In our last Quarterly Letter, one of the topics we examined was the ESG movement and its effects on the energy sector. After we published the Letter, we came upon an article called ESG Is Creating A Moat For Coalers (authored by Capitalist Exploits, August 2021 in Insider Weekly #211) in which they reference two Bloomberg articles: one from 6/10/2021 called Sky-High Coal Prices Won’t Spur New Mines in a Greener World,’ and one from 8/3/2021 called BlackRock Joins Citi To Study Plan To Close Coal Plants Early. We have excerpted part of the Capitalist Exploits article, and we provide our commentary afterward: ESG IS CREATING A MOAT FOR COALERS “You would think that all this ESG stuff was a really bad thing for coal miners. But it isn’t. Not if you understand what is happening. “Au-contraire, the ESG movement has made it a wonderful time to be an investor in coal miners. “The reason is that the ESG movement has created significant impediments towards supply [as referenced in the following Bloomberg News article from 6/10/2021]: From the article: “The highest coal prices in years aren’t enough to spur investment in new mines in the face of heightened efforts by governments and financial institutions to get the world to abandon the dirtiest fossil fuel. Prices are surging from China to Europe as demand for coal rebounds from a virus-induced hit, and temporary mine outages curtail supply. Yet companies remain hesitant to invest in new projects with financing difficult to come by and question marks over long-term demand.” “Unwittingly the ESG delusion has created an economic moat around existing coal miners. Let me ask you this. How many new entrants are there into the coal mining sector? Do you hear of existing miners raising capital to develop new mines? None and no. “Yet the world won’t be able to get away from its dependency on coal in any meaningful fashion. Wow, what a time to be investing in “dirty” coal mines! In case you missed it… “Another relevant article headline: “This can and will quickly become geopolitical and the question is this: can BlackRock, Citi, Prudential, HSBC, and their other ‘woke’ mates decide the fate of nations? The answer we believe is clearly, yes. And no. They are already affecting the fate of nations. Witness Canada and all of Western Europe. “Will they do the same to China? Will they do the same to Russia? The answer to that will only be fully revealed in the due course of time, but we don’t really need any crystal balls here as we just watch actions, not words. From the above article: “China put 38.4 gigawatts (GW) of new coal-fired power capacity into operation in 2020, according to new international research, more than three times the amount built elsewhere around the world and potentially undermining its short-term climate goals. Nearly all of the 60 new coal plants planned across Eurasia, South America and Africa — 70 gigawatts of coal power in all — are financed almost exclusively by Chinese banks” The rest of the article is a bit of a rant, but it is another illustration of how the environmental movement, through financial entities using ESG criteria, are pursuing a political / social agenda [the extinction of coal usage] regardless of the economic costs, which are not only proving to be large and much more significant than thought, but impact disproportionately lower income individuals, whose budgets are crimped by higher energy costs [electric bills have risen because higher coal costs generate more costly electricity]. We are for a cleaner environment and thoughtful use of as much renewable energy as can be tolerated. But the US economy (and world economies) must be able to function as efficiently as possible, meaning being powered by economical energy costs. The US as a whole has already proven it can have an efficient economy AND reduce both pollution and greenhouse gases – carbon production in the US is down over 10% since 2005 while fossil fuel usage is higher. The natural variability of the weather (and having nothing to do with climate change) requires reliable supply of electricity – the baseload, most reliable kind currently supplied by fossil fuel-powered generating equipment. Only when reliable, baseload replacement generation is found to be as or more efficient than current fossil fuel powered generation, should current generation facilities and technologies be retired. We are not even close to being there yet, so retiring plants for political and social purposes only seems to make our electric generation capabilities less reliable and thus, ultimately, more costly to everyone, AND making electric grid managers call on fossil fuel plants ultimately anyway. Let’s try and be more rational and economic about our electric generation and grid planning and management; it will help to start by leaving the social and political causes to later in the process. The Managers of Kanos Capital Management © 2021 by Kanos Capital Management, LLC All rights reserved.