How can we invest to beat climate change?
Is there any clear way we can beat climate change? We who inhabit the world of investment have spent our lives assuming that well-calibrated investment will fuel a healthy economy, and that a healthy economy will maintain prosperous populations and communities.
Of course, you will point out, this is often far from the case. The Great Depression in the 1930’s, recession in the 1970’s, the 2008 financial crash. These are more than fluctuations oscillating around a stable norm. But you can equally clearly see that in each case, well-calibrated investment was notably absent in the build-up to these economic and social catastrophes.
Now we can see another catastrophe looming. It is at a desperate stage, when even the politicians admit defeat, if only partially. COP26 was the much-heralded conference to solve the problem. But this is what one of the most respected commentators, Sarah Roberts of Practical Action, despairingly concluded:
In the run up to the COP the latest science declared a code red for humanity but the outcomes of COP fell way below what is required to move us onto a path that limits global warming to 1.5 degrees, critical for a viable future. Even if 100 per cent of the commitments made at Glasgow are met, we are still on a trajectory for at least 2.4 degree warming, which would be catastrophic… Outcomes from COP 26 were nowhere near good enough.
The build-up to COP27 has already started, although it is not due until November. In theory, we could put right the failures of COP26.
But can we? Do we know how? All the signs are that, in spite of the defiant rhetoric, we do not really know how. When you examine the practical reality across the whole spectrum of our economic and industrial machinery, the scale of the challenge is overwhelming. There is so much of it, and in some areas, so little work has been done to address the gathering crisis.
This is the problem for the investment community. When the political bodies responsible for governing our economy are stuck for the answer, then the investment community which pumps the lifeblood of economic activity into the body of our system has little chance of investing its money into the right solutions.
Just how bad the uncertainty of the Government really is regarding Climate Change was cruelly exposed on 30th June, when the Climate Change Committee launched its latest progress report. This report is blisteringly critical of the current UK Government. Although acknowledging the achievement of the Net Zero Strategy introduced last October, shortly before hosting COP26 in Glasgow, the report shows how subsequent policy introductions will only deliver 50% of the strategy.
As is emphasised by the Climate Change Committee, the urgency is now a matter of desperation. The Government has to realise that the timing for its plans cannot be set by Government. The timing is set by Climate Change. It is outside their control.
But the scale of the problem is immense. The transformation to an industrial economy took our world more than a century. The industrial loom, the steam train, the internal combustion engine, did not spring from the minds of their inventors fully formed. They were conceived, developed experimentally, tentatively expanded, improved, redeveloped, refined until reaching industrial production levels over decades. Henry Ford did not invent the modern car. He invented something which none of us would want to drive now.
These developments relied on strings of sequential interrelated innovations, which each improved aspects of the system, by integrating within it.
We have not got time for that. Yet it is the only reliable means of stimulating effective system change to transition the entire global economy from the hydro-carbon dependency of the industrial system created over the last century and more into a non-hydro-carbon dependency.
How can investors use their money to make that happen?
Clarity is the answer. As investors, we must be absolutely clear about the outcomes we are seeking as a result of our investments. Clarity requires intellectual rigour, remorseless scrutiny, a determination to understand, to expose fallacies or fumbling, and to steer a course relentlessly towards the future we all need.
There is a method within our grasp that can achieve this. We must always, first and foremost, examine the carbon effect of those companies in which we invest. Do they reduce carbon emissions, or other GHG emissions? Do they remove carbon from the atmosphere?
Why is this so important? Because carbon concentrations in the atmosphere are the cause of global warming, which in turn is causing the climate to change. In the end, it really is as simple as that. ; it requires eco-system regeneration as a result of biodiversity recovery; it requires consumption reform as a result of improved dietary practice. And so it goes on until you have covered every aspect of our lives.
All these things require investment, because they require innovation. They need innovation now. The next decade is not good enough, let alone the next century.
Which brings us back to Sarah Roberts. If she is right, and all the science confirms it, we are heading for something closer to 2.5 degrees rise rather than 1.5 (which is a certainty now). 2.5 is going to create horrific consequences, especially for the poor and vulnerable communities around the world.
As well as addressing carbon emissions and concentration, we also need to learn to adapt ourselves to live with the consequences of the Climate Change that is already happening. This too requires innovation, which in turn needs investment.
Once again, the solution to the investor’s questions is clarity. We must be clear about the potential benefits that innovations might bring to the task of adaptation in the face of the extremes of heat and cold never before experienced in parts of the world which will be worst affected, before we decide to invest.
None of this is easy. But it is all incredibly urgent, and there is a considerable amount of money available for it. Investment appetites and trends are going to suffer in the coming months and years as a consequence of the battering the global economy is taking, primarily from the escalation in energy costs, secondarily from the materials and supply shortages caused when the pandemic closed down almost all production around the world.
But investment in the fight against climate change will not suffer. Money will continue to be made available for this, because we can see it so clearly under our nose. Clarity, again, is the key to this. Mercifully, the nature and scale of the problem is now clear to us, in spite of attempts as recently as 2016 by the President of the US to deny its existence.
We must all become advocates of a new and more determined approach in the investment world. If we act together, it is possible that we can arrest and reverse the juggernaut of climate change.