Imagine the 700 ppm Fund. That number is far from set in stone, but it’s the International Energy Agency’s (IEA) best guess for where we are heading by 2100. IEA takes into account all countries’ stated emissions reductions targets and then some. This already optimistic scenario would imply a 50 percent chance of global average warming of over 3.4°C (6.1°F) above preindustrial temperatures and about a 10 percent chance of eventual global warming exceeding 6°C (11°F). Think back to chapter 1: Mark Lynas’s reference to Dante’s Sixth Circle of Hell, or HELIX, the European Union research project detailing the impacts. Both Lynas and HELIX end their nightmare scenarios at 6°C (11°F). We are looking at a 1-in-10 chance of going there or beyond. It’s tough not to sound overly dramatic about what that world would look like. Sea levels were up to 20 meters (66 feet) higher last time concentrations hit 400 ppm. A 700 ppm planet would look very different from anything we can imagine today. Still, that’s our current trajectory.
You have $1 billion under management to invest in such a world. One way to profit is to invest in restoring the value of damaged assets: Someone has to be pumping away flood waters and rebuilding homes. The flipside of the cost of coping with climate change: ka-ching! Enormous costs imply large profit opportunities.
One crucial issue is the time scale involved. Many of the effects are decades out, though plenty are not. Extreme storms, droughts, and floods are already hitting home. Buy food staples, fresh water, or any kind of commodity that will be scarcer and, thus, dearer in a much warmer and more unstable world. To make a buck off the general trend, buy all of these assets while there are still plenty of climate skeptics around, who are betting against the general trend, to ensure you get in before prices really take off. And, since we are imagining investment opportunities in a world heading toward 700 ppm, buy stakes in mining and oil companies savvy enough to drill in the newly ice-free Arctic.
Now imagine the 350 ppm Fund. We have long passed that threshold. Right now we are at 400 ppm for carbon dioxide alone. And the atmospheric tub is still filling at an increasing rate. Returning to 350 ppm would require an immediate about-face and then some. Everything we know about the economics tells us that this won’t and can’t happen. “Simply” turning off all smokestacks—an enormous, immediate, and global deindustrialization—will no longer do. If anything, it would require an enormous reindustrialization to transform energy and transport sectors and start capturing carbon directly from the air.
Lots of infrastructure will still be at risk for many years to come. We will have locked in decades, even centuries, of sea-level rise and plenty of unknown unknowns. It may already be too late for the West Antarctic ice sheet, but the world may steer clear from other tipping points with even costlier effects.
Stranded assets dominate the picture. Bill McKibben popularized the concept in Rolling Stone. The Capital Institute did the math for him: Just to stabilize atmospheric carbon dioxide concentrations at 450 ppm, about $20 trillion dollars’ worth of carbon still underground will likely have to remain there or be pumped out only while pumping the resulting carbon dioxide back in, devaluing fossil fuel companies in the process.
In this world, your $1 billion may be best served betting against coal, oil, and gas. They are bound to perform worse than the broader market. Wind, solar, and all sorts of low carbon technologies win. Carbon air capture technologies may be another big winner, assuming that the carbon dioxide price we all pay will be appropriately large. Once again, timing is everything. In order to make a buck, it will be key to get in at just the right time.
The truth ought to be somewhere in the middle, between the business-as-usual nightmare of the 700 ppm and the green dream of the 350 ppm worlds. Just to be clear, there’s an important difference between these two numbers: 700 ppm is where we are heading. Calling for “350 ppm” is a statement about where we wish to be heading. The two are in entirely different categories. There is hope that if we scream loudly enough and scream well, the world could maneuver away from the precipice of the 700 ppm future and toward an outcome closer to 350 ppm, but that’s far from a certainty.
So, what to do with your hypothetical $1 billion? First you need to realize that smart investment decisions are all about what is (or, rather, what will be), not what ought to be. The current Arctic gold rush is an all-too clear example of that. Those not holding their noses and, thus, not participating in the bonanza of newly opened shipping lanes, mines, and oil fields may well be losing out.
