Jeremy Grantham

Jeremy Grantham – What Investors Need To Know About Technology & Climate Change

Public lecture by Jeremy Grantham CBE on 11th April 2018 at a public lecture given in Drapers’ Hall, London. The lecture was titled “What investors need to know about technology and climate change: the race of our lives”.

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Jeremy Grantham

ery nice to be here thank you for coming special thanks to LSE for the enormous support at the Grantham Institute I have a soft spot for propaganda and the guy who wrote brave new world and I appear to be the only two people who believe you can have good propaganda as well as bad propaganda good propaganda is reaching out on with the truth and persuading the hearts and minds and so a special mention to Nick Stern who is a natural and brilliant propagandist and also to Bob Ward who runs the communication effort and let me say this about Bob Ward that the enemy excuse me the enemy dread his bite and his bark he goes after the denialists with great enthusiasm I have a brain crushing amount of data and exhibits and I’ve done this a few times and as I was having dinner with a fellow
environmentalist last night I thought well I got to make it special I’m gonna go home and write a little intro and under the encouragement of two glasses of white wine I did that and and even though you might think you do regret it in the morning once you’ve done anything if you’re me you gotta use it you’ve got to amortize your work in the interests of sorry about this and the interests of speed I’ll I’ll read it
and mostly environmentalists are always saying whatever you do don’t frighten the audience don’t scare them too much but if you take a look at the data that I’m showing you today there’s berries there is still a simple way to to avoid scaring the audience and that is you can lie you can distort it you can
cherry-pick
and and that is what the oil companies and and and their friends in in the UK I call their friends the loony lords I’m sorry
and they do it very well
Lord Lawson for example in the last few days on channel 4 said that the there had been no warming on the planet in the last 10 years which isn’t a bad
statement when you think that ten of the last of the warmest eleven years in history we’re in the last ten years the three warmest years in history were in the last ten years why he says this someone please explain it to me
maybe he hates its grandchildren I have no idea but to deliver anything
approaching the truth of course you’re going to scoop scare and audience that’s intelligent as for you guys who knows that’s a joke I’m sorry about that you could call this presentation the story of carbon dioxide in there and Homo sapiens without carbon dioxide you may not know that this would be basically a frozen globe it’s minus 25 degrees centigrade and and only two to three hundred parts per million of carbon dioxide delivers the pleasant world that we have prospered in carbon dioxide also plays a very central role it was the very heart through fossil fuels of the Industrial Revolution the Industrial Revolution was not really based on the steam engine it was based on on the coal that ran the steam engine without coal we would have very quickly had what I think of as the Great forest wars of the 19th century where the demand for wood to fuel steam engines to generate power would quickly have denuded all the great forests of the world and then we would have been back to where we were at the time of Malthus living at the edge of our capability with recurrent waves particularly in Eastern Europe of a famine as every other creature on the planet does good good years you advance bad years
you fall off a gallon of gasoline has about 400 petrol to you has about 400 hours of labor equivalent it’s just massive it means that ordinary
middle-class people have the power that only Kings would have had typically in the distant past and what that has done that incredible gift of accumulated power over millions of years as
catapulted as forward in terms of civilization in terms of culture science that created an enormous surplus with which we could do these things for the first time in history and above all agriculture particularly through the man-made manufacture of nitrogen without which you can’t grow anything it allowed the population to surge forward the sting in the tail is that this has left us with seven and a half going on 12 billion and that is only maintainable by continued heavy use of fossil fuels which will either run out or destroy the planet or both with the only possible exception only possible way out is rapid and complete decarbonisation and needless to say this is an extremely difficult thing to pull off and
extremely expensive in the long run if it depended on our good sense if we for example had to decide in our long-term interest to take five or ten percent of our GDP as if we were fighting a great war we would be toasted there is no way we would voluntarily pay such a high price to save our long-term bacon but technology particularly the technology of decarbonization has come leaping to help us this is the race of our lives and technology in my opinion will in one sense win and we come back in 40 years I am pretty confident there will be a decent sufficiency of cheap energy on the planet
that does not involve carbon and in 80 years perhaps it’s likely we will have full decarbonization if only that were the end of the story the truth is that we have moved so late
that by the time we reach a new
stability of plus two to three degrees centigrade a lot of damage will have been done and a lot more will happen in the future due to inertia in the following one or two hundred years when we stop producing a single particle of co2 that the damage grinds on first to sea level rise I don’t worry too much about the miami’s and the Boston’s that’s just a the kind of thing that capitalism tends to handle pretty well the serious problem is the loss of the great grain producing deltas around the world the nile the mekong bangladesh thailand these produce probably 10% of the world’s grain supply agriculture is in fact the real underlying problem produced by climate change but even without climate change it would be somewhere between hard to impossible to feed 12 billion people which is the UN forecast for 2100 especially difficult in Africa with climate change there are two separate effects on agriculture one is immediate the droughts the floods the increased temperature reduce quite measurably and materially the
