Blain’s Morning Porridge – March 25^th 2024: ESG and Climate Change may be unfashionable. Climate Change has not gone away.

“If we can’t all agree at the bare minimum that a giant comet the size of Mount Everest, hurtling its way towards planet Earth is not a f*ck*ng good thing, then what the hell happened to us?”

Assets Managers have gone quiet on ESG and Sustainability, under pressure from sceptical money and investors bored by climate change. That doesn’t mean the problem has gone away. The risks and the consequences for markets and prices remain enormous.

ESG investment has become a distinctly unfashionable topic in the City these days. The oil barons are back in the ascendancy – don’t dare address audiences darkly about climate change unless you want laughed off the platform. Across the Street everyone is as busily trying to define their Sustainability-Scepticism Quotient even harder than they once tried to establish their woke credentials across the environment, gender, race, and whatever other progressive theme hit the headlines…

In the last few weeks the dial against ESG has swung harder right: Donald Trump leads the polls in the US election determined to free-up and maximise US Oil and Gas production while renewables will be rowed back. BlackRock has seen Republican Red States pull over $13.3 bln in pension funds from its assets under management because Larry Fink is a “goddam climate change pinko-communist”. Many US financials, including JPMorgan (where Jamie Dimon is rumoured to be in line for a job from Trump), have pulled off the Climate Action 100+ initiative – the alignment of investment management with climate goals.

The pressure to achieve Net Zero by 2050 is waning. A whole raft of nations, including the USA (naturally), but also Qatar, haven’t paid their subs to the UN body coordinating COP and climate action – UNFCCC (UN Framework Convention on Climate Change.)

Although the ESG cadres embedded in finance are still producing reams of earnest tosh (that nobody apparently reads) about Scope 1 and 2 emissions, and provide oversight of climate risks to shareholder value (and opportunities), the heat is out the game – if not the climate.

The public have been infuriated rather than motivated by the antics of climate change protestors. When money is tight – no one cares about climate miles when trying to feed the kids before school. Corporates struggling with higher costs, rising debt servicing and declining consumer demand have bigger problems than “reducing GHC emissions across the value chain”.

However, the important points to note include:

• The little boy who cried “Wolf!”…. was eaten by a wolf.
• The frog in the pan said nothing and was boiled alive.

Bad things happen no matter if you exaggerate or ignore them or not.

You can either accept or deny the science that climate change is man-made or not, but the numbers and the threat they reveal are very real. The world is getting warmer. In the tiny thin coating around the planet we call atmosphere, that is bound to have consequences. We can either ignore them or prepare for them.

My personal experience of climate change – probably yours as well – is mild. My sailing has been somewhat disrupted by foul weather, and the back garden is in need of additional TLC as the bugs are out early and already thriving on some plants. The river level has been higher than usual, but still a good 2 meters before we need to get the sandbags out.

I spent last weekend on the Isle of Wight – beautiful, but the ground is so saturated by the succession of storms and low pressure systems that brought the wettest winter on record means farmers are struggling to find dry grass for their new lambs. The degree of saturation is such that parts of the Island are slipping into the sea. I was up in Wales the weekend just past – waterlogged fields won’t be producing crops any time soon. In my village on the Southcoast, the spring tides are higher than ever before. I guess it’s only a matter of time before a new landslip blocks the railway to London – again.

In the USA, the winter apparently didn’t happen across the Upper Midwest. Ice coverage across the Great Lakes was the lowest on record. It’s a different story in Africa where record temperatures and drought are triggering potential famine and mass immigration across the Sahel, or in the Mediterranean which is experiencing drought but also more regular storms.

Two things are happening we’d be ill-advised to ignore.

• The complexity of climate change is dimly understood – the scientists acknowledge that. Extreme climate events become increasing chaotic and difficult to predict or understand. The amplitude of climate change is widening – which any market watcher will spot as a potential indication of a chaotic shift moment approaching.
• The consequences of climate change on the real economy are going to start to bite, and again become more difficult to predict and quantify.

Last week the World Meteorological Organisation’s “State of the Global Climate 2023”, a “Red Alert to the World”, barely troubled the headlines. Its message was bleak, record temperatures around the globe, ocean temperatures spiking higher than ever, declining sea ice cover and glaciers retreating at record speed. Rather than cite each number – go straight to their dashboard – Key Climate Indicators.

The report warned about the rising risks of extreme climate events including these related to tropical cyclones and wind storms, flooding, drought and extreme heat and cold events. These are likely to raise risks relating to food security and population displacement.

The scientists are worried. Oceans are heating up way to fast. What are they missing? Most folk are now familiar with the story of Abraham Wald, the US mathematician. During WW2 he spotted that “if a plane made it back safely with, say, bullet holes in the fuselage, it meant those bullet holes weren’t very dangerous. Armor was needed on the sections that, on average, had few bullet holes such as the cockpit or the engines. Planes with bullet holes in those parts never made it back.”

Although we can spot and mitigate the effects of storms through weather forecasting and having resources ready to rebuild storm damage, thus reducing casualties and costs – our ability to sort these makes us blase about their risks. Scientists are increasingly worried about what we aren’t spotting in terms of climate change effects. Are we even fixing, putting additional armour, on the right things?

The reaction in financial markets is to assume climate change is something that happens far, far away.. in countries used to climate extremes. The reality is food inflation is perhaps the biggest risk to markets. Just how sticky will Food-Stickflation caused by climate change be if food prices continue to rise stubbornly more than 3 or 4% per annum. Right wing populist governments across the West have pinned their electoral success on “fighting” immigration – but how will they fare when unendurable heat and famine in Africa trigger mass movements toward cooler climates?

A group of German Scientists have warned Global Warming and Heat Extremes to Enhance Inflationary Pressures, causing a potential sustained inflationary impact of 3.2% per annum. It will impact Africa first and hardest. The report cites effects and consequence of reduced rains and higher termperatures in terms of more pest and disease outbreaks, shorter growing seasons and heat-stress on hard and soft infrastructure. Food security and resilience was incorporated into the COP28 agreement, but there appears to be little appetite (!) to do much about it.

The heat that’s built up in oceans (far faster than the scientists expected) is the power source behind extreme climate events. My spidey-senses tell me we should really seek to understand this and the risks behind it.. before a Broneroc eats the president.. (The final scene of Don’t Look Up.)

Out of time, and back to the day job..

(Actually, this being week before Easter, I am going to take some half-days this week to fix up my boat….)

Bill Blain

Stategist – Author of the Morning Porridge

Wind Shift Capital