Everything You Need to Know About Global Warming in 5 Minutes

The following is an excerpt from Summer Essays, a Second Quarter 2010 investment update by Jeremy Grantham, co-founder and chief investment strategist at Boston-based investment firm, GMO.  Outspoken and opinionated, Mr. Grantham is almost always an entertaining read.  With more than 40 years of investment management experience, he has earned the right to voice his opinions, and as such, is routinely quoted by the financial press.  His namesake firm (he is the G in "GMO") is a major instututional investment advisor, managing in excess of $100 billion in client assets.

You may agree or disagree with Mr. Grantham, but I hope that you find his comments interesting.

Scott Sadler

Everything You Need to Know About Global Warming in 5 Minutes by Jeremy Grantham

1) The amount of carbon dioxide (CO2) in the atmosphere, after at least several thousand years of being quite constant, started to rise with the advent of the Industrial Revolution. It has increased by 40% and is rising each year. This is certain and straightforward.

2) One of the properties of CO2 is that it creates a greenhouse effect and, other things being equal, causes the temperature to rise. This is just physics.

3) Several other factors, like changes in solar output, have major influences on climate over millennia, but these effects are known, are observable, and have been allowed for in current models. Critically, there have been no important changes in these other factors over the last 100 years.

4) The doubts arise when it comes to the interaction of CO2 with other variables in a complicated system, especially water vapor. It is impossible to be sure whether the temperature will rise slowly or rapidly. But, the past can be measured. The temperature has indeed steadily risen and is well within the boundaries predicted for the man made effect. But the forecasts still range very widely, from a harmless negligible rise to a potentially disastrous +6 degrees Fahrenheit or higher within this century. The main danger of the CO2 interaction with water vapor is the high probability that it will cause a great increase in severe precipitation episodes.

5) Skeptics argue that this wide range of uncertainty lowers the need to act: “Why spend money when you’re not certain?” But since the penalties rise hyperbolically at the tail, a wider range implies a greater risk (and a greater expected value of the costs). This is logically and mathematically rigorous and yet is still argued.

6) Pascal asks the question: What is the expected value of a very small chance of an infinite loss? And, he answers, “Infinite.” In this example, what is the cost of lowering CO2 output and having the long-term effect of increasing CO2 turn out to be nominal? The cost appears to be equal to foregoing, once in your life, six months’ to one year’s global growth – 2% to 4%, or less. The benefits, even with no warming, include: energy independence from the Middle East; more jobs, since wind and solar power and increased efficiency are more labor-intensive than another coal-fired power plant; less pollution of streams and air; and an early leadership role for the U.S. in industries that will inevitably become important. Conversely, what are the costs of not acting on prevention when the results turn out to be serious: costs that may dwarf those for prevention; and probable political destabilization from droughts, famine, mass migrations, and even war. And, to Pascal’s real point, what might be the cost at the very extreme end of the distribution: definitely life changing, possibly life threatening.

7) The biggest cost of all from global warming is likely to be the accumulated loss of biodiversity. This features nowhere in economic cost-benefit analysis because, not surprisingly, it is hard to put a price on that which is priceless.

8) A special word on the right-leaning think tanks: As libertarians, they abhor the need for government spending or even governmental leadership, which in their opinion is best left to private enterprise. In general, this may be an excellent idea. But global warming is a classic tragedy of the commons – seeking your own individual advantage, for once, does not lead to the common good, and the problem desperately needs government leadership and regulation. Sensing this, these think tanks have allowed their drive for desirable policy to trump science. Not a good idea.

9) Also, I should make a brief note to my own group – die-hard contrarians. Dear fellow contrarians, I know the majority is usually wrong in the behavioral jungle of the stock market. And heaven knows I have seen the soft scientists who lead finance theory attempt to bully their way to a uniform acceptance of the bankrupt
theory of rational expectations and market efficiency. But climate warming involves hard science. The two most prestigious bastions of hard science are the National Academy in the U.S. and the Royal Society in the U.K., to which Isaac Newton and the rest of that huge 18th century cohort of brilliant scientists belonged. The presidents of both societies wrote a note recently, emphasizing the seriousness of the climate problem and that it was manmade.  Both societies have also made full reports on behalf of their membership stating the same. Do we believe the whole elite of science is in a conspiracy? At some point in the development of a scientific truth, contrarians risk becoming flat earthers.

10) Conspiracy theorists claim to believe that global warming is a carefully constructed hoax driven by scientists desperate for … what? Being needled by nonscientific newspaper reports, by blogs, and by right-wing politicians and think tanks? Most hard scientists hate themselves or their colleagues for being in the news. Being a climate scientist spokesman has already become a hindrance to an academic career, including tenure. I have a much simpler but plausible “conspiracy theory”: that fossil energy companies, driven by the need to protect hundreds of billions of dollars of profits, encourage obfuscation of the inconvenient scientific results.