productivity of that year’s harvest and then there’s the delayed effect the most dependable outcome of climate change is an increase in heavy downpours it is precisely the heavy downpours that caused erosion and erosion is the great untalked about problem we’re losing 1 percent a year of our collective global soil it’s calculated that there are 30 to 70 good crop years left depending on the location in 80 years current agriculture is simply infeasible for lack of good soil
a separate a separate threat also closely related to fossil fuels is that we created a toxic environment not conducive to life from insects to humans as we’ll see and we must respond rapidly by a massive an urgent move away from the use of complicated chemicals that saturate our daily life finally in terms of the introduction a subtext to all this as the capitalism and mainstream economics simply can’t
apparently deal with these problems mainstream economics largely ignores natural capital I exempt LSE of course but it’s absolutely true otherwise the idea that a true pixee and profit requires the capital base be left completely intact and only the excess is a true prophet and of course we have not left a natural capital base intact or anything like it the replacement cost of copper and oil and so on we don’t attempt to replace them capitalism also has severe problem with very long term because of the tyranny of the discount rate anything that happens to a
corporation over twenty five years out it doesn’t exist for them therefore grandchildren have no value they handle very badly externalities even handle badly is flattering they don’t handle at all
it is completely ignored and the tragedies of the Commons indeed they’re made worse by deliberate well-funded and talented programs for obfuscation particularly in the US but also sadly in the UK so now for the now for the data the race of our lives climate damage accelerates here we have the exhibit that Al Gore made famous for hundred thousand years of carbon dioxide at the bottom of the ice ages you see for there there was a hundred and eighty parts per million that at the
interglacials of which there are four and a half you see it rose to 280 300 parts so 120 100 to 120 parts per million for heaven’s sake made the difference between two miles of ice on Manhattan and what we have today the ability of a carbon dioxide molecule to trap heat is amazingly impressive 1950 we were up in the general area where you might have expected the beginning of a several thousand year down Lake into another Ice Age when we pulled this stunt we added an extra hundred and twenty parts per million we added as much carbon dioxide as the complete amount that separates the bottom of an Ice Age from an interglacial and in a blink of an eye we’ve added that much and we will add the same amount again and another hundred and twenty it is a massive experiment and the best word to describe it is feckless which we are absolutely lacking in fact the I had a hard time with the climate scientists using the word acceleration I’m proud to say I did this one four years ago it’s only in the last year the climate science has taken to using the word I acceleration a fairly regularly in peer-reviewed articles good for them I think Trump has at least got one purpose in life he’s put a little more backbone in into into climate scientists the four years ago I did this one which just looked at the very modest increase in the first 50 years of the last century and the second 50 years and then between the two El Ninos which caused a local surgeon in heat from the 1998 peak to the 16 peak
25 pips 715 25 this is pretty impressive acceleration and there’s something about a bad
item accelerating that should make the hairs on the back of one’s neck its prickled that and the ocean temperature is of course also accelerating the black line is down to 2,000 meters and on the right you see that 1952 1937 units of heat increased a year and in the last 26 years the last few minutes its
accelerated to 99 units the most rapid acceleration of although was released recently an estimate that the melting of antarctica previously considered almost off-limits seems to be doubling every 20 years at least according to one group of well qualified scientists the
consequences most dependable as I said is the downpour this is just the incidence of
one one-inch a day which is a modest definition of a downpour in Houston they had 10 inches in one day followed by 10 inches followed by 10 inches it wasn’t just a hundred year flood they had last year it was off the record a thousand years you could say or impossible both of them work pretty well statistically the bad news was 18 months before that they had had what would have been a hundred year flood and 18 months less than 18 months before that they’d had a 50 to 100 year flood the data simply no longer computes on the old numbers the serious widespread consequences the flood damage here on the left and then the droughts on the right the wildfires and the extreme temperature events this does not include the dreads of
California while fires or Houston but greener technologies also accelerate the cavalry racing to the edge of the cliff before we throw ourselves off is my is my view of this and maybe they will get there first and maybe they won’t I used to think the odds were about 50/50 I think maybe a little less now we seem to have lost a ground in the last three years this is the best
some of the best news we could possibly read about this was a telephone talk with stockholders from the largest utility company in North America that has that owns a Florida parent light also owns the largest trader of wind and solar and what are you saying here is that without incentives early in the next decade wind is going to be two pennies to three pennies per kilowatt hour and battery storage will be a penny on top of that and he’s saying kind of pay attention here what this means is that the full levelized cost the full cost of building a solar and a wind farm and operating it will be less than the marginal cost than the operating cost of his best nuclear plant and his best coal plant and this is not from a friend this is from the dark side this is this is someone who makes money at building electric plants he knows what he’s talking about and as if that wasn’t good enough news because that says the game is over it’s all over by the shouting in terms of electricity we had
substantially more recently in the last two months a proposal for in Colorado for Excel corporation they were thinking of closing a couple of coal plants early they sent out four proposals they were overwhelmed with 850 350 of them were for wind and solar including storage of we deduce about four to six hours of storage to get the evening kicker and the median price below which half of them half of them were lower two point one pennies for wind plus storage so that’s already left
