ImpactAlpha, Jan. 16 – Jeremy Grantham called the Japanese bubble of the 1980s, the tech bubble of the 2000s, and the housing bubble of 2008. The British-born value investor has been warning of the risks of climate change long before it was fashionable. At this week’s Conservation Finance conference at Credit Suisse in New York, Grantham said oil companies “have behaved outrageously badly” and should be called out as “pariahs,” much like tobacco companies were several decades ago.
Credit Suisse’s Wilson Ervin engaged Grantham, who manages $60 billion in assets as chief investment strategist of Grantham, Mayo, & van Otterloo, in a frank and, frankly, remarkable, discussion the role of finance in addressing climate change. We excerpted some of the highlights:
You’ve talked about carbon as another type of bubble, what do you mean by that?
I have never said that, but it’s been attributed to me. Had I said it, what I might have meant was what Mark Carney is talking about, and that is that the world is seriously underestimating, in this case not the P/E ratio, but the dangers of climate change, the rate at which it will eventually have to move and the enormous amount of stranded assets that will result from being late. Oil companies are not moving quickly. They are fighting the move. They have behaved outrageously badly.
One of [Exxon’s] retired physicists in 1982 predicted to within 1% what the carbon content of the air would be in 2020 – 405 units parts per million. They had an ocean-going research vessel out there, they had peer reviewed articles in the late 70s about how dangerous carbon dioxide would be to the planet.
And In 1982, Exxon’s new boss fired all the economists except two who turned tail and started to write obfuscation articles. They sold the boat and they used the money to fund obfuscation institutes such as Cato and the rest of the boys who would go out of their way to make a strong case that climate change is exaggerated, it isn’t humans [causing it], and even if it were there’s nothing we can do about it.
There has been very little action for the good of society by any major corporation, but notably the fossil fuel industry.
My view on this is, if you behave badly, you should be called out. If they continue to behave badly, we should hold them to account and make them pariahs, like we did with the tobacco industry, who were equally altruistic, shall we say. The files of Exxon show they know the damage. Unless they are made to look like pariahs, politicians will never have the nerve to impose taxes on carbon, just as they imposed taxes on cigarettes. It took 20 years of making tobacco look like a pariah. We have to do that with the oil industry, unless they voluntarily start to behave well.
If they behaved well, cooperated, if they rolled with the punches and tried to anticipate the problems, they would be useful allies, because they deal in scale. At the moment, they are not just foot dragging, they have served to slow down the whole field by five or ten years.
What role does finance have in changing this? Bill Gates, for example, doesn’t think divestment is going to solve the problem. Where do you see the best places to put your efforts?
I have nothing against Bill Gates saying that tech is wonderful – never underestimate technology, and it may pull a rabbit out of hat. But to then go on to say, indignantly, that getting divestment has not saved a molecule of carbon dioxide from getting into the atmosphere misses the whole point.
This is not about the economics of the short term, this is about making them pariahs. That’s why you divest. If you divest without getting it into the newspapers, you’ve wasted your time.
What we need are the great thought leaders. We’re tragically missing the great universities – Harvard, Yale, Princeton, Stanford. They have not taken a leadership position. And it’s easy to do because it’s been a god-awful industry to invest in. The last 10 years it’s up 5% and the S&P has tripled. Coal has been even worse, and it is going out of business. It has been put on notice.
Solar was up 70% last year…
The technology of solar and wind is transcendentally helpful. There’s a video of one of the great techno-bulls giving a talk in 2016 saying it’s all over, the cost of solar is down to 3.2 cents. And I think, holy cow, it’s 1.7 today two years later. 1.7 pennies, down from 3.2 in the last two years.
It is way below the variable cost of running a coal electricity plant. They can give you the coal plant; it’s still cheaper to build a new solar plant or a new state of the art wind plant in the North Sea, and pay for the capital as well.
When you think about your investments in this space, how do you break down where you want to allocate your resources?
I think American capitalism is rather stodgy, monopolistic, too powerful in Congress, and somewhat lost the plot. The great exception to that is American venture capital. At the Grantham Foundation, our target is 70% fairly early stage venture capital. Well selected venture capital beats the stock market. Of that 70% our target is to have half of that in green early stage venture capital.
