The twentieth century was a terrible time to be born a blue whale. After 1926, when seagoing factory vessels were introduced, the population plummeted, and by the early seventies only a few hundred remained. Attempts at conservation met with limited success, and it seemed that the whale’s days were numbered. The Japanese and Russians, in particular, continued to aggressively hunt the docile mammals, well aware that such rapacity would result in their extinction. In 1973, a creative economist named Colin W. Clark decided to take financial analysis to its logical conclusion. He posed the question of which method—hunting the whales to oblivion and investing the profits in stocks, or fishing the population sustainably—would yield the most money in the long term. The answer: hunt the whales to extinction and invest all the proceeds in the market.
Though it might at first appear that the authors of a new financial report with the sobering title “Investing in a Time of Climate Change” are analogous to the Japanese and Russians in this story, they are, in fact, equivalent to Colin W. Clark, holding up a quantitative mirror to a fundamentally existential problem. Written for the world’s “superfiduciaries”—sovereign wealth and pension funds, foundations, and endowments—the report, published by the international consulting firm Mercer, is predictably dispassionate. Future temperature scenarios are discussed in the abstract and Latinate language of a medical diagnosis (“climate change poses portfolio risks”), and summary investment recommendations are made in what the psychoanalytic theorist Felix Guattari once described as the “sedative discourse” of our contemporary era. (“Only developed market global equity has a minimum negative impact, regardless of the scenario,” the preparers advise.) In other words, the document, like most other financial accounts of its kind, would be incredibly boring to read if it weren’t for the fact it is describing the apocalypse.
The report is not the first to try to quantify the investment impacts of various climate-change scenarios—reports from Deutsche Bank, the Risky Business Project, the Stern Review, and many others are floating around—but it is, to date, the most comprehensive from an asset-allocation perspective. Breaking climate-risk management out into four major factors (denoted by the acronym TRIP, which stands for technology, resource availability, impact, and policy), the authors recommend that long-term investors “consider hedging and weighting changes” and “focus on risks and opportunities across and within asset classes.” “They really view it as risk mitigation,” Chris Davis, the senior program director at the sustainability consultancy Ceres, told me. “If climate trashes the economy, they’re not going to be able to meet their pension-fund obligations.”
The sheer volume of global institutional holdings can be hard to fully comprehend. According to a 2014 report by the Organization for Economic Cooperation and Development, a body that works with thirty-four of the world’s economies to promote shared goals, their primary institutional investors held $92.6 trillion in assets in 2013. To put this number in perspective, the combined G.D.P. of the O.E.C.D.’s member countries that year was $47.3 trillion. (The market capitalization of ExxonMobil, Enemy No. 1 in the fight against accelerating climate change, is only roughly $344 billion.) When most people think of the global financial system, they think of the investment banks, the hedge funds, and the distressed-asset investment firms. These are the frenetic first-movers in the market, the players who most profit from uncertainty and panic. Pension funds prefer much longer time horizons. They eschew long-term uncertainty, and in this they are the most obvious financial allies of those who are working to curb climate change. “Their scale and power is unprecedented in the history of capitalism,” John Fullerton, the founder of the nonpartisan think tank Capital Institute, told me. “But the potential of that is not being realized, because they’ve been largely put into a passive asset-allocation position.”
A perhaps counterintuitive finding of the analysis is that a two-degree Celsius rise over preindustrial times need not, according to the authors, “have negative return implications for long-term diversified investors at a total portfolio level.” This is not to say that assets wouldn’t need to be reallocated. Under such a scenario, the analysts expect gains in “infrastructure, emerging market equity, and low-carbon industry sectors,” which is another way of saying that limiting climate change to a two-degree Celsius rise would require such enormous investments in clean energy—Ceres has called for an annual investment of a “clean trillion”—that it would be hard not to profit as an intelligent first-mover in this market. Losers like coal, the returns of which, according to the report, “could fall by anywhere between 18% and 74% over the next 35 years,” should be jettisoned to make room for new investments in renewables, which “could see average annual returns increase by between 6% and 54%” in the same period. Even if the world ends up exceeding the two-degree limit (a result that appears increasingly likely: according to the World Bank, we are already locked into a one-and-a-half-degree increase), the report’s authors expect, at some point, a wholesale run for the low-carbon doors, what Anthony Hobley, the C.E.O. of the nonprofit climate-and-finance think tank Carbon Tracker, described in an interview as an inevitable “come-to-Jesus moment.”
In a time of accelerating climate change, an increasingly volatile reality will eventually come up against the limits of modern portfolio theory. The definition of fiduciary duty is therefore starting to expand, to include not only traditional and largely passive investment policy but also active stewardship of global average temperature. This is an extraordinary paradigm shift in institutional investing. Last year, a coalition of larger and more forward-looking funds, including BlackRock, CalPERS, PensionDanmark, and Cathay Financial Holdings, representing twenty-four trillion dollars in assets, issued a statement calling on government leaders to provide “stable, reliable and economically meaningful carbon pricing that helps redirect investment commensurate with the scale of the climate change challenge,” as well as develop a plan “to phase out subsidies for fossil fuels.” This begs the question: Why do we need these leviathan institutional investors—historically the most passive and conservative players in the global economy—to tell us to take action that we know is both imperative and dangerously belated?
Past performance does not predict future returns” is the disclaimer on the back of almost any investment prospectus, and yet the entire concept of business-as-usual energy production would seem to promise that it does. Implicit in ExxonMobil’s or Chevron’s long-term business model—and share price—is a rise in global temperature far beyond any average our current civilization could withstand. “The tragedy and impending catastrophe is that we’re waking up at the very moment when it’s already starting to be too late for our actions to mean anything,” Bob Massie, the initiator of the Investor Network on Climate Risk, told me. Though it can seem cognitively dissonant, casting global climate change in the language of future financial returns can be a novel way to model hope.
In 1975, as it became ever clearer that, under business-as-usual scenarios, many pelagic whale species would be doomed to a rapid extinction, a popular movement emerged to shut the whalers down. Children, adults, politicians, and even businessmen marched and held up signs, and planted them on their lawns. They affixed bumper stickers to the backs of their cars that read simply and emphatically: SAVE THE WHALES. After years of political pressure, and a burgeoning cultural sense that the whales were too intelligent and sentient to destroy, an international moratorium on whaling was declared. To read Mercer’s report, which is not the first of its kind and most certainly won’t be the last, is to get used to the idea that the whales we are trying to save this time are us.
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