30% beyond what the previous guy was talking about and just in a few months that’s how fast it’s moving and and solar three point six pennies including storage and the storage bids here were point three pennies
the point-seven the previous guy had been talking about a penny and a few months later they come in with real bids for 2023 of 0.3 to 0.7 it really is amazing progress hasn’t been fully digested yet and in America and probably not here and this is what it looks like this is starting in 2009 for heaven’s sake a few minutes ago and look at the speed with which Solar has been coming down to 50 bucks five cents a
kilowatt-hour and an onshore wind below that and these are not up there with what we just talked about but that is the median coal plant so all you have to do is go back 10 years and this was a gleam in the eye in fact no one was suggesting it would have happened and now we have not just passed through that point but we have absolutely trashed it just a word on wind which people don’t understand that well in 2000 that’s a on the right there’s a pretty decent sized two megawatt turbine most of the ones you cycle past even in Holland are no bigger than that and mostly smaller that is a big windmill by what we are used to seeing in Boston we have nothing close to as big as there and over on the left you have a monster a ten megawatt which has now been put up and is operating two years ahead of schedule biggest one in in the UK and one two three four weeks ago on Monday ge announced that for 2022 orders you can have a 12 megawatt let me tell you about the 12 megawatt machine it is 260 meters high I mean it would take you half an hour to run the distance of these things the blade a single blade is a hundred and seven meters tall the total there for 367 meters much higher than the Eiffel Tower and I and we had lunch my wife and me on the top of the Eiffel Tower quite recently it is very big it is sitting just shocking to imagine a wind blade turning around over your head now how do these things work the energy they generate is is equal to the area they sweep so when you go from a ten-foot blade to 20 you don’t double your power you quadruple it
courtesy of PI R squared so you’ve square it which is the bigger the better but the thing that is much more powerful than that even is picking good wind and one of the things you get when you go up to the top of the Eiffel Tower is you get windier and wind does not go up when you go from 10 miles an hour wind to 20 it doesn’t just double it doesn’t just quadruple it arced tuples and that is why a hurricane at 140 miles an hour is not merely irritatingly more powerful than 120 is 70 percent more powerful than 120 mile an hour wet when you go up high you pick up about 20% increased wind which means 70% more power so we’re very very tall so you build these giant monsters for the North Sea you assemble them on the coast you stick them on a special boat you take them out they assemble it directly the the ones they have now they do in ten hours down from three days and as they become even more monstrous my guess is in 3040 years the cheapest power in the world will be the largest wind powers which by then might be 30 or even 40 megawatts 20,000 homes even from a 12 megawatt and everybody said oh yes but the weak sister here is batteries and it was true batteries did not even increase at 3% a year for the 50 years leading to 2010 and just about the time it became a cliche which so often happens the reality changed from in 2010 Tesla could do you a thousand megawatts and I’m sorry a megawatt for a thousand dollars
and this year it will be a hundred and fifty it’s dropped 85 percent in eight years
and when they’re making 30 million electric cars that will be half that the Grantham foundation happily is investing in the next generation of lithium-ion which is solid state will not burst into flame charges in five minutes and uses half the material and therefore half the weight and half the volume so it won’t just go from 150 to 75 at scale at scale the next generation and if we don’t get it Dyson and the boys will get it they’re also on the target it will be not 75 but 40 that will make an electric car far cheaper to build than internal combustion infinitely cheaper to run which it already is and with 15 percent of the moving parts much cheaper to Montee maintain this is a done deal and there’s a consulting firm who’ve been around for over a hundred years in in Norway and advising oil companies and more recently renewable companies generally considered pretty arm’s length and they have pretty aggressive
assumptions as as I do if you follow the data you realize things are moving along very well they put that into their models and this is what they get they get oil and fossil fuels peaking pretty soon but the bad news is by 2050 it’s still 50% of all the power is coming from fossil fuels even if you believe what I have told you about
electrification and electric cars which is pretty scary thought because it gives you this fossil fuel use even if it Peaks out which it will maybe not 2020 but maybe before 2030 but still the carbon emissions will continue to rise and on our best estimates and and and there’s really you get to almost 2 degrees by 2050 and half the power is still fossil fuels you can see how easily
we’re going to end up how easy it is to get to 3 degrees we’re going to have to fight and kick and scream to keep it at 2 and a half
this of course is just a massive this is the biggest movement since fossil fuels came in since the carbonization of the global economy in the industrial revolution this is the next biggest wave to decarbonize or die in the attempt or bust okay that wasn’t bad enough now the terrible news they’re feeding the 12 billion the impact on food sufficiency of population growth and increasing wealth climate change and soil erosion and many related factors so this is a population
it’s chugging along going nowhere when Matthews writes his piece it’s one and a half billion when I’m born its 2.2 and now it’s seven and a half but God’s sake is tripled in my lifetime are we serious I mean if that’s the curve in the stock market you know what to do
panic go short right and they are the official UN forecast high to low twelve billion
