(Bloomberg) — One of the most controversial investment strategies on Wall Street would look a lot less fraught right now if its defenders had been more dovish from the start, according to Kyle Bass.
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The hedge fund veteran and founder of Hayman Capital Management says the backlash against environmental, social and governance investments in recent years is largely due to climate activists’ demands for fossil fuels to be abandoned here and now. As a proposition, that was never sustainable or even responsible, he says.
“You had all these idiots saying, if somebody’s producing hydrocarbons, we’re not going to let them do business with you or receive capital,” Bass said in an interview. “And so Texas hit back and said, if you’re going to let somebody who’s producing hydrocarbons do business with you, we’re not going to let them do business with you.”
It’s a line of argument that goes to the heart of an increasingly intractable standoff between much of Wall Street and the climate movement. A recent example is the months-long campaign outside Citigroup Inc.’s Manhattan headquarters, where tense confrontations between bankers and protesters have taken place.
Protest organizers have stoked enthusiasm with slogans like “Hot People Hate Wall Street” and “Eat the Rich.” So far, dialogue has been limited, with neither side making any significant concessions.
Bass, who has spoken out on behalf of agendas on multiple sides of the American political spectrum, ranging from tariffs on China to abortion rights, is the latest in an increasingly vocal list of financial professionals who characterize such climate activism as naïve. Others who have made similar points include KKR & Co. co-founder Henry Kravis, as well as JPMorgan Chase & Co. and Goldman Sachs Group Inc. CEOs Jamie Dimon and David Solomon.
“Energy transitions take 40 or 50 years,” Bass said. There are people who “think we can just turn off hydrocarbons and turn on alternative energy. But they have no idea how the grid works and they have no idea how business works.”
The focus now should be on energy efficiency and electrification, with a full transition to nuclear power in the long term, he said. Until then, it is more realistic to accept that fossil fuels and renewables “will coexist for decades and decades to come,” Bass said.
Many Wall Street firms that initially signed up for net zero alliances have since become targets of bans in Republican states targeting companies seen as hostile to fossil fuels. Those same companies are now becoming more vocal in their support of oil and gas clients.
“Bypassing hydrocarbons is like bringing politics into investing,” Bass said. “If you’re willing to give up returns, then so be it. But I think that’s naive and a breach of fiduciary duty.”
Texas, where Bass is based, passed two laws in 2021 that limit government contracts with companies that take what state officials see as punitive measures against the fossil fuel and firearms industries. The legislation, now being challenged in court, has prompted state officials to impose restrictions on financial firms including Citigroup, Barclays Plc and BlackRock Inc.
The Sunrise Project, a nonprofit focused on the financial sector’s contribution to global warming, says such legislation is a bad-faith attempt to “punish financial services providers for managing investment risk.” The group points to evidence that laws like the one in Texas ultimately cost taxpayers money.
At the same time, climate scientists warn that the planet is reaching dangerous tipping points as rising emissions fuel increasingly deadly floods, wildfires and droughts. The continued financing of fossil fuels that directly contribute to those emissions is contributing to climate catastrophe and must be urgently reversed, they say.
Meanwhile, regulators in Europe, which has the world’s largest ESG investing rulebook, are adapting their stance. A comprehensive overhaul of existing regulations is now underway with a view to allowing a less absolutist stance on fossil fuels. In essence, investors who can demonstrate that they are helping a company with a large carbon footprint transition to a greener future will likely be able to call it an ESG strategy.
ESG investors have already begun to adjust their strategies to meet expectations that regulations will be more accommodating to the fossil fuel sector. A recent survey by Goldman Sachs analysts found that ESG funds now have more exposure to the oil and gas industry than they did a year ago.
According to a team of Goldman analysts including Evan Tylenda and Grace Chen, changes to ESG regulations in Europe “could fuel flows toward companies that have traditionally been excluded.”
Meanwhile, Bass is adapting to a greener future by specifically targeting investment projects that protect the natural environment. Since 2021, he has been buying land through his private equity firm Conservation Equity Management, with the goal of protecting forests from overexploitation and monetizing ecologically fragile habitats.
Bass, who rose to fame after successfully betting against U.S. subprime mortgages during the 2008 financial crisis, says there is clear opportunity to make money in conservation. In fact, he says he sees enough demand from outside investors to expand his strategy.
“We’re focused on mitigating or offsetting physical impacts on the environment,” Bass said. “And we’re going to make a pretty penny doing it.”
Part of Bass’ business is generating so-called mitigation bank loans, which are tradable units that companies that are legally obligated to offset their environmental impact can buy.
Whether it’s renewable energy developers or oil producers, companies still have to compensate for the damage they cause to the environment, Bass said.
Ultimately, Texans’ support for fossil fuel producers has “only made things better” for investment strategies like his, which are tied to the sale of offsets, Bass said.
–With assistance from Lisa Pham.
(Adds ESG fund flow data after 13th paragraph.)
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