Blain’s Morning Porridge – May 31st 2019
“Dreamed a dream by the old canal…”
Check out www.morningporridge.com for links to what I’m reading…
It’s been a funny week. The news flow has again focused on “What Donald Said Next”: last night he took a pop at Mexico, threatening a plague of tariffs if they don’t do more to close the border. It’s been a difficult week to get things done – loads of people were off their desks for the UK mid-term school break, and it was holiday shortened week across Europe (UK on Monday, Continent Thursday/Friday). Next week we have the 75th Anniversary of D-Day – and we’re taking bets on what Donald says to upset us all…
Meanwhile, a large number of readers agree with my investment thesis Climate Change is one of the major themes to profitably address in the medium-long term. It gone from fringe to mainstream: This morning 120 UK business leaders handed a letter to the Prime Minister urging her to legislate for zero net emissions by 2050. It matches the advice given by the Committee on Climate Change earlier this month. Scotland plans to set a zero target for 2045.
Yesterday I went to an event hosted by a new fund focused on Carbon Capture. They’ve absolutely nailed the need and opportunity: the Need is to reduce the amount of Carbon Dioxide (CO2) in the atmosphere, and the Opportunity looks distinctly profitable as the world wakes up to Climate Change reality! (I’m going to write something specific on the fund, and the economics of Carbon, in June’s Alternative Asset Monthly – and I’m hoping to do an interview with the CEO on the soon to be launched Blain’s Financial Porridge Podcast (launch in June if I can master the tech!))
If you are still of the opinion rising temperatures and sea levels don’t matter, you don’t want to listen to scientists, and want to remain a climate change denier, then I won’t change your mind – but try these factiods:
· We pump 40 bln tonnes of greenhouse gases into our atmosphere every year. The physics and chemistry of how these cause warming is very well understood.
· The amount of CO2 in the atmosphere has risen from 275 ppm (parts per million) to 415 pmm in just 50 years.
· 800,000 years of Ice-core samples prove temperature is closely correlated to CO2 levels, and temperature rises lag CO2 by some 50 years.
· No one knows what the spike into unchartered high CO2 levels means for global Temperature – but all agree its probably bad.
· Temperatures this millennium are the highest on record.
· The Earth is getting hotter. Sea levels will rise. Miami and New York are among the major cities that sink first.
· Warm air holds more water – it’s going to increase rainfall, causing flooding, but also drought as the ground dries faster as the earth heats.
· Wildfires will increase.
· The number of Insurance Weather catastrophes is rising.
· Permafrost is melting – contracting 80 miles a year, pumping not just CO2, but Methane (a much worse Greenhouse gas) into the atmosphere. There is a risk of a runaway greenhouse effect as the earth and ocean warm and can’t retain sequestered methane and Co2.
· Drought, floods and weather events will trigger mass migration. Global Militaries rank global warming among the greatest threats for the social upheaval it will cause.
There is no doubt Green politics, Climate Change and the Environment has become a critical Social Theme of the new millennium. There is massive interest in finding solutions across the whole sector. Suddenly it’s no longer fashionable to ignore or deny it’s happening – although I was slightly perturbed by one of my old chums who runs a massive equity book dismissing it as: “too late to do anything about it, society will collapse anyway, get over it….”
The Paris climate accords, the demonstrations triggered by a concerned Swedish Schoolkid, the Greens taking 20% of the European vote.. We are past the stage of climate change as a fashion. Now it’s real and it has to be solved. Identifying positive opportunities to invest in climate change solutions and mitigations will be massive – perhaps as disruptive and exciting as the opportunities triggered by computers, the microchip, mobile phones and, now, AI.
I’m not particularly interested in stuff like labelling bonds issued by industrial companies “Green” because they funded capex on buying bio-diesel trucks – or Saudi Arabia seeking ESG “speshul” status on Aramco bonds.. What I’m focused on is direct investment in the new tech, the new ideas and the new stuff we need to fix the planet. Not labels.
More to the point, I expect the returns generated by genuine alternative investments in climate change, renewables, waste, the environment and the future, will prove de-correlated to stocks and shares, the financial assets so distorted in price by the unintended consequences of QE (my second major investment theme!)
Market driven solutions will prove the most effective way to cure the planet. The most obvious was to address climate change is to stop pumping carbon dioxide (CO2) into the air. The principal of making polluters pay for the carbon they create is well accepted, but the climate-change deniers scream about how that pushes up consumer costs, while neglecting to mention how avoiding pollution costs raise their bottom line.
· If you simply tax the causes of climate change – you will simply create a carbon tax avoidance racket funded by the rich for lawyers to game and exploit.
· It you restrict, and then lower, carbon rights, and sell them, then markets have proved they find the optimal and right level.
The “Cap and Trade” approach is likely to prove the most effective way to price pollution rights. By reducing the amount of Carbon permits each year, and pushing the price up, you ensure producers will find new ways to produce less CO2. If they don’t – penalise them. If politicians try to fudge, let them explain and be shown the door by the increasingly environmentally conscious electorate. (Ok, so that didn’t happen in the US where large parts of the electorate still think Trump was right to pull out the Paris Accord!)
Unfortunately, Carbon Trading has something of a checkered past – there are many stories about fraud, evasion and the difficulties of trading carbon credits. I suspect we move on from here – the pressure to do something is so huge it can’t be avoided. China will soon have one of the largest Carbon markets.
If something is tradeable, its investible. The fund I met yesterday are completing an early stage equity round. They see a diminishing number of credits push up carbon prices – its going to happen. Meanwhile, I’m working on deals that will create Carbon offset credits.
I will be the first to accept some of the stuff we see in Climate Change finance is just hatstand – like the chap who invented a process to extract CO2 out the air and recombine it with hydrogen to create Green Diesel. Marvellous indeed: “so you are talking carbon out the atmosphere through an energy intensive process so you can burn it and put it back in the atmosphere. Er, do you see any flaw in that?” Or the German Greens who opposed Nuclear power and forced Germany to run coal fired power stations instead? It reminds me of the days when a start-up Dot.Com petfood company was valued about the same as Weetabix!
But, hey, folk have been funding WeWork, Tesla, Uber, and NetFlix – and they are unlikely to ever turn significant profits, so why not invest in stuff that is not only good for the planet, but good for your pocket as well.
If you want to learn more about the Carbon fund, I’ll be delighted to set up introductions.
Out of time, and back to day job!