– sorry sixteen billion to eight billion with twelve is merely the middle of their forecasts I would say of course it’s not going to happen I know now enough about agriculture to know there is no way we’re getting to 16 billion and probably no way we’re getting to 12 our last best hope is that the fertility rate around the world drops and in the developed world it’s dropped more than people realize two point one dotted line is replacement cost and everybody in the developed world is now below and given the cultural trends it looks like it’s going to stay there and we have some wonderful cases in in the developing world this is Iran obviously Muslim country got some help from oil but they had seven children per woman in 1961 and now they have 1.6 I mean what an achievement and you could dismiss it well they’ve got a lot of money but my favorite one of all really is Bangladesh also coming from
children per woman to 2.2 they are dirt poor they are cheaper they are poorer than Nigerians and yet they’ve managed by persistent government effort training local women going out persistently talking to the villages and the town’s folk they have gotten it down they’ve also gotten down by the way the
incidence of diarrhea and and dysentery and child mortality and stunting to almost nothing to ten percent of what it was fifteen twenty years ago and a half of India which is twice twice as rich as they are so this is this is the problem it’s Africa the official forecasts of the UN is virtually all of the increase we’re looking at is is in Africa the rest of the world is half a billion Africa is 3.3 billion six and a half times more than the rest of the world combined Nigeria alone is more than the rest of the world at six hundred million the official forecasts believe it or not is they think the middle range forecast with Nigeria’s they’ll have 800 million people by 2100 they’re had 28 million when I was born they have a hundred and ninety today and they’re not entirely comfortable feeding the people they have as it is and a recent poll they were asked you want to emigrate forty percent said yes mostly to the UK well that works out pretty well
forty percent of 800 million we could squeeze in 320 million if we were feeling generous and just to rub in that point there is no way Europe can handle any any material number of African food refugees that are likely in my opinion to be offered to the marketplace if you will if we took a hundred million that would hardly be a downpayment on the kind of problem that they will have the next 60 70 years and because it is absolutely impossible for us to do justice in any way to their problem we should recognize that in fact attempting to do it in a half-baked manner will be very self-destructive to the social harmony of of Europe I’m kind of sad to have written four years ago that the first casualty I thought of African problems would be the liberal traditions of Europe little did I know how fast that would move and how dramatically it would stimulate the right wing if you try to do the
impossible
on this one you will end up with a lot of right wing reflex you just have to work out a reasonably fair clear way of saying no you cannot take food genuine food refugees it will not be doable I am left of Karl Marx by the way on income inequality just to let you know that I have no fascist leanings that I’m aware of
this is a total demand for food as calculated no as in the past there’s something relentlessly smooth about that which is terrifying and this is the crop yields
starting in the the end of the Green Revolution which ran from about to 1960 to 71 3.5% amazing just think about it every three years you have a 10% increase in output from a given field incredible mainly through sturdier crops designed to handle masses of fertilizer combined with the masses of fertilizer and not surprisingly regularly that has declined to 1.1 which is exactly the rate of population growth we are now capable of increasing our yield of grain which is the heavy lifter of calories 80 percent at the same rate we’re
increasing our population there is no safety margin and then we get into the economist stuff of diminishing marginal returns now if you’re going to look for them in
returns in grain production where are you going to look you’re going to look at the people who do the very very best right that’s where you expect to see it soonest and these are the people who grow wheat the very best per acre it is not the US they do the best per person one farmer and his son and 6,000 acres but we do much better in Europe per acre and in Japan for rice these are the best producing countries for grain and they have not increased their productivity for 15 years even though they had pretty steadily for the prior hundred hundred years and this is one of the reasons the great surge of fertilizer that started after World War two and more or less maxed out about 88 and now the US and China in particular clearly used a little more than is optimal and some countries particularly in Africa could benefit but the great surge is behind us so this is my attempt to look at the marginal returns the productivity of grain 1930 to 50 of chugging along at a fairly hands-on 1.5 the Green Revolution for 20 years kicked it up to 3.5 and then it bounces back to 1.5 but in the last 20 years it drops another half point to 1 and we estimate the following 20 years it will drop just a quarter of a point to 0.75 and this is an exhibit that shows the top dotted line is the extrapolation that people use typically and and the effect of the erosion which starts off fairly modest at 10% and and then becomes much bigger almost
geometrically bigger as you go out in the following 40 years we’ve added a little green line which is actually minus 13 which is the impact of
increased flooding on erosion let me tell you something about science by the way people work in silos there is a report we’re coming to on climate change effect on agriculture it does not mention the word erosion okay
you have my personal guarantee these are climate scientists and the other guys with their feet in the mud our erosion scientists and they do not talk
apparently so we called out the erosion guys and they said as far as they were aware they were not particularly concerned about climate change even though a huge increase in heavy floods is a guarantee there’s a peer-reviewed paper that said that the English summer god bless it by 2100 would have four times the intense downpours that it has today just what the English summer needs apparently this this drizzle drizzle stuff gets on your nerves let’s have some serious rain
