09 Dec 2020

Climate change – is Mars the answer?

Harold Hutchinson

Head of Research

How can investors tackle climate change? Will investing in nature be the key to combating this important issue? Harold tackles this topic in his latest blog post. 

Elon Musk has suggested that colonising other planets may be part of the solution to reconcile sustainability with the future growth of humankind. The background involves some uncomfortable facts. The earth’s surface temperature has increased by approximately 1oC since 1850. The trend is robust for land and sea observations, and for northern and southern hemisphere measurements. Polar ice-caps are melting, the vast permafrost from Alaska to Russia is thawing, glaciers are retreating and sea-levels are rising. Major earth ecosystems including the Coral Reef and Amazon rainforest are being disturbed. 

 

Nobody seriously doubts that the combustion of fossil fuels is a root cause of rising Greenhouse Gas (GHG) concentrations in the atmosphere, with the attendant climate stresses. Of course, there are remaining uncertainties in terms of positive and negative feedback effects. Moreover, the Earth has lived through Snowball and Fireball periods during its past (although as far as we know, no humans were around to experience it). Even for the most ardent sceptic, the precautionary principle suggests we should be careful, given that nature is full of ‘tipping points’, and we are putting it under increased strain.

 

Alas, for the last 30 years, the international policy response has proven to be singularly inept about doing much to abate rising CO2 emissions in the atmosphere. It is a brave soul who puts their faith in the ability of COP26, scheduled for November 2021 in Glasgow, to reverse the inexorably rising trend of GHG concentrations. 

 

A better path to salvation lies in a combination of voter pressure on governments, shareholder influence on corporates, and ‘bottom-up’ change in the legal frameworks governing the city-states that increasingly populate the world. So, the long arm of environmental and corporate law may certainly help us, especially if tight legislation takes hold in transport and global supply chains more generally. The real question is whether these forces for good can collaborate quickly enough to stop our extinction. 

 

For investors, we are moving into an era of much greater uncertainty than is often appreciated. Weather and climate drive economies to a greater extent than we care to admit. Rising volatility and tail events threaten a flight to safety in debt and equity markets, and the re-emergence of the State to provide capital of last resort. The path to such an eventuality would be one where traditional risk measures that underpin financial markets become meaningless, undermining traditional diversification strategies including index funds. 

 

Is it all doom and gloom? Intriguingly, there is one emergency exit that appears to be win:win – investment in nature. Own rates of return on key ecosystems in the Earth’s biosphere are well in excess of equity or bond market yields. Despite this, we continue to destroy them. That is unsustainable, and bad economics also. Yet it creates an investment opportunity. Put simply, there is a huge pool of undervalued assets lying in nature. 

 

Colonizing Mars is still a distant prospect, even on optimistic assessments. While Elon has talked of sending one million people there by 2050, that is several orders of magnitude less than an expected population of Earth of around ten billion by that time. A better alternative exists. There is no need to head off to Mars at all – ‘Mars ain’t the kind of place to raise your kids, in fact it’s cold as hell’, as Elton John reminded us nearly fifty years ago. Instead, we just need to look after our own pale blue dot. 

 

This blog is an abridged version of a longer article on climate change available below: 

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Disclaimer: The blog does not aim to give investment advice, but is designed to afford relevant longer-term context to investors, encouraging a broad perspective where uncertainty is high and a spirit of learning is important. The views expressed are those of the author, not those of Investec.