Among all the unpopular professions in the financial sector, short sellers are among the least loved. Sometimes, however, they are alive to dangers that are missed by the rest of the market.
Investors who sold out of Lehman Brothers in 2007 — when chief executive Dick Fuld said he wanted to tear short sellers’ hearts out — would have saved serious money. Had German regulators looked into allegations of fraud at Wirecard — instead of banning the shorting of its stock — they might have averted an epic institutional humiliation.
As vast (and urgently needed) investment floods into green assets, it’s vital that these funds should flow towards companies that can play a meaningful role in the energy transition — rather than profiteers with clever publicists. As we’ve previously written, it’s interesting to consider whether short sellers could play a constructive role on this front.
For today’s edition, Patrick and I spoke to Carson Block — one of the most prominent short sellers of recent years, who now sees ripe pickings in the hotly funded green business sector. And Kenza explains what a gas project off the Australian coast tells us about the insurance sector’s net zero efforts. See you on Friday. (Simon Mundy)
Clean energy sector ‘filled with lies and bullshit’, says Carson Block
Few prospects can be more unpleasant for a corporate leader than attracting the sustained interest of Carson Block. The founder of short-selling hedge fund Muddy Waters shot to prominence more than a decade ago by loudly — and correctly — describing the Canadian-listed Chinese timber company Sino-Forest as a fraud. A string of high-profile short bets followed, against targets ranging from then FTSE 100 healthcare company NMC Health to the French retail giant Casino and Singapore-listed commodity group Olam.
Now Block has turned to green business, having concluded that the excitement around ESG strategies is leading investors to overlook glaring problems in this space, he told us. “It’s like, ‘Hey, you’re doing renewables! We can’t ask any questions of you.’”
Block, in contrast, has started asking quite pointed questions. This summer he published a report on Sunrun, the biggest US residential solar power provider, accusing it of being an “uneconomic business” that had exaggerated the value of its customer agreements while understating future costs.
Typically, a Muddy Waters attack prompts a dramatic fall in a company’s market value. Sunrun’s shares, on the other hand, jumped nearly 30 per cent on the day Block went public with his claims, and has held on to most of those gains. Block had the “misfortune”, he told us ruefully, to publish his report just after the rebel Democratic senator Joe Manchin agreed to support a historic bill promising more than $300bn in green investment — sending Sunrun’s shares to $30.92 from $23.79. Sunrun closed at $30.47 yesterday.
Block remains adamant that Sunrun’s investors are in for nasty surprises. He claims the company has used aggressive accounting methods to overstate the cost of its solar panel installations, inflating the value of the tax credits that it sells on as a core part of its business model. He also pours scorn on its suggestion that 90 per cent of customers will renew their deal with Sunrun at the end of their 20 or 25-year contract — rather than invoke their right to have the “obsolete” old panels removed at Sunrun’s (potentially huge) expense.
Misleading practices are widespread in the US residential solar sector, Block claims, blaming an obsession with rapid growth at the expense of standards. “It’s not to say that . . . on the entire planet, there are not renewables projects that are economic. But what they’re doing by and large is not economic,” he told us.
Sunrun roundly rejected Block’s report, in a riposte that claimed, no fewer than eight times, “Muddy Waters has it wrong.”
“Our detailed response shines a light on the inaccuracies in their critiques,” Sunrun chief executive Mary Powell told us in a written statement.
The company said that the short seller’s report based some of its assumptions on a provision of the US tax code that applies to individuals, rather than to businesses such as Sunrun. It said its projects were evaluated by independent appraisers “consistent with industry best practice”. As for the renewal question, it said it had used conservative estimates that showed most customers staying with Sunrun, “similar to the realities of any customer subscription business”.
While Block admitted that his report contained an error on the tax code, he argued this had no material impact on his argument. The dangerous froth in green business, Block claims, goes far beyond Sunrun. In July, he announced a short position in Hannon Armstrong, a sustainable infrastructure investment company that has rejected Block’s claims of “effectively meaningless” accounts. And he points to his rival Hindenberg Research’s short calls on electric vehicle makers Nikola and Lordstown, each of which has seen its share price crater in the past two years.
According to Block, the trillions starting to flow into green investments have attracted a wave of opportunists, many of whom will do no good for either their investors or the planet. “Everywhere I’ve looked in this space, it’s just filled with lies, and bullshit, and people who are getting very, very wealthy on the back of that,” he told us. “It’s depressing, because these are the people who are supposed to save the planet, and . . . this isn’t going to do it.” (Simon Mundy and Patrick Temple-West)
The looming Indian Ocean headache for global insurers
More than 200km off the coast of north-western Australia, Ichthys — a liquefied natural gas project run by French energy major TotalEnergies and Japan’s Inpex — is providing a perfect test case for how seriously the insurance sector is taking the energy transition.
What makes Ichthys worth watching is its substantial expansion plan. Its annual production capacity is set to grow from 8.9mn to 9.3mn tonnes by 2024. This capacity would rise further with the drilling of a dozen new wells in a second phase of the expansion, which could keep Ichthys producing gas until at least 2060, according to intelligence firm Rystad Energy.
Yet, if the world is to reach its goal of net zero by 2050, there should be no development of new oil and gasfields, according to a highly influential report from the International Energy Agency. While it may not technically amount to a “new field”, this warning sits uncomfortably with the big expansion planned for Ichthys, which is already Australia’s second-highest emitting industrial project, according to the Clean Energy Regulator.
Ichthys’s expansion is dependent on getting backing from insurers and financiers. A document by the Supreme Court of Western Australia reveals the names of insurers who provided coverage for Ichthys’s onshore plant between 2012 and 2017, when the industry was under less pressure to act on climate change. The names of insurers for such projects is usually a closely guarded secret.
The world’s leading insurance companies all have to decide whether to insure this type of expansion in future. Paris-based NGO Reclaim Finance wrote to 16 of the European, American and Asian insurers named in the document, asking them not to support Ichthys’s expansion phase. Only one, the Australian insurer Suncorp, said it would not support Ichthys’s new development. French insurer Axa said the expansion would not fall foul of its exclusion policies. The other 14 either declined to comment or said they had not been approached to provide insurance for the expansion phase.
A lot has changed since the offshore project first started in 2012. Notably, 11 of the insurers who originally underwrote Ichthys became members of the Net-Zero Insurance Alliance, which commits them to net zero emissions in their insured and reinsured projects by 2050. It also means they must “phase down and out unabated fossil fuels”, according to accrediting body the Race to Zero, referring to projects that are not cancelled out by carbon capture or offsets.
All this comes amid a widespread reappraisal of gas investments in the middle of the energy market chaos triggered by Russia’s invasion of Ukraine. “I believe that gas will be with us for 100 years,” BlackRock’s chair Larry Fink told German newspaper Handelsblatt earlier this week, in an interview that drew criticism from green campaigners. Fink pointed out that the EU’s new taxonomy of sustainable investments includes gas plants (if they meet certain conditions).
New technologies are expected to further blur the lines of what counts as a credible transition plan for gas companies. Inpex said in August it had obtained permission to develop a carbon capture and storage unit near Ichthys, though this won’t be live until 2030. It says it is committed to a lower-carbon future and to ensuring energy security for the Asia and Oceania region.
Meanwhile, most big global insurance groups — with exceptions such as Suncorp, Swiss Re and Allianz — are not ruling out support for new oil and gasfields, focusing instead on excluding especially destructive practices such as Arctic drilling and tar sands oil production. The gaps and grey areas in insurers’ net zero policies are not likely to disappear any time soon. (Kenza Bryan)