erosion is a power-law 95% of the time even a heavy heavy rain has no effect the farmers are not stupid they don’t lose soil that easily but it’s the two or three real downpours a year the one or two every two or three years the monsters that caused the gullies that are 10 feet deep and in Iowa and it’s that kind of rain that’s that’s coming and has been coming in these last few years notoriously and will increase and this is a county in Iowa this is really absolutely mind-blowing for me 1850 they had 14 inches now you need three to four inches of good soil we were having dinner with a soil scientist I’m sorry with with a farmer in in renewable farming last night and she said three to four inches is what you need
they had 14 inches they had a
magnificent excess and 1911 and a half 1959 point five seven in 1975 five point five in 2000 they had apparently stopped it there and so we called them up tracked them down and got the latest number the good news is the erosion has reduced by more than 50 percent they are getting worried and but it’s four point eight is the bad news now four point eight is still really nice
efficiency but you can imagine looking at that with another one at 4.8 when you need three to four that your about time to get scared but there is no there is no scared in this business no one seems even slightly interested in this point so one of the two most dreadful reports I have ever read came out unfortunately from it was in the Proceedings of the National Academy of Science generally recognized as number three when they’re this dangerous you want them to be in the 400th Journal the yang and about ten others which is increasingly the pattern they were looking what they did is they went back over 50 years and they looked at the actual effect that the flood had in an area in the US what did a flood do in Iowa what did a drought do in Montana and so on and and did the heat have any effect at the moment almost none but in the future quite a bit and then they extrapolated according to the mid-range forecasts for floods and droughts and just used the effects and and built in the increasing severity and they came to this conclusion that it would be forty-seven percent less than just extrapolating the existing productivity it would take it back to the
productivity levels of 1980 there was a follow-up report peer-reviewed on France and French wheat very similar
conclusions if this represents the world we will not be able under current agricultural techniques to maintain stable society as we know it and Africa in particular will will have incredible problems you’ve never seen an exhibit like this because there’s never been one because the erosion people don’t talk to the other guys but this is putting in one by one erosion the increased effect of heavy downpours and and so on and finally we decided okay we’ll give will give that great study by liang and the boys will give them a 1/3 debit because their study said everything else being even and the world will not stay still will change its crops that will put arm and a leg
into trying to get more drought
resistant flood resistant grains so we gave them a 1/3 credit on their damage and it’s a 56% collective reduction in what other people appear to assume will be the case and a 38 percent reduction from today this better be wrong I don’t know why it’s wrong but it better be wrong other problems facing big AG water availability of an expansion bug and pathogen immunity the weeds of becoming a terrible problem do you know there is as much loss to the typical crop in the u.s. today as there was in 1945 before we started
chemical warfare you can’t now give it up because you’ve trained those weeds to grow like weeds pardon the expression and they would come screaming back and ruin your crop but if you could go back in a time machine and not change it it does appear that we have not gained much ground by spending so much money on chemicals toxic environment 75% loss of flying insects this is the second of my two horror stories most of you by now have probably picked this up it was done by German serious amateurs who had a passionate attachment to insects who knew there were such people but in Germany they went out assiduously and married to a German I can say with Teutonic efficiency and every the same night in the summer every year in the same place they put out the same net and caught everything that flew into that net and they measured it from 1989 they did it several times in forest preserves of one of the big provinces in Germany and what happened since 89 which 28 years ago 75% of the flying insects have disappeared 75% of the sheer mass of all those insects
it does appear that this is a toxic environment that is simply not conducive to life and the real trouble here is this incredible doubt no one knows what is causing it and let me ask you a question
who will get the benefit of the doubt will they ban the chemicals to give the benefit of the doubt to Homo sapiens or will they not ban them to give the benefit of the doubt to the chemical companies do not hold your breath I will guarantee that at least for the first few years until this becomes a
flashpoint they will give the benefit of the doubt so the chemical companies and we must hammer them on this issue I do believe this issue will catch fire and overtake climate change there is something more personal about what is happening to the insects the butterflies the bees and the humans let me just say global distribution of phosphate reserves you cannot you cannot grow any living thing without phosphorus and potassium and and this is the problem we mine phosphorus and we mined potassium they are finite reserves and phosphorus is a particularly finite reserve the recent report said it reduces the chance of life out in the universe because there is a universal the shortage of phosphorus and if life there was to be based like life is here the lack of phosphorus would be a huge hindrance and we have a lot of phosphorus but the bad news is 75% plus or minus 10 is in Morocco in the Western Sahara so when you see Isis take over Morocco you have my personal guarantee that within a week the US military the Chinese military and maybe the European military will be in there we cannot afford we only have 50 years with no growth outside Morocco and with growth 35 years and under 35 years on something you need to live in an agriculture based on mining it shipping it and pouring it in
millions of tons over the fields you need to go to sustainable agriculture and that takes decades of change and farmers like fishermen are extremely conservative ok climate change the problems with capitalism we have the six a great extinction going on but no response no calculation of the costs in in mainstream economics toxicity I’m sorry the heading for this one is wrong it doesn’t matter
