With the direct action of Extinction Rebellion in
London over the Easter period (over 1,000 arrests), the BBC's hard-hitting
"Climate Change - The Facts" and the rise of the school strikes for
climate started by Greta Thunberg, there is no doubt that our climate crisis is
quickly climbing to the top of the political agenda.
The focus of the challenge
is directed towards governments which have not been taking climate seriously.
As a result, last week our parliament declared a climate emergency - the first
country in the world to do so! It's not so clear what action this declaration
will bring about but there can be little doubt that there will be some big
changes to come.
Over the past six months or so, I have tried to get
my head around this important subject - the science, what the consequences may
be if we carry on with business as usual, what that may mean for our economy
and my investments, what needs to be done to avert the worst-case scenarios. So, in
this article, I wanted to clarify my thoughts on the subject.
Of course, climate change is nothing new - our
climate is continually changing. The last ice age ended some 12,000 years back
when vast areas of the Northern hemisphere including the UK and much of Europe and N America was covered by a vast ice sheet. The Earth has moved in and out of these
naturally occurring interglacial periods for at least two million years.
The current man-made climate change however is interrupting this
natural cycle and the warming we see today is well outside of the pattern of
the past 800,000 years. The problem we are facing at present is the speed at
which our planet is warming and our ability to adapt to the relatively rapid increase in temperature.
The
Problem
Over the past 150 years or so, the average global
temperature has increased by around 1C. This is due the industrial revolution
and increasing reliance on coal, oil and gas. These are fossil fuels which
release greenhouse gas emissions (GHG) such as carbon dioxide and methane into
the atmosphere when burnt to create energy for our homes, transport and
factories. The scale of these emissions has gradually increased due to an ever accelerating
global population and growing affluence of developed nations which means more houses, cars, lorries, shipping and airplanes.
 |
GHG Concentrations over past 1000 years
(courtesy of wxshift.com) |
These GHGs are trapped in the upper atmosphere and
hang around for many years after they are released. Some of the gases are naturally
absorbed by the seas (25%) and by our trees but we have been producing much
more than nature can deal with. Over time, these gases build up and form an
ever thicker layer in the upper atmosphere which traps some of the sunlight and
causes gradual warming.
The levels of CO2 in the atmosphere is measure and
currently stands at 415 parts per million (ppm) which is the highest
concentration for the past 3 million years. The average over the past 500,000
years has been 260ppm. When I was born in the 1950s it was 310ppm and the
global population was 2.5 billion.
The last time we had CO2 levels this high, the
global temperature was 3C to 4C warmer than today and there were trees growing at the
south pole.
Despite the agreement reached in 2015 in Paris by
200 world leaders, CO2 emissions continue to rise. In 2018, global emissions
rose by a further 1.7% to a record high of 33.1 Gt of CO2 and the highest
increase since 2013. Coal for power accounted for a third of this, mainly in
Asia. China, India and the US were responsible for 85% of this increase whilst
emissions reduced in Japan, Germany, France and the UK.
The global population is growing - currently 7.5
billion - and as the economy grows to meet demand for more goods and services,
the demand for energy increases.
The
Consequences
This rapid rise in GHGs which has caused the 1C
rise in global temperature is starting to impact our global weather patterns. The
past 5 years have been the warmest on record all over the planet and this trend
is due to continue due to the GHGs already locked into the atmosphere. This is
leading to more powerful cyclones/hurricanes, severe flooding, more intense
wildfires, droughts and changes to natural habitat which is already leading to
the extinction of animals and plants as well as coral reefs.
These severe weather events have already caused
loss of human life - 3,000 people died in hurricane Maria in 2017 when it hit
Dominica and Puerto Rica. In Kerala, India last year an estimated 500 people
died during storms and flooding. In March 2019, cyclone Idai stuck Mozambique
with devastating effect - hundreds killed and up to 2 million people displaced and
made homeless by flooding. These are just three examples of the hundreds of
extreme weather events of recent years.
