The plot so far: In an AAA piece about Frankenstorm, we suggested that the disconnect between the view of climate change in the United States and the rest of the world was the result of an intentional effort on the part of certain financial interests to protect the value of their natural resources holdings. This had been done through a disinformation campaign implying that climate science was “liberal”, and therefore not really science. This type of affinity fraud is one to which Republicans, statistically speaking, have seemed to be particularly susceptible, based on the polling data available.
Such a campaign flies straight in the face of the US Defense Department’s assessment that the effects of climate change are a significant threat to American national security. We have not yet suggested that such an intentional campaign might well be viewed as unpatriotic and disloyal to US interests. But it would be tempting to do so.
In most countries, science is science. We would argue that a country that dumbs down its use of science to the level of political tool is a country in decline. But we’d prefer to be wrong.
Lest you doubt, the following was reported by Jane Mayer in The New Yorker: "Fossil fuel magnates Charles and David Koch have, through Americans for Prosperity, a conservative group they back, succeeded in persuading many members of Congress to sign a little-known pledge in which they have promised to vote against legislation relating to climate change unless it is accompanied by an equivalent amount of tax cuts. Of the eighty-five freshmen Republican congressmen elected to the House of Representatives in 2010, seventy-six had signed the No Climate Tax pledge. Fifty-seven of those received campaign contributions from Koch Industries’s political action committee. The study notes that more than half of the House members who signed the pledge in the 112th Congress made statements doubting climate-change science, despite the fact that there is overwhelming scientific consensus on the subject."
The Frankenstorm article drew five serious responses, all worthy of study and comment. They did a good job of reflecting the broad spectrum of arguments against climate science. We’ll finish with an update on the investment implications of this contretemps faux.
The first four comments were skeptical of climate science.
Comment 1. Science refuses to say when we’ll be underwater.
"But the entire world of science never said a climate crisis will happen, only could happen and it’s been 26 years of research, mostly into effects not causes. The science agrees we could be at the point of no return yet there does not exist one single IPCC warning of “crisis” that isn’t peppered with maybes and “could bes” and “likelys” etc. We demand that if the world of science is going to condemn our children to the greenhouse gas ovens of a climate change crisis, at least be clear and say it will or will not happen."
Response:
The above writer probably listens to a weather report daily. He can see a hurricane moving in his direction on the weather map, and is likely not bothered by the forecaster’s inability to tell him how many raindrops will fall on his particular head, or whether the winds will topple a tree onto his house.
A successful hedgie friend of ours echoed the comment in a different way. He noted that science is changing its view constantly through new discoveries, so it was too soon to accept the scientific view. By chance, his sources were equivocal about climate science, so he saw no reason to buy into climate science as a reality.
The scientific view might have something to do with predicting the future, which scientists know to be a bit dicier than predicting the past. If one knew the precise spot where the cue ball would strike while shooting a game of pool, there might be enough information to predict the trajectory of all the balls on the table. There are rather more variables influencing the climate on Earth. More, probably, than the variables influencing next year’s sales at Walmart. It should be enough to see the forces at work, and established trends in place. Analysts can't get forecasts right a year in advance, and you want climate scientists to give you chapter and verse on the precise shape of the world climate system for trade date plus 20 years?
Writer #1 and our hedgie friend commit substantial dollars every day on the basis of uncertain predictions (called research) about future events. And they have learned to live with and run portfolios comfortably even with those uncertainties. Living by the standards writer #1 and our friend were applying to climate science, they would be incapable of doing their jobs, as there would never be sufficient certainty to make a decision. We didn’t mention this detail to our friend at the time. Guest protocols, you know.
It happens that there is a published scientific estimate that's pretty meaningful. A leading climate research institute now says that sea levels will rise 2.3 meters for every 1 degree Celsius rise in the world's temperature. That would be about 7 1/2 feet in the United States. more than the height of almost anyone except the deceased pro basketball player Manute Bol. So the next time you're with your kids at the beach, stand up and imagine what the coastline would look like if the water is a couple of feet over your head.
This might not bother anyone if it were going to take a few hundred or thousand years to get there. But there are now some projections (like from NASA, for example) that, on average, suggest a 1% rise in Celsius by about 2050. And that's without taking into account the delta of the rate of change, which is itself rising.