toxicity affecting humans also a 50% loss in the developed world in the sperm count of us humans I mean give me a break who is worried about this this was a meta study of almost 200 surveys this is not trivial data are you going to panic at 75% reduction how about eighty seven and a half I mean we’re like the flying damned insights I mean we’re on our way out and the same reason
unspecified toxicity which we do not quite know what is causing what is it the Teflon in the bottom of your pan is that the plastic wrap around your food is it the stuff in the air and diesel cars is that all of the above
we don’t know all we know is the consequence complete inability of capitalism to deal with these things let me tell you the story of a devil and the farmer so a devil goes out to a
Midwestern farmer and he offers them a deal I will guarantee you for your soul three times the profit on your wheat and your car and everything else if you sign the contract for your soul and all the other clauses and Clause 21 is it will cost them one percent of their soil as well as their soul and one percent is exactly what they’re losing anyway so that was pretty easy
so they sign up and of course they make killing and his grandchildren his great-grandchildren the present value of that deal is 5.5 million and the No Deal farmers up the road who decided to tough it out and keep their soul it’s 2 million
now this is the bad news that’s 100 years of course you’ve lost all your soil and as I like to say at least when the starving people arrived from Chicago at the farmer dies rich you cannot feed the people with no soil and the devil has conned you into doing it but this is the bad news
every MBA ever generated is going to sign that damn contract or flunk the course I mean this is a dramatically profitable deal we’re engaged in Steven Pinker and the boys who saw it say everything is wonderful this is the point everything is wonderful because we’re not accounting for sustainability and the old joke about so far so good as you fall through the Empire State Building so far so good so far so good sixteen inches of soil 12 inches eight inches so far so good we’re just running through the system this is an
illustrative climate change portfolio the kind of portfolio that you investors will need to get your brains around it has I can barely read it here it has thirty four percent clean energy ten percent solar six percent wind clean power generation smart grid copper you need five times more copper for all things electric than you do internal combustion energy efficiency twenty bottomless pit of opportunities to make money an agriculture 23% agriculture is the key and third generation high-tech agriculture is my favorite investment the Grantham foundation has 50% venture capital fairly early stage unique in the foundation business and a lot of it is aimed at agriculture and finally the peril of divestment I have met more investment committees than I care to think about perhaps a couple of thousand I would think by now and there’s no more conservative group on the planet than an investment committee and if you tell an investment committee if you carpet an investment committee they think they’re ruined if you tell them you’re going to take out anything from their portfolio interfere
anyway they’ll say that it’s due to the long term result and and certainly if you took out something like utilities or energy or fossil fuels it would be incredibly destructive so it is said so finally we did the test we took out each of ten major groups and ran consistently with the remaining 90 and the first time I did this we did it from 1989 and you will see how dramatically they vary on the top row there’s 50 basis points difference between the best and the worst they’re all the same and when I saw this I thought oh my god we picked an incredible year but what the hell and I went ahead being unscrupulous and presented the data and my conscience finally got the better of me so we went back and we tracked it but just before we look at that look what happened to tech that is the little unique little outlier on the downside as the tech bubble formed and broke and then it got back as if it had never happened all of those ten lines track across as if they were the same and then we extended it first of all to 1957 and and secondly to 1925 and yes of course it ruins the whole thing it has now gone from 50 bits to 54 bits so 90 years it has nice costume who knew the market has found something it is efficient at it may be hopeless in bubbles and busts but it can tell you that it’s priced these big groups pretty well there is no free lunch in buying high-growth technology over low growth boring dopey utilities they have priced the utilities down and the tech up and they do indeed do it right and they produce the same returns this is amazing what does this mean for divestment it means that if you go in there and you take out fossil fuels your starting assumption is not death and destruction your starting assumption until proven otherwise is that it will have very little effect and it’s just as likely to be positive by 17 bits as negative and that’s an amazing
contradiction to what every investment has ever said as far as I’m concerned but things are not the same because it obviously takes a major miscalculation to move the dial here nothing like that has happened for 90 years but I do think that decarbonisation is just such an event the reason I think that is the oil companies the chemical companies are not rolling with the punches
they are fighting it tooth and nail they are still funding obfuscation programs in in North America and if you do that as a corporation as a capitalist you are likely to bite the dust if you’re facing a major change if you fight it and they are fighting it if they rolled with the punches they might do quite well and and bleed off their capital and pay big dividends but they are not doing that and there is not a fallback to chemicals and that’s what you’ll hear oh yes maybe we’ll lose our gasoline market but we’ll fall back on petrochemical feedstock oh no they won’t my guess is the
petrochemical will be having more suits in 20 years than they have and they’re already facing 50 to 100 suits that they have misrepresented
the oil company’s products and in the old days of the 1970s they had
peer-reviewed articles by Exxon
scientists saying how dangerous carbon dioxide was they had a very expensive ocean-going ship taking data and then in 1982 new guy comes in fires them all except the two scientists who turncoat who turned their coats and cranked out stuffer for denialists
and they have misrepresented their products and should pay a high price and if I were you as investors I would make sure if you have a long range horizon you absolutely categorically avoid chemicals as well as absolutely avoiding fossil fuel companies they face a headwind and climate change companies will be difficult they will have over edge