In addition to the impact on every days lives,
there is a massive economic cost from climate change. Insurance group Swiss Re
have reported that climate-related losses have averaged $180 bn each year over
the past 10 years. In January 2019 the World Economic Forum's Global Risks
Report at Davos ranked extreme weather and failure to adapt to climate change
as the top two global risks
The polar ice caps are warming at a faster rate
than the global average. The latest estimates are for at least 3C by 2100 which
would lead to the thawing of large areas of permafrost and the release vast
amounts of carbon dioxide and also methane gas which is 20x more potent than
CO2. This would cause additional warming and result in a tipping point which
could lead to a runaway warming which far exceeds current forecasts.
The world's largest ice shelf in Antarctica - the
Ross Ice Shelf - is the size of France and several hundred metres thick. It is
melting ten times faster than originally thought. This could lead to rapidly
rising sea levels around the globe.
Some Solutions
We have reached a crossroads - if we carry on
without making any serious changes to the way we live our lives, we face
unimaginable consequences. If we continue to do what we've always done, we will
get what we've always got - an ever warming world. So it follows, we need to
change what we've always done in order to get a different outcome.
We have collectively generated more GHGs than the
planet can reabsorb. We understand the problem and we know what needs to be
done - and, importantly, we have all the tools and technology already to address
the problem. We now just need to get on and DO IT.
We need to get to net zero emissions quickly. Some
people suggest 2030 and others a more realistic transition of 2050. The term 'net zero' includes reductions in all GHGs such as methane and nitrous oxides - carbon
neutral only refers to carbon dioxide. Perhaps a clearer term would be 'climate
neutral'.
1.
Plant more trees - trees absorb CO2 and if we quickly
plant millions more trees and stop clearing rainforests for cattle grazing, it
will provide a breathing space for other initiatives to kick in. Support more tree planting via The Woodland Trust.
2.
Energy - transition from coal,oil & gas to
renewables such as solar and wind. These renewable sources of power are now
actually cheaper than fossil fuels so just on economics alone, it makes sense
to speed up the process.
3.
Transport - a top consumer of fossil fuel such as petrol,
diesel and kerosene (aviation). It is responsible for around 25% of
energy-related emissions. Electric vehicles are part of the solution...provided
the electricity comes from renewables.
International shipping is a major polluter and
accounts for around 3% of global emissions and around 20% of emissions from
transport. Maersk, the worlds largest container company has recently announced
a policy to be carbon neutral by 2050. It would be technically feasible to
decarbonise shipping using biofuels and renewable energy by 2035 according to
the OECD.
Aviation is one of the fastest growing sources of
GHG emissions. If it was a country it would be in the top 10 emitters. One
round trip from London to New York is the equivalent of heating a house for the
whole year. Aircraft are becoming more efficient all the time but we are flying
more. Until electric planes are introduced on a commercial basis (trials underway), the only solution is for individuals to choose to fly less.
4. Food - Our global system is responsible for a whopping 40% of global emissions. Transport accounts for around 17%,
packaging a further 10%, refridgeration 4%, distribution to retailers 4%, our
journeys to the shops and when we get it home, a further third is thrown away
which adds further to emissions. We need to become more self-sufficient as a
country, to stop wasting food and also think about food miles.
Meat and dairy is a huge factor in global warming.
Emissions are on track to become the worlds biggest contributor to climate
change and already surpass the likes of Shell and Exxon Mobil. As well as the
increasing levels of GHGs such as methane from livestock, there is
deforestation to create more pasture and pressure on water supplies. Much of
the forest is cleared by 'slash and burn' which adds to the problem.
The solution is relatively simple - people can consume less meat and dairy and move to a plant based diet. Check out your diets carbon footprint.
The UKs Performance
Here in the UK, our record on cutting back on CO2
emissions is good compared to many other developed countries. We have reduced
emissions by 39% compared to 1990 levels. This figure however excludes emissions from
air travel and shipping.
Our emissions levels are now back to where they
were in the 1890s when Queen Victoria was on the throne.
Much of the reductions in recent years are due to
moving away from coal as a power source - down 16% in 2018 and 80% over just
the past 6 years.
