The race of our lives revisited
GMO’s founder and long-term investment strategist, Jeremy Grantham, offers a wide-ranging analysis of interconnected environmental crises, explores solutions and makes recommendations for investors. The paper covers climate change, population growth, soil erosion and toxicity. It concludes by making the case for environmental investment strategies and fossil fuel divestment.
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OVERVIEW
The paper opens ominously with “It was always going to be difficult for us – Homo sapiens – to deal with the long-term, slow-burning problems that threaten us today” and goes on to demonstrate the urgent need to address manifold environmental crises to support an estimated population of 11.2bn people in 2100.
Divided into eight parts, Grantham explores the issues with data and case studies, discusses structural barriers to change including modern capitalism’s short-termism and the political influence of vested interests, but also strikes a note of hope in the extraordinary advancements in green technologies.
Part I: Summary of the argument
Part II: Back-up data – climate change damage is accelerating
Part two provides a detailed view of how climate change is not just occurring but accelerating. Grantham provides evidence of increasing temperatures, ocean heat, and extreme weather.
Part III: Decarbonising the economy
Part three describes the rapid deployment and falling cost of clean technologies, including case studies and data on wind, solar and battery technology. However, he also concludes that without massive additional investment, humanity will not meet the Paris Agreement’s 1.5oC target and could see a 2oC temperature increase by 2050.
Part IV: Climate change and feeding the 11.2 billion
Part four opens with a discussion of population growth, highlighting that Africa faces food sufficiency challenges under the weight of a population which is expected to double by 2050. Grantham goes on to discuss the decline in agricultural productivity gains due to peaks in yield growth, soil erosion and climate change. The interaction between climate change and soil erosion is of particular concern with the impact from the combined issues expected to result in a 56% decline in productivity in 2040 vs 47% from climate change alone (declines vs continuation of historical improvements).
Part V: Toxicity, biodiversity, and the deficiency of capitalism
Part five covers a collection of other issues, including chemical toxicity which Grantham links to increasing allergy and cancer rates, and bio-diversity loss. He closes the section by criticising modern capitalism’s inability to deal with these issues, pointing to short-termism and the use of discounting in valuations.
Part VI: Investing and the environment
A brief section describing the sector splits in GMO’s climate change opportunities portfolio which includes allocations to clean energy, smart grids, copper, energy efficiency, agriculture and water.
Part VII: The alleged perils of divestment
Section seven assesses the issue of fossil fuel divestment by comparing returns of 10 sectors going back to 1925 and finds that all sectors have delivered broadly similar returns over that period, implying that divestment from fossil fuels would not have resulted in a material loss in returns (+/- 0.1%). He goes on to argue that, given the challenges to the fossil fuel industry, divestment could protect portfolios from long-term risks.
Part VIII: What should investors do about climate change?
The paper ends with recommendations to:
- Vote for green politicians
- Lobby investment firms to be greener, and
- Engage with investee companies to do the same.
KEY INSIGHTS
- Modern capitalism is ill-equipped to deal with long-term, slow-burning problems like climate change, soil erosion and increasing environmental toxicity, which threaten humanity's ability to feed a population of 11.2 billion people projected for 2100.
- The average annual rate of global warming accelerated to +0.015oC per year from +0.007oC between 1958 and 1998. Since 1998, this has accelerated further to 0.025oC per year, with ocean temperature warming accelerating at an even faster rate.
- Increasing global warming has driven a 15x increase in floods since 1950, a 10x increase in drought mortality since 1996, a seven times increase in wildfires and 20x increase in extreme temperature events.
- Disruption of fossil fuel energy is occurring today and accelerating due to the falling costs and increased capacity of green technologies. During the 2020s, renewable costs will fall to a point that it will cost more to run an existing coal or nuclear plant than build and run new solar or wind. The capacity of wind and solar has also increased, in 2000 an average wind turbine had a capacity of 2MW, in 2016 it was 8MW and in 2022 it is expected to be 12MW. Lastly, battery costs have fallen dramatically allowing for intermittency of renewables to be cost effectively managed.
- Grain productivity growth has fallen from 3.5% per year during the green revolution to 1.2% now, which is a similar rate to population growth. Soil erosion, which is occurring faster than it can be replenished, and climate change are further impacting agricultural productivity. Grantham's research found that the combined impact of climate change and soil erosion are not being properly accounted for by scientists. Together these changes could reduce grain yields by more than 38% on current levels by 2040. Additional challenges like super-weeds and bugs, and limited and concentrated phosphate supplies further compound these issues.
- Based on current rates of soil erosion the world is losing approximately 1% of global soil a year and around half a percent of arable land. It is calculated that there are only 30 to 70 good harvest years left, depending on the location, putting the entire system of modern agriculture at risk.
- Chemical toxicity in the environment along with other pressures is contributing to all manner of issues from a 75% decline in insect populations, to lower sperm counts, to increases in autoimmune disorders and cancers.
- When looking at the returns of the 10 main economic sectors between 1989 and 2017, the difference from best to worst was 0.50%, from 1957-2017 = 0.61% and from 1925-2017= 0.54%. Meaning that taking out or "divesting" from any one sector would have resulted in a minimal difference in returns which was just as likely to be positive as negative. When looking forward, the falling costs of renewable energy and increasing demands to reduce emissions, an argument can be made that divestment of fossil fuel investments can protect long-term returns, although Grantham notes, in the short term, this may not be the case.
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RELATED QUOTES
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“Without incentives, wind is going to be a $0.02 or $0.03 product early in the next decade. Battery storage will be $0.01 on top of that. And when you look at… coal and nuclear, today, operating costs are around $0.03. New wind and new solar, without incentives and combined with storage, are going to be cheaper than the operating cost of coal and nuclear in the next decade. That is going to totally transform this industry.”
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