mansion but they will have a tailwind of more rapid growth for sure which never hurts thank you we’ve got just about 20 minutes just two more on for questions there’s lots here and I should remind you the LSE tradition of gender balance in in questions we don’t always achieve it but I just noted lady just here yes Centre for multilateral negotiations and I’ve got a question what role do you think regulation should play you talked a lot about science and and business and if a tool and how to make it effective I don’t think capitalism works at all well without regulation if you count on a capitalist doing anything other than maximizing the short-term profits you’ll make a bad bet don’t hold your breath there are one or two altruists in the capitalist world Marks & Spencer is pretty good Unilever is very good but in general they’re answering to
stockholders who are pounding the table and maximize your short-term profits get the stock price up capitalists do not work on these issues they are not going to solve the problems unless regulations insist they will strip mine and have the acid run down the streams of West Virginia those regulations have been taken off now by by Trump it’s quite iniquitous and and never count on them to do any of this so regulations and regulations are the only way you can run a capitalist society and live to tell the tale thank you thank you
Julianna Halloran writer and broadcaster the first time I saw you speak at UCL a few years ago you did weigh in on this point about soil erosion and you have linked the dangers of soil erosion with climate change and heavy downpours to what extent do you think is this issue being better understood in the states where you do tend to get more extreme weather and in this country I haven’t seen it really written about much the Honorable exception may be of the Guardian once or twice do you think there is a gulf or gap between our knowledge and assessment of this issue in Britain compared sadly no it it’s ignored perhaps even more
comprehensively I think there there is an honorable tradition of more
agricultural research and and more connection between that and the general public than there is in the US they know nothing about it thank you
Joe Haeg from Grantham mr. to Imperial College thank you for a wonderful talk Jeremy you took a look about fuels obviously and also about climate change and also food now one thing that’s going to be assert across those areas is the issue of biofuels and you didn’t say much about biofuels and I wonder if you have an opinion on those the the trouble about biofuels in general is that it competes with the ability to grow regular food and since I think the growing of regular food is an
overwhelming problem it’s hard to squeeze biofuel into that equation so I think in general land-based biofuel is a bit of a red herring
I think ocean based biofuel is quite interesting possibility growing seaweed which outgrows land-based plants four to one the best so out grows even a sugarcane and so on that’s the
possibility that
the Grantham foundation is looking at quite seriously but I think lambaste is a very temporary thing and will
eventually be driven out of business by the need to grow food
could I just emphasize Thank You Jo that that was Jo how very distinguished physicists from Imperial College and director of sister Institute the Grantham Institute they gentleman over there please and shout at me because I’m apparently going a bit deaf hello Jeremy Pete wheeler from the Nature Conservancy I was surprised in your model portfolio that you only had one point seven percent in timber or forestry given that you know as by our analysis to get to 2030 on the track we need to be on for a two-degree world we need to grow a lot more trees and to grow trees you’ve got to use them and sequester the carbon in perpetuity so query why is the forestry timber industry such a small weighting in your portfolio the that suggested portfolio had only one objective and that was to understand the forces of climate change and to make money it was a capitalist take on it wasn’t a do-gooders take on it yes of course you could have a lot more timber the fact is that timber like every other asset on the planet has been pushed up in price and down in yield by the long term existence of zero return on cash etc etc and the yield in New England has gone from seven to four and a half the yield on an Iowa farm has gone from five to three it’s simply not that attractive to be blunt in capitalist terms the other thing in sequestering terms you can’t get enough leverage out of lower deforestation and increased
reforestation to really get the job done in any material way if in ten years we were zero on that equation we would be doing well we’ve got to do something much more scalable much more rapid and dramatic than that although please let’s do the best we can on that increase the soil
the carbon content increased the quality of our farming is multiples of that but still not not enough to solve the problem we are going to have to start sucking carbon dioxide out of the chemically by all biologically or physically and biologically would be the best way and we’ve got to find a way to do that and the current methodologies are too slow thank you right at the back there please hi Thank You Jeremy going back to AG technology is 50% of your portfolio that you’ve mentioned I’m just curious what sort of technologies are you excited by in his vertical farming one of those vertical farming is only useful for cities to grow high-priced crops elegant veggies for
michelin-starred restaurants it and it makes good sense and you can make good money in terms of calorie heavy-lifting forget it you need millions and millions of acres and to do that you need good soil etc oh sorry I didn’t answer your question but third generation
technologies I bumped into a really exciting one recently where they look at the kind of biome of the plant the micro organisms inside the plant and they extract them using a technology
unavailable five years ago and they grow plants with each single micro organism to see what effect it has and they collect those that do a good job for drought and flood and growth efficient processing of carbon and so on and and then they coat the seat and and with cotton they have a double-digit increase in in productivity it’s a very promising kind of third generation attack happy to say Grantham foundation has a small holding there’s gentle interest there Paul Dickinson CDP Jeremy thank you so much if we look at the systemic problem we need regulation and the price mechanism to change behavior
