25 Mar 2020
The power of E in ESG
How can the rule of e be applied to monitoring the earth's climate?
For a mathematician, Euler’s number 2.718 (approx.) or ‘e’ is magical. It pops up in all sorts of apparently unrelated places. Investors will have come across it in the calculation of compound interest; scientists will be aware of how e plays a critical role in modelling the spread of a virus. Whether it is in bond markets or the growth of Covid-19, e is at work.
Consider a different context, away from money or disease. Imagine trying to balance a pencil on its point – conceivable in theory but in practice impossible. There are many situations in nature where symmetry is possible in principle but we rarely see it in reality. The reason being, tiny disturbances from the perfect equilibrium grow rapidly with time and lead dramatically towards another state (think of the pencil falling from upright - on its point - to flat on the table).
In nature, distruptions in symmetry often grow initially at a proportional rate to the size of the disturbance itself, just like the pencil. Knowing that, e allows us to model the early dynamics almost perfectly.
What has all this to do with the E in ESG? Perhaps more than you think. Embedded in e is a warning for humanity – in the real world, disturbances that start small can quickly become big. Just think of the earth’s climate.
Of course, there is a broad range of temperature change scenarios imaginable as carbon concentrations increase, and the honest academic modelling admits as much. What remains debated are secondary changes in water vapour, cloud cover, and ocean circulation.
Hopefully, the net effect of our existing international effort to control the stock of global greenhouse gases in the atmosphere, implies a ‘manageable’ average global temperature increase of under 2.00C this century.
Nature is underpinned by complex maths, and e is a red flag. We ought to treat our environment with respect; this is self-interest not altruism.
However, positive visions such as these are not a given. There is little evidence to date that global climate change policies are working, as carbon concentrations in the atmosphere continue to rise. More worryingly, deep uncertainty is a feature of the climate prediction business.
While most reports focus on average climate responses, biosphere tipping points are perfectly possible. The maths here is unhelpful - the further we push our luck, the greater the likelihood of a ‘runaway’ rather than a median temperature response.
The earth can be fevered or freezing and keep spinning – as 'snowball' and 'fireball' periods in the distant past revealed. Alas, earthlings lack this versatility. If e governs the initial stages of a climate escaping from its past, we could be in for a very nasty shock.
Climate change is not the only existential risk out there and it's pandemics currently dominating the news. But we shouldn't forget a common thread. Nature is underpinned by complex maths, and e is a red flag. We ought to treat our environment with respect; this is self-interest not altruism. That is why E is in ESG.