Fed Chairs on ESG Standards

ESG Standards

Nothing says Thanksgiving like a “thank you” to the White House for nominating Jerome Powell to a second term as Federal Reserve Chair. It’s one of those situations where I’m thankful for the devil I know rather than the one that I do not. Powell is certainly dovish when it comes to monetary policy

But Lael Brainard – who was named Vice Chair – is the second-most dovish voting member on the Board of Governors. She was already voting on policy through 2023. 

The decision signals that the Federal Reserve isn’t maximally politicized just yet. Powell will have the ability to continue to taper the central bank’s massive balance sheet without any significant political influence. However, if the U.S. enters a recession, his job will be in trouble. 

Brainard Isn’t The Best for This Sector

Brainard is heavily engaged in the advocacy that the central bank should do more to fight climate change. The Fed can step in and start to embrace Environmental, Social, and Governance (ESG) standards in the financial markets. If they do, it’s going to be bad news for the energy sector in the medium term. 

The ESG standards have altered board rooms dramatically around the globe. Activist shareholders are pushing for board seats to push companies to reduce their carbon emissions and fight climate change. Yet there appears to be magical thinking that the U.S. or any nation on earth will be able to eliminate carbon-based fuels in the next 20 years. 

The entire global economy was founded on carbon-based energy. It took the global population from 1 billion people to about 8 billion in a century. So, when you talk about gutting the global economy of carbon-fuels in 20 to 30 years, it’s a lot like replacing the human circulatory system with cat food instead of oxygen-rich blood. 

The World Moves Forward with ESG Standards

In the Netherlands, a court ordered Royal Dutch Shell to cut all of its emissions by 45% in the next nine years. That’s scientifically impossible, so the company would face impossible odds. They’d cut the Dutch from their name and moved. 

It’s not just activists and courts that are creating new challenges for the oil sector.

Now, ESG has led to a spike in borrowing costs for oil and gas drillers. Despite solid credit fundamentals and strong demand, the companies are struggling to find capital. Large institutional investors are under pressure to comply with ESG demands. That’s bad news for oil companies that need money to expand production. 

This is impacting Europe already, which faces shortages of coal and natural gas. It’s impacting eastern Canada as well. It could hit Maine later this year as heating costs spike. Now, let’s go one step beyond a bond market that has distorted the oil markets. 

Imagine that the Federal Reserve – the central bank – sets mandates that drive up the cost of capital and try to politicize this matter. It could hammer the U.S. energy sector even harder. 

I listen to people dance around and claim that we can power our economy on wind and solar within a decade. They are delusional. The European continent is already facing one of the first crises created by a man-made shortage in oil and gas. It won’t be the last.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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