A climate storm for investors: Gilding

Beware the coming climate storm. A moment is approaching when science and markets will collide, but then merge, with chilling consequences for investors who miss the moment, and great excitement for those who are well prepared.

The signs are all around us now. Signs that a storm of climate action will soon rage through the economy, sweeping away denial and, along with it, those companies, politicians, investors and industries that aren’t ready.

Signs like our past two opposition leaders and Prime Ministers being removed with climate change a central issue in their downfalls. Signs like 2008 being the first year when the money invested in new renewable energy generation projects was greater than that invested in new fossil fuel energy generation. Signs like the last decade being the hottest on record, as of course each decade has been since 1980. Signs like the first new car company IPO in the USA for half a century being a disruptive electric car company.

There is great investment and excitement now in renewables, with over $100 billion invested in 2008 and the same in 2009, despite the uncertain financial climate. Yet we see growth in coalmines, new coal export facilities and a lack of action in politics in Australia and the US. What is an investor to do with such confusing signals?

Simple. Observe the science, because the science drives everything else.

The facts are now very straightforward on the problem and its causes, as stated by the peak US science body The National Academies of Sciences. They said last month the science of climate change is in the category of those theories that had “been so thoroughly examined and tested, and supported by so many independent observations and results, that their likelihood of subsequently being found to be wrong is vanishingly small. Such conclusions and theories are then regarded as settled facts.”

So this is not a philosophy or a political viewpoint. These are facts. Smart investors deal in rational analysis, not ideological perspectives or wishful thinking. As US Senator Daniel Patrick Moynihan said “Everyone is entitled to his own opinion, but not to his own facts.”

So if you believe in facts, you will be understand that science will, in the end, overcome resistance and denial, as argued by Professor Stephan Lewandowsky from the University of WA: “The laws of physics will relentlessly assert themselves, unswayed by public opinion, political shenanigans, or elections. Ultimately, the laws of physics will speak so loudly that no amount of wishful thinking can prevent them from being heard.”

The reason we can be so confident that this storm, when it hits, will be ferocious and effective at driving change, is by considering what happens when science meets markets. The science dictates that when we act it will now have to be dramatic action.

We know that to avoid catastrophic risk we must keep warming below two degrees and, as a result, this is the target agreed to by governments from US, to China, to India to Australia. If you don’t like political metrics then consider that this is also the target endorsed by hundreds of global corporations from GE to Rio to HSBC.

Acting as late as we are, achieving this target will require us to virtually eliminate CO2 emissions from coal oil and gas within a few decades. This means eliminating whole industries and replacing them, which is where the science meets the market.

Markets are particularly good at challenges like this, using what Austrian economist Joseph Schumpter called “creative destruction”. Markets are unconcerned about collateral damage and friendly fire. They won’t deliver the change steadily or calmly. Markets don’t play politics and will have no regard for sunk capital or prior commitments.

When we act on climate this will be creative destruction on steroids, with the resulting economic storm wreaking havoc and wiping out companies and whole sectors, while creating tomorrow’s new economy and corporate giants. It will be volatile, chaotic and exciting for investors, with fortunes made and lost based on the quality of judgements.

It’s hard to look at today’s politics and investment strategies and accept this analysis. It’s hard to imagine so many people being so wrong. It was also hard to imagine, in 2007, that the world’s governments would nationalise banks and car companies and spend trillions bailing out the financial system. It was hard to imagine, in the USA in 1940, that the coming four years would see military spending go from 1.6% to 37% of GDP and that government would take over and direct the economy, with actions like banning the production of private vehicles. In hindsight, though, such things are always obvious. And with the benefit of hindsight in 10 years time, the coming climate storm will have been obvious as well.

There is only question you have to ask yourself when you see the signals that are now flashing in bright neon lights, screaming “warning, warning, everything is about to change”. Am I ready?

This article first appeared on Climate Spectator.