Comment 2. Increased energy costs make the existence of climate science impractical.
"Addressing climate change means making energy more expensive, which in turn will eviscerate the economy of any nation which unilaterally implements ameliorative policies. Energy is at the root of all economic activity. Republicans know and care more for the economy than Democrats do, most Americans believe; and it is as stewards of the economy that they oppose making everything more expensive, and thus globally uncompetitive."
Response:
2010 US energy consumption cost about $1.2 trillion, according to government statistics we found. June 2013 estimates of the cost of Frankenstorm were $68 billion, or 5.6% of the nation’s annual energy expenditure. One would need a pretty substantial annual rise in the cost of energy to offset the costs of increasing major storms spread unevenly throughout the system causing substantial dislocations. Anyone remember the gas lines for a few days after Sandy? If that happens where people carry firearms, the U. S. will go off like a firecracker.
To paraphrase Gertrude Stein: A cost is a cost is a cost is a cost. Whether it’s an increase in energy costs, or repairing damage to your shorefront property, or a government scrambling to put a bandaid on a possible windstorm insurance company default, it’s still a cost. Excluding those costs creates an accounting bias in favor of the very group which has put a finger on the scale on the scientific side.
Wikipedia includes a section on the relation of the storm to global warming. It generally concludes that global warming was a significant influence in the storm’s generation, and that there will be an increasing number of such storms.
Comment 3. Climate people are all Nazis.
"Hitler and the Nazis were the precursors of the green movement:
“We recognize that separating humanity from nature, from the whole of life, leads to humankind’s own destruction and to the death of nations. Only through a re-integration of humanity into the whole of nature can our people be made stronger. That is the fundamental point of the biological tasks of our age. Humankind alone is no longer the focus of thought, but rather life as a whole . . . This striving toward connectedness with the totality of life, with nature itself, a nature into which we are born, this is the deepest meaning and the true essence of National Socialist thought.” (Comment by Ernst Lehmann, Biologischer Wille. Wege und Ziele biologischer Arbeit im neuen Reich, München, 1934, pp. 10-11. Lehmann was a professor of botany who characterized National Socialism as "politically applied biology.")
The same thrust by today’s left-wing is still the same old fascist story."
Response:
Who knew? This writer would have us believe that there is a direct link from Nazis to this:
Ninety-seven percent of climate scientists agree that climate-warming trends over the past century are very likely due to human activities; and most of the leading scientific organizations worldwide have issued public statements endorsing this position.
We’re not aware that scientists as a group are on any political side. Most of them will probably be quite upset to learn that they are Nazis.
As will people from a number of world religions, Buddhism and Christianity to cite two, where there is some credence given to the notion that humans are part of the totality of life.
The commenter's basic logic error is simple. Suppose members of Group A believe Premise B. It does not follow that if someone believes B, they are therefore members of A. If Nazis believe their children should drink milk, it does not follow that parents who give their children milk are Nazis.
Comment 4. Atmospheric Scientists (Meteorologists) Know Better. With Notable Exceptions.
"As an atmospheric scientist, I can assure you that climate change has been tiny, and that extreme weather has NOT been increasing. The reason that there is so much resistance in the USA to climate change legislation is that there is a huge group of scientists like me that I like to call “lukewarmers”. We recognize that the earth has gotten warmer and that global warming is very real but the changes have been small, the forecasts have no proven skill, much of the science is not understood, the hysteria is dramatically over-hyped and most of the proposed “solutions” will produce negligible mitigation at enormous cost."
Response:
Well, at least some meteorologists know better. Like the American Meteorological Society, in this August 2012 Information Statement. Here's a brief excerpt: "Warming of the climate system now is unequivocal, according to many different kinds of evidence….. All of the 10 warmest years in the global temperature records up to 2011 have occurred since 1997, with 2005 and 2010 being the warmest two years in more than a century of global records….
