ESG Now Means Bullets and Oil

The Sunday Essay ☕️

Three years ago, when I was interviewing public company CEOs, I would get a common request before we hit record, “Make sure you ask me about our ESG strategies.”

ESG, or Environmental, Social and Governance, was the future of responsible commerce. 

Every public-facing CEO believed that in order to convince the public the support them (give them money), they needed to prove their actual mission was to make the world a better place - money came second to doing the “right thing” (there is some fantastic irony there.)

Values-driven organizations owned the day. When the economy is good, debt is cheap, and markets rally, everyone has time to posture and signal how virtuous they are. 

But as the world has become less certain, investors have been asking questions that previously had been overlooked.

Granted, politicians and CEOs of the 2020s can promise anything for the 2040s, and bold statements of carbon emission cuts and clean power did what they were supposed to do - win near-term votes on promises that someone else would have to keep.

But recently, investors have begun to get their calculators out and ask questions about the viability. For example, by 2040, electric vehicles and batteries are estimated to consume in 3.3 million pounds of nickel per year in a world that presently only produces 2.8 million pounds (while production is declining).

Similar spreads exist through copper, lithium, cobalt, steel and critical energy metals. Investors who historically built their portfolios by betting on the low emissions companies of the future have realized that we lack the required material to turn these dreams to reality.

This is old news to my readers. But now Mainstreet is catching on:

• The S&P Global Clean Energy Index has fallen 12% over the last three years and 30% year-to-date.

• Today, 63% of investors claim they are “not convinced by ESG claims from funds”, up from 48% in 2021.

• August 2023 saw a record $547 million of outflows from the Responsible Investment category - amplifying a multi-month trend.

Don’t take this as investor skepticism - it is investor realism - it’s healthy.

Everyone agrees that a future with sustainable habitat conservation and reduced pollution is a target to embrace. But every entrepreneur knows that setting goals is the fun part - executing the action plan is the important part.

We’ve entered the important part.

In order for ESG promises to materialize, the expectations have to be realistic. And this is where we separate the real from the woke. It is easy to point fingers and condemn; it is much harder to create productive solutions.

In our newly uncertain world, an unavoidable characteristic of human nature is floating to the surface: When the incentives change, our opinions change.

War, energy security and resource scarcity will redefine what we consider a “social good.”

Following a decade of condemning investment in the energy industry, we’ve entered a decade of global instability and conflict.

It's a sticky situation.

Russia, a country that Former Canadian Prime Minister Stephen Harper described as a “gas station run by the mafia” (his words), has weaponized its energy sector.

They’ve applied export limits on diesel and gas and agreed to massive price cuts for special friends (China will have access to Russian gas at 50% of the cost of Europe this winter). It is probable that we will see similar posturing in the Middle East over the next few months.

The geopolitical chess board is being shaken up - new friendships will be bought and sold.

The United States, while suddenly (and urgently) lifting sanctions on Venezuela in an attempt to revitalize its oil industry, has been starving its own energy producers of capital. As a consequence, the Permian Basin, the only significant source of domestic oil production growth over the last 12 years, has entered its sunset days and is in decline.

America and Europe have been busy shutting down nuclear power plants, yet today, the price of nuclear fuel, Uranium, has bolted in response to energy insecurity. As legendary commodity investor Rick Rule has said from my stage many times, when it comes to Uranium, “Either the price goes up, or the lights go out - which do you think is more likely?”

In a world of political instability and resource scarcity, securing energy for your citizens absolutely qualifies as a “social good.”

So does defence…

President Biden is taking a lot of heat for draining the strategic petroleum reserve in 2022, but he also drained a lesser-known reserve that will now bite…

Established in the 1980s, the War Reserve Stockpile was a US-made arms depot, which, according to the JINSA (Jewish Institute for National Security of America) website, “is intended as a readily-accessible reserve – an insurance policy – for Israel to obtain vital munitions in wartime.”

Unfortunately, last April, officials in Israel began raising fruitless concerns about the dwindling stockpile of US munitions stored in the country as Washington was quietly shipping the armament via the Port of Ashdod to Ukraine.

A strategic weapons storage for a Middle East conflict, conveniently located in Israel, but inconveniently drained in order to support Ukraine.

The United States currently produces 28,000 shells per month. Ukraine is currently firing 4000-7000 shells per day. Back to the math of nickel and electric cars, it’s time to get the calculators out.

In early September, the Pentagon stated a goal of increasing production to 100,000 monthly shells by 2025. This was before the new Middle East conflict was added to the accountability list.

This is the evolution of ESG - it is now a social good to invest in domestic energy production, in the raw materials sectors - and I don’t think it’s a stretch, but in defence and security.

Whether bullets or batteries - the lack of supply will continue to trigger rising prices, and a wave of capitalists will rush to finance the gap.

The importance of raw materials, metals and energy has never been more important than it is right now.

It has also never been more important to pray for peace, vote sensibly, and invest wisely.

If you are interested in learning the fundamentals of commodity investing, with a special focus on the metals sector, you will love The Commodity University - a ten-chapter course taught by myself that covers the basic definitions, supply and demand factors, economic indicators, and portfolio construction.

Check out the Commodity University HERE.

Now, on to the portfolio…