An Exxon Mobil green bond? Don’t laugh
Rather than rail at Big Oil for polluting, financial lenders should consider incentivizing them with creative green financing opportunities
‘I’m shocked - shocked! - to find that gambling is going on in here!,’ Capt. Louis Renault, right, played by Claude Rains, tells Rick Blaine, played by Humphrey Bogart, in the 1943 film Casablanca.
(Mark Hulbert, an author and longtime investment columnist, is the founder of the Hulbert Financial Digest; his Hulbert Ratings audits investment newsletter returns.)
CHAPEL HILL, N.C. (Callaway Climate Insights) — Are you shocked — shocked! — to discover that gambling is going on in the casino?
I was reminded of this classic line from the movie Casablanca by some of the reactions earlier this week to the release of internal Exxon Mobil Corp. (XOM) projections that the company’s already-huge greenhouse gas emissions would grow by 17% by 2025. Those projections in fact revealed nothing that we didn’t already know.
What we already knew, of course, was that Exxon Mobil is a huge producer of greenhouse gases and has steadfastly refused to extend much more than diplomatic recognition to efforts to reduce those missions. And though the company is definitely the bad boy in this debate, it would appear that at least some of Exxon Mobil’s competitors are guilty of the same behavior — and yet don’t suffer from as much bad publicity.
Consider those oil and gas companies that have endeared themselves to some environmentalists by publicly committing to be carbon neutral at some point many years in the future — 2040 or 2050, for example.
Kathy Mulvey, accountability campaign director in the Climate and Energy Program of the Union of Concerned Scientists, is cynical. In an interview, she pointed out that some of these competitors have conceded that, despite their goal of eventually being carbon neutral, their GHG emissions over the next several years will likely grow. How are they different than Exxon Mobil?
I ask not because I wish to defend the company. I do not.
My point instead is that, instead of reacting in mock horror to what they already knew about Exxon Mobil, climate-focused investors might do better to recognize that now could be a good opportunity to influence the company’s behavior.
More on that in a minute.
The reason that the Exxon Mobil projections were old news is that they reflected what had been put in place in 2018. That’s when the company adopted a seven-year strategic plan to invest in increased oil and gas production, with the goal of doubling its earnings by 2025. The projections released this week reflect the likely growth in the company’s GHG emissions if that seven-year plan is achieved.
That’s a big if, since Exxon Mobil is far from being on track to meet its earnings goal. The company’s earnings per share in calendar 2019 were half those of 2018, and its 2020 EPS will almost certainly be an outright loss.
The company’s stock is down 48% so far this year, even with dividends reinvested, versus a 7.4% gain for the S&P 500.
In perhaps the ultimate blow to the company’s ego, earlier this year it was removed as one of the component stocks in that bluest of blue-chip stock market benchmarks, the Dow Jones Industrial Average. A further blow to the company’s image would be cutting its dividend. Investors recently have let Exxon Mobil stock’s yield rise to over 10%, an implicit bet that it will soon could be cut.
A financial lifeline?
Clearly, the company is hurting right now. Might Exxon Mobil therefore be a company for which climate-friendly investors could make a difference by extending financing at favorable terms?
I referred in general to this possibility in my column two weeks ago, you may recall.
I argued then that socially responsible investors can maximize their impact by focusing on companies that wouldn’t necessarily go green on their own — but which just might if plentiful and cheap financing were made available for that purpose (via investment vehicles such as a green bond).
I readily concede this is a long shot in the case of Exxon Mobil. Most environmentalists consider the company to be a lost cause, with this week’s revelations yet more evidence of the company’s intransigence.
Yet Martin Oehmke, the finance professor at the London School of Economics who was one of the co-authors of the research on which that two-weeks-ago column was based, said in an email: “If it is possible to push Exxon Mobil towards industry leaders (in terms of carbon neutrality), then this is something that socially responsible investors should focus on.”
To be sure, it’s impossible to know for sure whether Exxon Mobil can be pushed. But we do know that it’s worth the effort. The company is one of the biggest global emitters of greenhouse gases, either directly through its own operations or indirectly from those who burn the fuel the company sells. An even modest reduction in the company’s total could very well benefit the climate more than most other actions you can take as investors.
And we also know what isn’t working: The dual strategy of divestment coupled with suing them. To even consider the possibility of changing ExxonMobil’s behavior through our investments, we have to be willing to overcome our preference for investment purity and instead invest in a company that many environmentalists consider to be the financial equivalent of Voldemort.
There is no shortage of energy-related investments the company could profitably pursue, according to Paula DiPerna, a special adviser to carbon data tracking firm CDP. In an interview, DiPerna said that fossil fuel companies have more climate-related investment opportunities than climate-related financial risks. She based this fascinating assertion on the responses CDP has received to the firm’s annual request for companies’ climate data.
What’s holding oil companies back is either the absence of sufficient cheap capital or a failure of imagination. The green bond is perhaps the most straightforward way of addressing the former (and hopefully influencing the latter). With such debt, a corporation secures investment capital in return for a commitment to use the proceeds for a climate- and environmentally-friendly project. Companies are incentivized to pursue such projects because green bonds can be issued at a lower yield than otherwise comparable debt that does not have such a commitment.
Needless to say, we need to pool our investment dollars in order to have a big-enough sum that could interest a giant corporation such as Exxon Mobil.
So one thing we can do is urge the socially responsible mutual funds in which we invest to let the company know that there is serious interest in an Exxon Mobil green bond.
A more general step we can take is to favor funds that invest in green bonds generally, since ample financing for such bonds has the potential of getting noticed by corporate chief financial officers. The largest U.S. open-end fund focusing on these bonds is the Calvert Green Bond Fund (CGAFX), with $611 million in assets under management.
The largest green bond ETF in this space is the iShares Global Green Bond ETF (BGRN), with $105 million in AUM.