That said, some recent evidence suggests that the more socially conscious of enterprises may, in fact, be outperforming the market, sometimes quite significantly. But our advice isn’t about the fact that seeing things through green-tinged glasses could help identify opportunities that the market misses. Instead, we’ll focus on the fact that smart investment decisions are all about managing risk. There’s a distinction between risks to the planet and risks to Big Coal, Oil, and Gas, but there’s also an important link: Regulations and policies for the most part point in only one direction.
Few doubt that, given trends in the regulatory climate, the arrow for tobacco stocks points downward. In Australia, tobacco companies are required to sell their products in plain packaging, with graphic health warnings. The 2011 Tobacco Plain Packaging Act was met with fierce resistance by a handful of tobacco companies, who stood to lose a lot and argued in court that the act was unconstitutional. The day the Australian High Court rejected these arguments and upheld the law in August 2012, British American Tobacco and Imperial Tobacco share prices each dropped by about 2 percent. The High Court decision could have gone the other way, possibly lifting stock prices, but it’s highly unlikely that governments will suddenly decide that tobacco has been vilified for too long and start removing packaging restrictions and smoking bans. If anything, more cities will follow Mayor Michael Bloomberg’s New York and banish smokers onto the sidewalks, or worse. Investors concerned about managing risks ought to take note.
Something similar goes for anyone wanting to invest in Big Coal or Oil. Regulation, for the most part, will only push coal or oil company valuations down, not up. They are the ones with the stranded assets once we have a sensible price on carbon dioxide. It’s highly unlikely that governments will suddenly start taxing wind and solar companies and increase subsidies for fossil fuels even further. (Big Gas may be in the gray zone: Initial regulations may price coal-powered generation out of the electricity system once and for all, making natural gas the fuel of the moment—at least until it, too, runs up against ever tightening greenhouse gas limits. It may be a “bridge” to a low carbon future, but that doesn’t mean it wouldn’t justify eventual heavy tolls in its own right.)
In short: Divest, because it’s the prudent, less risky financial decision. It helps you hedge against downside regulatory risks and stranded assets. The move from the 700 ppm path toward a 350 ppm one will come in political fits and starts. Not investing in fossil fuel stocks is not just the ethical choice, it may well be the profitable one.
All that said, all-out divestment from fossil fuel stocks may not be the only ethical choice. Better yet: Apply that socially conscious screen to what you do with the returns. Why cede the ground of (sadly) profitable investments to those without scruples and with no desire to influence the current trajectory?
It’s clear that all of us—at least the billion or so high-emitters on this planet, including most anyone reading (or writing) this book—have been profiting from a world heading toward warmer climates all along. That doesn’t make it right, but there’s indeed an ethical path forward: Now that the reality of heading toward 700 ppm and the mandate of bending the path toward 350 ppm have become abundantly clear, take your outsized returns and make your money work even harder by helping scream for the biggest policy push your newly found wealth can muster.
It is widely known that financial markets can become dangerously unstable, yet it is unclear why.
Recent research has highlighted the possibility that endogenous hormones, in particular testosterone and cortisol, may critically influence traders’ financial decision making.
Here we show that cortisol, a hormone that modulates the response to physical or psychological stress, predicts instability in financial markets.
Specifically, we recorded salivary levels of cortisol and testosterone in people participating in an experimental asset market (N = 142) and found that individual and aggregate levels of endogenous cortisol predict subsequent risk-taking and price instability.
We then administered either cortisol (single oral dose of 100 mg hydrocortisone, N = 34) or testosterone (three doses of 10 g transdermal 1% testosterone gel over 48 hours, N = 41) to young males before they played an asset trading game.
We found that both cortisol and testosterone shifted investment towards riskier assets.
Cortisol appears to affect risk preferences directly, whereas testosterone operates by inducing increased optimism about future price changes.
Our results suggest that changes in both cortisol and testosterone could play a destabilizing role in financial markets through increased risk taking behaviour, acting via different behavioural pathways.