11) Why are we arguing the issue? Challenging vested interests as powerful as the oil and coal lobbies was never going to be easy. Scientists are not naturally aggressive defenders of arguments. In short, they are conservatives by training: never, ever risk overstating your ideas. The skeptics are far, far more determined and expert propagandists to boot. They are also well-funded. That smoking caused cancer was obfuscated deliberately and effectively for 20 years at a cost of hundreds of thousands of extra deaths. We know that for certain now, yet those who caused this fatal delay have never been held accountable. The profits of the oil and coal industry make tobacco’s resources look like a rounding error. In one notable case, the obfuscators of global warming actually use one MIT professor who also defended tobacco! The obfuscators’ simple and direct motivation – making money in the near term, which anyone can relate to – combined with their resources and, as it turns out, propaganda talents, have meant that we are arguing the science long after it has been nailed down. I, for one, admire them for their P.R. skills, while wondering, as always: “Have they no grandchildren?”

12) Almost no one wants to change. The long-established status quo is very comfortable, and we are used to its deficiencies. But for this problem we must change. This is never easy.

13) Almost everyone wants to hear good news. They want to believe that dangerous global warming is a hoax. They, therefore, desperately want to believe the skeptics. This is a problem for all of us.

Postscript

Global warming will be the most important investment issue for the foreseeable future. But how to make money around this issue in the next few years is not yet clear to me. In a fast-moving field rife with treacherous politics, there will be many failures. Marketing a “climate” fund would be much easier than outperforming with it.

Forbes.com: Sustainability Must Be Central To Corporate Strategy Now

Sustainability Must Be Central To Corporate Strategy Now.  It's too late to have it any other way.
Dean Krehmeyer, Michael Lenox and Brian Moriarty -- Forbes

Corporate America has been dramatically increasing its attention to and leadership in sustainability. Companies have been announcing plans for carbon-footprint reduction, publishing sustainability reports, creating billion-dollar clean energy investment funds and forming sustainability coalitions with corporate customers, suppliers and even competitors.

That's happened because investors and the public have been insisting that sustainability move beyond being a departmental concern and into the boardroom and executive offices. Yet a 2008 McKinsey survey found that while 60% of executives believed climate change is strategically important, fewer than a third were actually doing anything about it. Why the disconnect? Partly because it's all so new and complex.

Executives need to begin by understanding exactly why they're engaging in sustainability activities.  There are three basic drivers of corporate sustainability initiatives: regulatory requirements, market incentives to go beyond those regulatory requirements and new market opportunities…

 

http://www.forbes.com/2010/06/16/sustainability-corporate-strategy-leadership-citizenship-ethisphere.html?partner=email

 

More Sustainability Disclosure from the Nation's Largest Firms

Bowing to continued investor demands, the world's largest companies have undertaken their most detailed disclosures yet.   Institutional investors such as the nation's largest pension plans have increasingly insisted that companies disclose the degree to which their businesses are at risk from potential limitations on carbon and other emissions.

See S&P Companies Increase ESG* Reporting for the complete story.

* ESG refers to Environmental, Social, Governance issues and the active monitoring of corporate policies, and performance pertaining to them.

Declining world oil production after 2014?

This interesting report, courtesy of Environmental News Network, gives new estimates of the finite nature of our crude oil resources.  Look for peak production in less than four years and increasing price volatility as we approach that time.

http://ow.ly/1qsxSq

Wal-Mart's New Competitive Advantage -- Sustainability

As the world's largest retailer, Wal-Mart has successfully used its size to master technologies, processes and management techniques to outmaneuver its competitors for decades. The company's close connection with its suppliers, along with massive volume sales, has permitted Wal-Mart to transfer its efficiencies to its customers, resulting in lower prices and even higher sales volumes.

Wal-Mart hasn't always had the PR wind at its back, however. The 2005 film, Wal-Mart: The High Cost of the Low Price highlighted the large number of uninsured workers at the company along with numerous other less-than-flattering accounts of company behavior. So, was it inevitable that the strongest retailer would ultimately do what is in their best interest relative to its competitors? Perhaps. This might explain the firm's support of mandated employer health coverage after years of opposition.

While Wal-Mart's support of health care reform is surprising on the surface, its recent "Sustainability Initiative" is beyond ambitious. The company plans to create a highly complex "Sustainability Index" that would measure the environmental impact of every item on its shelves. The responsibility for documentation falls initially on each supplier, knowing that Wal-Mart will give preferential treatment to the most eco-friendly products. In fact, some products may never make it to market if Wal-Mart signals its opposition. Any wonder why laundry detergents are all "concentrated" now? WalMart directed the use of less water and packaging. That sounds like Wal-Mart directing Procter and Gamble on how to make its own products...

Do investors have reason to worry? Indeed, some big suppliers may have significant (unseen) liabilities in their current product lines. And where do the other retailers fit into the picture? Wal-Mart has taken the environmental high road that promises to change the face of retailing forever. I would hate to bet against them.

Still think that Sustainable Investing is a niche reserved for Treehuggers?

Better think again.

Boardwalk Capital Management
www.BoardwalkCM.com