Globally averaged sea level has risen by about 17 cm (7 inches) in the 20th century, with the rise accelerating since the early 1990s. Close to half of the sea level rise observed since the 1970s has been caused by water expansion due to increases in ocean temperatures. Sea level is also rising due to melting from continental glaciers and from ice sheets on both Greenland and Antarctica. It is clear from extensive scientific evidence that the dominant cause of the rapid change in climate of the past half century is human-induced increases in the amount of atmospheric greenhouse gases, including carbon dioxide (CO2), chlorofluorocarbons, methane, and nitrous oxide. …Prudence dictates extreme care in accounting for our relationship with the only planet known to be capable of sustaining human life."
Comment 5. Learning Disabilities in Surprising Places.
"I’ve been involved in energy activism for a while, and I’ve learned the hard way that people don’t change positions easily, and if they do, they often manage to do it while pretending that they didn’t. There is a rather discouraging study where they took 50 people who all admitted to believe a common myth. Then they gave them tons of information that overwhelmingly proved it was a myth, including people in positions of respected authority saying so. Only one changed his mind and accepted he was wrong before. Seven said that they had always believed the correct thing (in spite that they were selected because they said before otherwise). Five simply refused to talk about the subject. The rest continued defending their previous beliefs with various weak arguments, including the very common “OK, maybe I got the facts wrong, but the actions that were justified with these facts were still right”."
Response:
This comment was the only one of the five that found climate science valid. Thus, in this small sample of AAA readers who are, presumably, scientifically literate and current with technology, 80% took a view counter to today’s scientific consensus. You can probably imagine how embarrassing this would be to the money management profession if a similar percentage looked askance at, say, the latest research on semiconductors because they had gotten fooled by a negative campaign by the abacus and typewriter interests. The saving grace is that this is too small a group to be treated as a statistically significant sample.
A stroll down memory lane might serve to illustrate the point. Here's a reminder of another piece of legerdemain that influenced investors and slowed down rational financial decisions, until...... From Wikipedia: "In a conference call on April 17, 2001, then CEO Skilling verbally attacked Wall Street analyst Richard Grubman, who questioned Enron's unusual accounting practice during a recorded conference call. When Grubman complained that Enron was the only company that could not release a balance sheet along with its earnings statements, Skilling replied "Well, thank you very much, we appreciate that ... asshole." However, Skilling's comment was met with dismay and astonishment by press and public, as he had previously disdained criticism of Enron coolly or humorously." Enron was trading in the 50's about that time. It finished the year worthless. The Enron price story its last year was, pure and simple, a story of how quickly investors figured out what they had bought into.
Imagine Bernie Madoff saying that mathematics was "liberal" when the math showed that investor money had disappeared. You get the point. You do, don't you?
Incidentally, research by the International Energy Agency suggests that to meet goals of limiting temperatures rises, over half of current fossil fuel assets may be found to be unusable, leading to substantial writedowns of those assets. So, people like the Koch brothers and similar interests may well be rational actors from their own self-interested point of view, but likely not from yours, if and when you stop to think about it.
So What's A PM To Do?
Get with the program, maybe. The Financial Times just published an article "Investors Should Strike While the Planet Is Not Too Hot. " The article discusses a growing concern amongst scientists regarding climate effects, and cites some of the steps investors are taking in their portfolios. It also suggests in passing that high-carbon portfolios may be vulnerable to sharp writedowns due to certain seminal and foreseeable events.
Here's something about Miami drowning, reported recently in Rolling Stone. The article quotes a University of Miami department chairman who believes Miami won't survive more than 100 years. Since he lives in the area, it's hard to see why that opinion might be linked to his personal financial gain.
By itself, this is one more data point indicating a direction. What should interest you as a portfolio manager is the analytical trend, combined with a sense of when climate change investment analysis will reach a tipping point. On that day, your investment portfolio will be influenced by the market's perception of the future and start to discount climate influences. Whether you accept the science or not, you'll still have to decide how the rest of the investment world will react when the market delivers its bloodless verdict on the winners and losers.
For those researching this type of thing, we found that www.ceres.org might be enormously helpful. In addition to working with investors in the Ceres Coalition, Ceres directs the Investor Network on Climate Risk (INCR), a network of 100 leading investors collectively managing more than $10 trillion in assets. They are also a source of information on wide-ranging sustainability topics, including global water scarcity risks, challenges from unconventional oil extraction, corporate climate change strategies, and regulatory/policy-related analysis.
And they're not alone. Look for continuing reports and interviews on the subject.