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Jeremy's Blog 6th June 2022: Growth

This article by Jeremy Moody first appeared in the CAAV e-Briefing of 1st June 2022

The argument that climate change will bring investment opportunities was sketched in this presentation, Why Investors Need Not Worry about Climate Risk, by Stuart Kirk, HSBC’s Global Head of Responsible Investment to an FT Summit – Turning Talk into Action to Hit ESG Targets – on 19th May. With that billed provocative title, he provoked and was then suspended from his job.

Analysis shows banks, under post-2008 regulation, to be at less risk from climate change than insurers protecting what is. Kirk’s view was as a lender or investor looking at where value might be created as well as at risk. However and with its commitment to green investment, Legal & General’s Chief Executive commented that it was “very good to have a debate” about climate change policy and the part companies should play in the transition to a low-carbon economy.

Climate change and its risk were not disputed. Kirk accepted the science – “there will be fires”, Miami might be 6m under water in 2100 – but that brought opportunities. He rejected the language of doom, implying its lack of credibility:

Sharon [Thorne, Global Chair of Deloitte] said we are not going to survive – and indeed no one ran from the room; in fact, most of you barely looked up from your phones at the prospect of non-survival.

While there might be more climate-related disasters, deaths from them had fallen sharply over the last century. He reviewed a graph showing increasing media references to “climate catastrophe” accompanied by rising stock markets; “the more we are doomed, the higher prices go”. Pleading for proportion alongside other challenges, the risks might be negligible, exist but be priced in (offering an upside once solved), or the generality of investors were wrong.

The answer lay in human adaptability. “Humans are spectacularly good at managing change”; as well as mitigation, more money should be invested in adaptation. The predicted hit on GDP – 2 to 5 per cent - was small compared to the 5 or 10-fold growth expected for 2100 from 2 to 3 per cent real growth a year.

Since 1930, the S&P 500 index showed 6.5 per cent annual real growth. Had he been asked then to forecast the effect of carbon on growth by 2020, “we would put together a really, really nasty outlook for today from what we knew in 1930, we would never have understood deindustrialisation, we would never have understood the rise of the service economy, we would never have understood how GDP is getting lighter, we would never understand how machinery is getting more efficient. Likewise, we have no idea what the next 50, 100 years are going to bring … that chart will look more or less the same …”.

With “the transition … there are thousands of opportunities out there. We have a trillion dollar car company that nobody at the FT predicted five years ago … they are the sort of opportunities we need to invest in …”.

Kirk did not appear to under-estimate the scale of what climate change might impose and require. Although his observation of value might suggest this was beyond the 6 year average length of an HSBC loan, his reference to Tesla was to change already happening. It is perhaps not that growth will allow adaptation but that adaptation might drive growth. In his example, the economic activity in protecting, adapting or moving Miami (and all equivalent settlements) with its population combined with the innovation which he implies, never minding all the other adaptive changes, would be part of that economic growth. England’s new vineyards are only a small illustration.

While accepting the “just transition”, “There will be winners whose share prices go up and down and there will be losers whose share prices go up and down. … some will destroy value and some will create value ... very possible to build portfolios around both winners and losers.”

Both Kirk and his critics see enormous change. His dispassionate but vividly phrased 15 minutes proved contentious, offending a quasi-theological view about attitude not argument as critics protested that he did not care about net zero or ESG objectives. Yet businesses and investors, whether on the farm or in a bank, necessarily look at where value may be created, transferred or destroyed while the principle of additionality asks where money will make a difference.

Cassandra, Luther, Galileo and the boy looking at the emperor’s clothes all had their views. The point of free speech is that their arguments, good and bad, are not disregarded as heresies but tested. The risk is of the same conformity of “groupthink” that brought the financial crisis and now brings “greenwashing”. Diversity of views and acceptance of challenge are the antidotes we will need to understand and tackle the larger changes and shocks we now face. Future prosperity with climate change depends on that.

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