would you agree potentially that the most useful thing institutional
investors can do is to collaborate to get money out of politics I don’t know if it’s being number one it’s
dramatically important the u.s. in particular to a degree you wouldn’t understand is run by the capitalist system the very rich people and the corporations there’s something called a gilens flatline 31% of all bills go through Congress and if the general public love it it goes to 32 if they hate it it goes to 30 hands to flatline if the ultra-rich love it it goes to 65 they aren’t imperfect but if they hate it it goes to nil nothing gets done in America unless the elite approved representative democracy has ceased to exist and breaking that hold which we have to do is the top of the list for America I might put it in the top three and the rest of the world ladies just say sorry just just just here second row it was a hand over there it’s gone away but ladies just here yeah
hi I’m Ashley from climate kik Australia my question is on the circular economy and the role you feel at my plane addressing some of these crises around climate climate change
oh it’s a circular economy and how you feel that might play a role in
addressing some of the climate change crisis I think you laid a lot of stress on energy efficiency which is one part of resource productivity and the circular economy looks at resource productivity right across the board from you know design through to management right through a bar to elegant and economic concept for me I prefer blunt instruments I’m sorry okay and lady just here sir do you think it would be very useful if we could assign this space in the atmosphere to the different
countries so that they were more aware of how much more co2 they could emit and do you think it’s important to develop direct air captures so there’s a way that people can compensate for emissions yeah these are dreadfully complicated issues I think carbon capture is hopelessly on economic as currently conceived there may be a breakthrough we’ve actually heard rumors of a enzyme with which you coat the material the chalky material which a Caltech
scientists referred to as having orders of magnitude improvement now if any ordinary person says orders of magnitude I interpreted as being a lot but if a guy from Caltech says that I interpret it as
at least a hundred times more efficient so we immediately offered to invest in it and he refused for the first time in my experience a university refused to have incremental money donated to research so it might be it might be something really promising but that’s for measuring everyone’s output I think in the end you’re going to have to tax those countries that don’t play ball you’re going to have to tax their incoming product for a carbon intensity and you’re going to have to calculate that some way it’s not going to be easy but if you don’t do that then the chain becomes you know as strong as the weakest link and in the end you have to solve that a broad-based global carbon tax would be good if the UN could get its brain around that one dimitra’s and get us from the Grantham Research Institute to the LSE thank you for a fascinating talk I’m also coordinating lead author for the global environment outlook for the UN so I will take back your point about downpours and soil erosion and make sure I’m sure it’s been done perfectly well but I will check to make sure it is well I will certainly take the message back my questions about pricing you know in a world I mean you showed the asset portfolio and the ex post pricing seemed to be reasonably efficient of course that cuts both ways and it begs a question in a world where if you were to take a strategic fall would look in certain sectors simply aren’t viable in the kind of environment that you’ve talked about if you were to look for you know interest parity in a portfolio subject to risk and returns those sectors ought to be priced a lot less healthily than they are and yet they’re not so there seems to be for every person like you and us who talk about the lack of strategic viability for this sector there is a counterparty who thinks they are a strong viable long-term concern so my question is really this why is there such mispricing it’s it seems a little bit kind of you know I’m uncomfortable with the answer that oh well they’re just all very short-term it’s that seems a very insensitive
it’s a good point that but they’re operating in a biased world in most industries there is no bias there’s good news bad news optimist pessimist but in uniquely in the fossil fuel industry there is systematically biased output of data you read The Wall Street Journal religiously etc etc you do not get a level playing field in terms of the viewpoints issued on the fossil fuel consequences and in that world it is not surprising that investors have been a bit slow on the uptake
that the dangers that they’re moving by the way the dangers are much greater than you think
and what typically happens in these occasions like going bankrupt is you do it very slowly very slowly and then suddenly all at once and it always surprises people in the market just about the time you give up hope that it will happen it happens at four times the speed you ever thought Jennifer Reiter the back there hi there Jerry Pearlman natural capital partners in response to the u.s. planning to remove himself from the Paris agreement we seem to grow from the voluntary carbon market and she’d like to get your perspective on if you feel the voluntary carbon market has a role to play in decarbonizing the economy I see progress on on all good behavior and and voluntary actions but I don’t see anything like the speed and quantity to get this job done we will not do this unless basically we’re paid to do it unless the techniques become economic as I said earlier if we actually were faced with a situation where the only way to decarbonize was to pay a huge chunk of our GDP we would not do it until the very end we would scramble when it was too late
voluntary will not do even a decent fraction of what we have to do it’s lady just stare at the back
thank you sir fire to help do you think that it would help if the FDA FDA were to make understanding of climate part of the criteria for deciding whether people were fit and proper to actually run the financial markets and if so what might that look like
these questions are getting so
complicated
I must I’m gonna have to quit yes it would help but how to structure that it takes knowledge that I don’t have but it would help a lot

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