any other business.  It is made up of a number of employees who are required to satisfy their bosses, their bosses are required to satisfy their Board, their Board is required to satisfy their shareholders; and the shareholders have to satisfy the community.  When this chain is broken at any point, the business itself is threatened.  It will often fail, when this happens.

But until this happens, it will not fail.

Don’t hate the investors

This must lead to a different conclusion to Bloomberg.  If, as we see, the NZBA is ignoring its pledge with regard to Big Oil and Renewables, it is doing so for a reason.  It will feel that it is doing the right thing in terms of its obligation to society.  If, to continue the logic, it is doing so and not being punished for breaking the chain of responsibility, similarly, it follows that it is continuing to serve its obligation to society by doing this.

However, the psychology that lies beneath Bloomberg’s apparently shocking exposure is much the most important consideration in understanding how we are in this situation, and why this paradox is not a paradox at all.  The people who are doing this are just like us.  They inhabit the same world as us, they eat the same food, use the same shops, tread the same pavements.  They take their children to the same schools, the same libraries, the same cinemas.

They are people.  Like us, they can see climate change coming.  They may have been in London when it reached the hottest temperatures in London’s recorded history.  They might have found it difficult to sleep that night in the sweltering heat.  They might have worried about their children drinking enough liquid.

In other words, the people who are making these investments are as aware as the writer for Bloomberg, and you and me, of the dangers that Oil & Gas companies threaten all of us with, including them.  Investment in Oil & Gas companies is damaging the investors, as well as the rest of us.

But they have a situation of their own to consider.  They are reporting to bosses, who report to a Board, which reports to shareholders, all of whom sanction this.  Indeed, their job specification requires them to do it.

But look beyond why the companies corporately mandate their employees to make these investments and loans.  They are following the lead of Government, representing the society of which they are a part, which has endorsed the continuation of Oil & Gas investment; it has increased subsidies to the fossil fuel industry; UK Government has, in fact, just cleared the way for a new coal mine to be created in Cumbria.

These corporate entities are not making decisions based on their own choice of the most profitable route for investment.  They are making the decisions based on Government direction and policy.

It is not fair to see investment as a force for harm, and investors as being to blame, people we should hate.  Investment is a force for good, indeed, it can only be a force for good in a world where society has the means at its disposal to decide whether the investee companies receiving investment survive or are pushed to the wall.

Unfortunately, there is another aspect to the psychology of this relationship.  Its complexity and its remoteness from the day-to-day lives of the community mean that ordinary people feel powerless to make any difference without the most extreme protests.  (Some have more charm than others.  Who remembers the Campaign for Real Ale – CAMRA – which forced the big brewers in the 1970’s and 80’s to give drinkers in England the beer they wanted, not the beer the brewers wanted?  It is still a good example of how society can get what it wants when it stands up for itself.)

But this is not all.  The politicians themselves are also gripped by a sense that business is bigger than Government, which means policy will sometimes be made in the interests of big business rather than society.  The US is especially prone to this problem, Presidents being beholden to business interests that funded their campaign and will fund their re-election.  The UK has been heading that way for some time.  When Margaret Thatcher, a legendary opponent of cigarettes, raised tax on a packet of 20 by 50p in her first budget, UK sales dropped more than at any other time in the history of the UK market prior to that.  She was lobbied by the Tobacco industry so effectively that she changed the Minister responsible from an anti-smoking hawk to a dove and never again made a material change to the price of cigarettes.

Our psychology conditions which way we travel on these issues, the psychology of society, the psychology of its servants in business, the psychology of its representatives in Government.  Bloomberg might seek to blame the Net-Zero Banking Alliance.  But don’t hate the investors.  They are doing what they are told.  And they are being told to do it by you and me.

 

Nick

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