“There’s something happening here and you don’t know what it is, do you, Mr. Jones?” Bob Dylan, Ballad of a Thin Man.
Those of you who enjoy fresh lobster for dinner are no doubt familiar with lobster logic when they’re in the pot. There isn’t any. Lobsters probably don’t notice the incremental changes in water temperature until it’s too late for them to do anything. By then, they’re cooked, a happy event for you, less so for them. In many areas of life, small incremental changes are subtle and escape attention until the trend is too far gone.
One such area, we submit, is the scientific view on climate change, although we can’t see a similar happy event for humans as when lobsters are cooked. The scientific view on anthropogenic causes of climate change is clear. There is no longer any debate, although a surprising number of non-scientists think there is. Are you one of them? Well, then……….
“You don’t need a weatherman to know which way the wind blows.” Bob Dylan, Subterranean Homesick Blues
Maybe you heard of Bob Dylan before he became famous in a Super Bowl commercial. Quoting him twice at this time is purely a coincidence.
There was an article published on the weather.com website entitled, Startling Number of Scientific Papers Disputed Human-Caused Global Warming Last Year, wherein we learned that:
“Despite searching just over a year’s worth of the scientific literature on global warming and climate change, one man’s exhaustive search could turn up only a single paper that dissented from the consensus view on the human causes of global warming.
That search was made by James Powell, a retired geology professor and former college president turned science historian who also served for 12 years on the National Science Board, to which he was appointed by Presidents Ronald Reagan and George H.W. Bush….
“If scientists allegedly disagree about it … then we should find the evidence for it in the peer-reviewed literature,” he explained. “It’s a little bit like what people say in a courtroom: You can say anything that you can get away with, but when it comes right down to it what really counts is the evidence.”
AAA readers will appreciate that peer review approval in the scientific community is rather akin to audited corporate financials. Financial fraud in your investment portfolios can ruin your whole day. If you, dear reader, have an “unaudited” view of the scientific consensus on climate change and are investing based on that unaudited view, should you be equally worried? That’s really your call.
A Brief Stroll through the World of Climate-related Investing
On January 15, the “2014 Investor Summit on Climate Risk: Financing the Clean Energy Future” was held at the United Nations in New York City and attracted over 500 institutional investors. Attention to the speakers, topics and participants gives a lot of insight into the world view of portfolio managers managing in line with the scientific consensus.
Speakers and topics included:
- Risky Business: the Cost of Inaction, moderated by Mindy Lubber, Director, Investor Network on Climate Risk. Panelists included Robert Rubin, former Secretary of the Treasury and Tom Steyer, Farallon Capital Management founder and president of Nextgen Climate Action
- The Future Is Now: Closing the Clean Energy Investment Gap, moderated by Jack Ehnes, CEO of CalSTRS. Panelists included Lisa Carnoy, Global Capital Markets Head for B of A Merrill Lynch; Mark Fulton, Founding Partner, Energy Transition Advisors; and Michael Liebreich, ceo Bloomberg New Energy Finance
- Resiliency and Risk: Addressing Climate Change as a Business Imperative. Speaker: J. Eric Smith, President and CEO, Swiss Re Americas
- Stranded Assets Risk: The Future of Fossil Fuels in a Low Carbon Future, moderated by Jeremy Leggett, Chairman, Carbon Tracker. Panelists included Nick Robins, Head of HSBC Climate Change Centre of Excellence; Anne Simpson, Senior Portfolio Manager, CalPERS.
- Investing Globally in Climate and Clean Energy Solutions, moderated by Jane Ambachtsheer, Partner, Mercer Investments. Panelists included Donald MacDonald, Trustee Director BT Pension Scheme and Chairman of Institutional Investors Group on Climate Change; Frank Pegan, CEO, Catholic Super; Cecilia Reyes, CIO, Zurich Insurance Group.
There are at least a couple of takeaways from this listing. The first is that climate change is a mainstream, not a fringe, investment topic. The preponderance of insurers paying close attention speaks volumes, since they are the ones on the front lines of managing the financial risks associated with climate change.
The second is that there are potentially significant risks to fossil fuel portfolios, and that those risks will probably run along parallel tracks with popular acceptance of the established scientific consensus on climate change. Carbontracker is a useful resource for understanding the research being done on stranded asset risks.
As we look further into the current scientific view of the future, some other novel ideas emerge, like climate departure, as explained in the Washington Post:
“Climate scientists sometimes talk about something called climate departure as a way of measuring when climate change has really changed things. It’s the moment when average temperatures, either in a specific location or worldwide, become so impacted by climate change that the old climate is left behind. It’s a sort of tipping point. And a lot of cities are scheduled to hit one very soon.
A city hits climate departure when the average temperature of its coolest year from then on is projected to be warmer than the average temperature of its hottest year between 1960 and 2005. For example, let’s say the climate departure point for D.C. is 2047 (which it is). After 2047, even D.C.’s coldest year will still be hotter than any year from before 2005. Put another way, every single year after 2047 will be hotter than D.C.’s hottest year on record from 1860 to 2005. It’s the moment when the old “normal” is really gone.
A big study just published in the scientific journal Nature projected that the Earth, overall, passes climate departure in 2047…..Christopher Field, who directs the Department of Global Ecology at the Carnegie Institution for Science, has said, ”The boundary of passing from the climate of the past to the climate of the future really happens surprisingly soon.”
Climate scientists are no longer debating if. The discussion centers on where, and how bad the effects might be. Climate departure is expected before 2030 in Lagos, Jamaica, Singapore and Jakarta. And not long after in Mumbai. Google’s entire corporate lifespan is now longer than the amount of time until the first world cities are expected to begin experiencing climate departure. Not many people will now admit even to remembering a world that didn’t have Google.
Those of you who trade based on charts will appreciate that climate departure, as described, is really a major breakout on the global temperature chart.
Of Tipping Points
Malcolm Gladwell has written: “The tipping point is that magic moment when an idea, trend, or social behavior crosses a threshold, tips, and spreads like wildfire.” There are a couple of tipping points related to climate change. The first tipping point is the point at which material climate change becomes inevitable. Unfortunately, climate scientists would likely argue that the tipping point has been passed, and that we are now fighting a rearguard action against the worst effects.
The second tipping point is, for purposes of this article, the point at which climate change becomes a primary, not secondary, influence on investor behavior. It’s clear that this second tipping point has not yet been reached. But most savvy investors know that the markets discount future events well in advance. There is already not-so-anecdotal evidence of the effects of climate change on some real estate values. One or two well-placed storms could be all it takes to create significant upward and downward revaluations related to climate change. As the disruptive effects of climate change are better understood by non-scientists, one could imagine annual reports and 10-K’s which include sections on climate change risks on companies’ business prospects and climate effect analysts becoming required staff for most investment institutions.
When you stand within the scientific consensus and view the investment landscape, many of your investment assumptions will change dramatically, as will your portfolio decisions. And, we believe, you will have a competitive advantage over those who are more lobster-like in their investment approach. Climate is a macro factor that will have all-pervasive effects on virtually every industry, with special influences on real estate, food production, energy and insurance, just to name a few. And it’s now the wild card in every investment portfolio.