According to the latest analysis of government
projections, around 50% of our electricity will come from renewables by 2025.
This is mainly due to the rapidly falling cost of solar and wind generation
rather than any change in government policy.
However the Committee on Climate Change are
concerned that we are not making sufficient progress in many areas of our
economy. Whilst we are doing well on power generation which accounts for around
25% of emissions, we are not doing enough in other sectors to reduce CO2
emissions, particularly transport/aviation and housing.
 |
| Greta Thunberg |
Our current target is 80% reduction by 2050 but
this lacks ambition and we are off-track to meet our 4th and 5th carbon budget targets. To meet our obligations under the Paris agreement, we need
to achieve net zero emissions by 2050 and this is the recommendation of the
recent report from the independent Committee on Climate. This would involve a
reduction of around 8% each year. Hopefully, as our parliament has now declared a
climate emergency, there should be no problem in adopting the new targets.
It's one thing to adopt a recommendation, and
quite another to implement the policies to make it happen.There could well be much
resistance to the transition from the familiar to the new. For example, around
90% of our homes have gas central heating. Most systems will have been fitted
in the past decade and will be very expensive to replace. People are used to
the technology and it works - heating and hot water at a reasonable price at
the flick of a switch. Millions of home owners will need to be persuaded to
switch to electric heating - the costs of the switch will need to be affordable
and the technology reliable. I suspect the transition to a carbon neutral UK
will be a monumental effort and certainly take much longer than the 2025
demanded by the protestors.
Here's an excellent in-depth analysis from Carbon
Brief
Investors
Most savvy investors understand that in order to
secure our long term financial goals, we first have to learn to live within our
means and then save for the future. This principle can be applied to global
warming - we must learn to live collectively within the sustainable limits of
our planet. There will be few attractive investment opportunities for a world
above 2C.
So, what are us small investors supposed to do? I
guess we are all different with our individual perspectives and goals so there
is no 'one-size-fits-all'.
Personally, I have decided to reduce my overall
exposure to equities. I have moved from Lifestrategy 60 to LS 40 (but this is
still a problem), I have reduced my exposure to big oil via the sale of City of
London, I have recycled some of the proceeds into Vanguard SRI Global, I have
built up my 'green' portfolio which now accounts for just over 1/3rd of my
total investments. I have contacted Blackrock requesting they
offer climate-friendly index funds. Last week I had a long conversation with Vanguard's senior management in the UK to urge them to introduce a climate-friendly option for my investments (following many email requests!). I am assured they are actively looking to introduce ESG or fossil-free funds but no time-frame.
The more pressure from concerned investors, the more they are likely to act so if you are one of the investors who would like to see more ESG options from Vanguard, please email : personalinvestors@vanguard.co.uk
I have lowered my expectations for future returns. The 9%
or 10% nominal average from my portfolio over the past decade is unlikely to be
repeated. I suspect the average could well be nearer to 5% or 6% and I am expecting more
negative years as volatility increases.
Fund managers probably don't pay much attention to
the likes of Extinction Rebellion, however when the Governor of the Bank of
England, Mark Carney warns on the dangers of climate and says "take global
warming seriously or you will lose money", it is language they understand.
In a recent address to the City, he told them that companies that don't adjust
to the realities of climate change will simply cease to exist.
The B of E is part of a global Network for
Greening the Financial System who are collaborating on plans for the
reallocation of capital on a massive scale to ensure we can meet the Paris
Climate Agreement.
Around $1 out of every $4 of professionally
managed investment in the US - a total of $12 trillion in assets - is now invested in ESG or SRI funds according
to CNBC and this has grown by 40% over the past 3 years.
According to a survey by UK Sustainable Investment
& Finance, less than 1 in 5 fund managers believe oil companies will remain
a good investment in 5 years time if still focussed on fossil fuels. Survey
participants manage over £10 trillion and included HSBC, Schroders and UBS.
