This is a mea culpa. It’s my fault – I’ve only just got the joke on climate change. And not, I might add, because this summer the UK suffered its highest temperature on record. I might be daft, but thanks to my old geography teacher I know the difference between weather and climate.
I completed my personal paddle across the environmental Rubicon after a sequence of meetings with one of our asset managers. It was the first time I had seen evidence that I found scientifically convincing. It was also the first time that I had seen the consequential, granular outcomes of the rapidly improving climate models now being used by institutions such as the Woods Hole Research Centre.
First, the bad news. Climate change is not a part of the Environmental, Social, and Governance (ESG) Venn diagram. For what it’s worth, I consider ESG now 100% business-as-usual. Climate change is existential, it is not a subset of the diagram. It is the page on which the diagram is drawn. The three imminent climate change factors – as they relate to human endeavour – are heat stress, drought, and rising sea levels. Put simply, it’s a matter of where we can live on our landmasses.
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
This is a mea culpa. It’s my fault – I’ve only just got the joke on climate change. And not, I might add, because this summer the UK suffered its highest temperature on record. I might be daft, but thanks to my old geography teacher I know the difference between weather and climate.
I completed my personal paddle across the environmental Rubicon after a sequence of meetings with one of our asset managers. It was the first time I had seen evidence that I found scientifically convincing. It was also the first time that I had seen the consequential, granular outcomes of the rapidly improving climate models now being used by institutions such as the Woods Hole Research Centre.
First, the bad news. Climate change is not a part of the Environmental, Social, and Governance (ESG) Venn diagram. For what it’s worth, I consider ESG now 100% business-as-usual. Climate change is existential, it is not a subset of the diagram. It is the page on which the diagram is drawn. The three imminent climate change factors – as they relate to human endeavour – are heat stress, drought, and rising sea levels. Put simply, it’s a matter of where we can live on our landmasses.
But there’s something preventing us from responding as we should. And it’s not material – a matter of whether or not we can – it’s whether or not we will. The big problem, as I see it, is actually cultural.
The Cause Of Inaction
Now bear with me. But I think the real reasons that we have not begun to address the issue of climate change are twofold:
1. The message itself is too simplistic
2. The delivery of the message is too strident
The general public is sick and tired of being patronised, hence the anti-elite backlash and the rise of Trump, Brexit, and populism.
In fact, the public understands complicated issues, and for the most part, are wise and fair and kind and thoughtful. Mainstream media widely misunderstands their current distrust in “elites” . It is not because the general public are ignorant, it is because the general public recognises that there is an unfair distribution of risks vs. rewards, of costs vs. benefits.
And they do not respond well to the language of fear and escalatory threat. We need a new way of approaching the challenge of climate change (or ‘CCC’, as I like to call it). And note that I’m using ‘challenge’, here, rather than ‘crisis’. We must stop the language of doom and peril. For it is not working, clearly. Rather than emphasising escalation, let’s start employing the language of ‘joint venture’.
The general public recognises its own common interest. We need cultural encouragement; we need to embrace the concept of ‘nudge’ and not shove – more ‘carrot’, less ‘stick’. The general public understands cumulative evidence and the precautionary principle. That’s how we all run our lives. We are not feckless fools. We understand that we need to stop measuring and start doing – and soon.
A Possible Solution
Climate change is a global issue not a local issue. It cannot be addressed by individuals, by single governments, or with a balkanisation of inadequate responses across the globe. It has to be a unified, global effort.
Of course, there have been attempts at this, but getting nations to agree has proven to be problematic. That may not change until it is too late.
We need a global framework that can be implemented quickly by global institutions. We need to overcome the current inertia by using the principal system humanity has developed to distribute risks and rewards: capitalism. And the clue to how is in the name: capital.
When the banking crisis of 1907 occurred, J.P. Morgan locked the right people in his library and after lengthy ‘discussions’ we had the Federal Reserve System in inchoate formLikewise, following the global financial crisis of 2007-2009, the Basel III framework was developed to establish capital adequacy.
If you get the right sort of crisis, you get an appropriate, powerful, global regulatory capital response. Does anybody seriously suggest that the correct response to climate change does not relate to financial resources?
We need a global framework to efficiently release capital specifically to address climate change. Financial institution concepts such as Risk Weighted Assets, Eligible Collateral, and Net Stable Funding Ratio must all be given their climate change equivalent measures. If Basel III was about attribution and fair pricing of appropriate risk allocation, we need a capital nudge towards a host of climate change challenge (CCC) responses.
Why not make ‘climate change challenge, CCC bonds’ eligible collateral for central banks? Perhaps have zero weighted CCC loans on bank balance sheets.
We need to encourage appropriately discounted access to capital with the commensurate benefits of new sources of economic activity – a whole new sector of the global economy with an entirely clear objective: to fix the climate change challenge.
So here’s a call to FSB, BIS, IMF, WB, IADB and all the world’s central banks:
‘Release your capital to face this new challenge’
When we, the general public, see that the financial elites are making these major cultural changes to capitalism, the concept of Joint Venture will lead to the general public changing their CCC behaviour too.
Written by the Macro Dilettante. One time Jackson Hole symposium attendee. He has traded since the late 1980s, and was a macro hedge fund portfolio manager from 2002 to 2015.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)