Green VC is going to have a topline from heaven. The one thing you can be certain about is everything green will have a faster growth rate than everything black. Electric cars will have a vastly higher growth rate than gasoline cars, which are now going backwards.
The greening of the grid, energy efficiency, is going to have much greater growth than standard business as usual.
The topline of a green portfolio will simply be a lot faster. Why would you not choose to put an overweighting in that area?
We are a front runner in solid state lithium ion batteries – half the weight, half the volume, charges in 9 minutes and never catches fire – that’s a game changer. And there are lots of those game changers out there.
Larry Fink wrote a letter that a few people read… what is the impact of letters like that in some of those movements Larry’s been trying to drive?
Hugely important. Well done, Larry. Now, can you vote your index funds a little greener? It’s one of the lowest-rated funds in the world. Legal & General votes their index funds extremely well. Northern Trust not so badly. And way down at the bottom, BlackRock. This dog has a terrific bark, and I am seriously hopeful that its bite will sharpen up a bit too.
Yesterday was a terrific day. The EU said they were going to set up a $1 trillion greening program. The Guardian had a wonderfully upbeat article on the fermentation of enzymes and microbes to create new food. We know they’re working on meat, but they are nearly a year or two away from making cheap protein that will make all of those horrible fillers like palm oil redundant, will not be nearly as bad for you and will displace masses of milk and cattle and greenhouse gasses associated with that.
Farming will completely be changed. If you can make cheap protein filler, you will end up with half the space for cattle and half the space or less for soy and corn, and we can go back to serious farming.
When you look at agriculture, how much of it is about replacement of meat products and how much about other challenges?
Farming, done well, sequesters carbon. Out in the Midwest they inherited 8% carbon/organic matter. It has been taken down to 1.7, 1.9 today. Completely denuded, turned into fine grain, light, brown stuff that blows away in the wind.
If you do serious regenerative farming, you can increase that by about .2% per year. One percent every five years. The people who have done it over 20 years have taken it all the way back to 8% carbon. If you did it globally, that’s about 30% of everything we produce in the way of greenhouse gas emissions.
It’s not just sequestering, it’s what you don’t do. No tilling; you save all the energy. No fertilizer, so there’s no nitrogen oxide, which is 200 times worse than carbon dioxide that we throw on the fields in excess because it’s cheap. And none of that running off to poison the Gulf along with phosphorus. Above all, you end up with no poisonous chemicals of the pesticide variety, which are doing such a job on us. This will be the big crisis of the next 10 years. It’s much worse than climate change.
After the war the sperm count in the developed world was 120 units, today it’s 40 – and nobody’s talking about it. It’s still going down by 1.9% a year and if anything is showing signs of acceleration. Fertility is crashing everywhere. If we do not act very soon, in 10 years, most people will need help becoming fertile and in 30 years all but a handful will.
This will move very fast, [and] affect chemical companies, so along with divesting your oil companies, for heaven’s sake, divest your chemical companies as well. Three suits against Monsanto’s RoundUp have won. Monsanto has lost more money for its parent Bayer than Bayer paid for Monsanto.
When you think about the challenges and opportunities to use finance to protect and restore some of our natural ecosystems, have you seen anything that excites you, or do you have any advice?
I was on the general board of The Nature Conservancy when we were working on the great Seychelles ocean deal, and so on, and they’re all encouraging, but they are band-aids compared to the need for government backing. Externalities are not addressed by capitalism or mainstream economics. Economics says that we are run by labor and capital, but as I like to say, try making a loaf of bread without wheat and heat.
The fact that we have finite resources that we deplete and throw away plays no role in mainstream economics.
A true profit – Hicksian profit, in the trade – says, it’s only a profit if you leave the entire system exactly as valuable and intact as you found it at the corporation level. We are not doing that to our natural system. We are running it down, we are despoiling it, and we are not charging it on the balance sheet or the income statement. If we did, it is not clear to me that the last 10 or even 20 years that the developed world has actually been making any money.