In 2018, Aviva assigned £1.8 bn of new investment
into wind, solar, biomass and energy efficiency which takes the total invested
in low carbon to £3 bn. In addition they hold a further £1.3 bn in green bonds
to support the transition to a sustainable economy. They are committed to
delivering on their responsibilities under the Paris Agreement and say :
"There
is no greater collective risk we face today than tackling climate change. If we
do not take urgent action to limit global temperature increases to within 2°C,
the impacts upon the economy, society and our business will be nothing short of
devastating. Aviva is determined to make its own contribution to tackling
climate change. This is not at odds with business or investment. In fact, it is
a business imperative".
The way we use money has a knock-on affects to the
wider community. We can use it to support companies that are drilling in the
Arctic for more oil reserves, or we can invest in companies which are
installing wind turbines and solar panels. Governments can spend tax receipts
on subsidies for home insulation or for airport expansion. Every decision,
large or small, will impact on the environment and climate change.
Norway's sovereign wealth fund with assets of £1
bn recently decided to divest away from 134 oil/gas companies in its portfolio
as they now regard them as risky assets. For the time being, they will retain
holdings in Shell and BP but this could signal the thin end of a very large
wedge. Large companies which fail to comply with the Paris Agreement face
increasing risk of divestment from the growing impact and ESG funds. In
addition, these companies will face big litigation cases for damage resulting
from their activities.
I think it's becoming clear to many that companies
which damage the environment will be increasingly marginalised as the financial
community responds to concerns about climate. Sustainable and ethically sound
investing which respects the environment will become the norm - possibly more
quickly than many people imagine. Investors will still want a return on their
investments but equally, they want a planet that is clean and healthy which
they can enjoy in their retirement and will remain so for their children down the line.
Conclusion
Of all the 450 articles I've posted over the past 6 years, I feel this is by far the most important. However I am merely scratching the surface of this subject and it
will be interesting to see how the story unfolds.
I am obviously concerned for
our future as I have children and five young grandchildren under the age of 10. However, I see the tide is turning and that people in positions of power seem to get the message and
that's encouraging. I remain optimistic that we can rise to the challenges
ahead. I am sure that as the catastrophic consequences of 'business as usual'
become clearer to more and more people, they will change their lifestyles and
demand action from politicians, policy makers and businesses...and maybe fund managers!
We are now entering uncharted territory - global
temperatures are rising rapidly, atmospheric CO2 levels are off the chart and
life as we know it is under threat as never before - and yet many are addicted
to their modern lifestyles and refuse to heed the warnings. It seems we have a
few years to make some fundamental changes - maybe 10 or 15 - but certainly no
time to waste like the last three years bickering about Brexit.
In a recent documentary 'Climate Change : The
Facts', Sir David Attenborough said
"
While Earth has survived radical climactic changes and regenerated following
mass extinctions, it's not the destruction of Earth that we are facing, it's
the destruction of our familiar, natural world and our uniquely rich human
culture."
This is a climate emergency. The UK, Scottish and
Welsh governments as well as many local authorities throughout the UK have
recently declared such an emergency. Rising GHG emissions do not respect the
boundaries of individual countries - it's a global problem. We need a system
change and a green new deal on a global scale to tackle the threats confronting
us all.
The world will not end in 2030, but if we don't
make some serious inroads to reducing global emissions over the coming decade, the job will be a
legacy for future generations and the problems facing them will be far more
intense and difficult to manage. To my way of thinking, it just makes sense to stop putting off the
difficult decisions and just get on with what we know needs to be done.
Plant more trees and stop destroying rainforests; move
to a largely plant based diet; leave fossil fuels in the ground and build more
renewable capacity; appoint a minister for Climate Change and also put this
subject on the national school curriculum. These and other measures are not
exactly rocket science.
We have caused the problem and we now need to get
it sorted as a matter of urgency...more and more rational people understand it's
simply the right thing to do.
Do you have any thoughts on this subject? Are we
already doing enough or should we be moving things along with more urgency? How
will your finances be affected? Have you taken any steps to climate-proof your
portfolio? Maybe you think it's all a big fuss about nothing. Leave a comment
below, share your views with others.
