Climate science 100 over years ago

Published in 1912 (source link here), the climate impact of coal and carbon dioxide (CO2) was known then. Indeed Eunice Foote in 1856 was one of the first to suggest CO2 would lead to a warmer planet. (See American Journal of Science and Arts, google embed below). There was anouther paper in 1896 from Arrhenius in Sweden, also eloborating on these ideas (pdf here)

This highlights two factors to me: (1) Data and reporting is insufficient to bend demand-side human behaviours. Given the economic growth fueled by fossil  energy (see the work of energy economic historian Vaclav Smil) and the view from 1/3 of Americans who disbelieve man-made climate change (see Yale Survey on climate).

Data are not enough. Experts are not enough. Marketing, stories and convenience rule.

Observe how pink is for girls and blue is for boys simply because of marketing that becomes entrenched. 150 years ago this was not the case. My high school tie is pink, at a boys school, as we choose that colour in many years ago.

Observe Nespresso coffee pods, a solution for a problem we don't really have (and that makes mainly worse coffee, or not better, than other methods) but created a problem with waste recycling (that was not thought about fully until years after launch), but it's more convenient (by a small margin) and well marketed. The man who invented the idea now has regrets.

Climate is not unique in this.

The (2) point is the necessary imprecision and variability of climate models. It has taken 100 years to get to this point.  However given, this imprecision you can take risk-philosopher Nassim Taleb’s view: “We have only one planet. This fact radically constrains the kinds of risks that are appropriate to take at a large scale. Even a risk with very low probability becomes unacceptable when it affects all of us - there is no reversing mistakes of that magnitude. Without any precise models, we can still reason that polluting or altering our environment significantly could put us in uncharted territory, with no statistical track-record and potentially large consequences... While some amount of pollution is inevitable, high quantities of any pollutant put us at a rapidly increasing risk of destabilising the climate, a system integral to the biosphere. Ergo, we should build down CO2 emissions, even regardless of what climate-models tell us..." (Noted in this previous blog here).

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The current Arts blog, cross-over, the current Investing blog.  Cross fertilise, some thoughts on autism.  Discover what the last arts/business mingle was all about (sign up for invites to the next event in the list below).

My Op-Ed in the Financial Times  (My Financial Times opinion article) about asking long-term questions surrounding sustainability and ESG.

Current highlights:

A long read on Will Hutton looking at Brexit causes and solutions.

Some writing tips and thoughts from Zadie Smith

How to live a life, well lived. Thoughts from a dying man. On play and playing games.

A provoking read on how to raise a feminist child.

Some popular posts:  the commencement address;  by NassimTaleb (Black Swan author, risk management philosopher),  Neil Gaiman on making wonderful, fabulous, brilliant mistakes;  JK Rowling on the benefits of failure.  Charlie Munger on always inverting;  Sheryl Sandberg on grief, resilience and gratitude.

Buy my play, Yellow Gentlemen, (amazon link) - all profits to charity

Divesting sectors. The impact on returns. Evidence that oil divestment may not impact returns.

Grantham and colleagues have looked at the S&P500, over the last 28 years, 60 years, and 90 years; excluding a major sub-component sector each time. Grantham’s overall conclusion it that it didn’t make much difference in return - although some might argue at the max range of 50bps that compounded over 28 years may be significant. Others might suggest that the power of diversifcation and time, also makes this conclusion unsurprising.

Caveats could include: not peer reviewed (although I have found similar conclusions with slightly different data sets), different exclusions may produce different answers (specifically Tobacco might come up as a narrow exclusion; cf Dimson’s data set on “sin stocks”), and that S&P500 is not world representative (however it has the best long run data set, and is a widely used index that does represent a facet of corporate America).

Grantham writes (see link to LSE talk  here)

“So my colleagues and I finally carried out a test to see exactly how an investment portfolio would have been affected by divesting from a group of companies that are listed in the Standard and Poor’s 500, the index based on the market capitalisations of 500 large companies listed on the New York Stock Exchange or NASDAQ.

These companies can be divided into 11 sectors (not including real estate). We considered the 10 long-term sectors (real estate was added relatively recently), and analysed how the index performed without each sector.

Initially, we considered the period from 1989 until 2017. [The results are shown in Figure above]. You will see how dramatically the index changes with the removal of each sector – there is only a 50 basis points difference between the best and the worst. They are basically all the same!

You will see that excluding the information technology sector made a small difference for a few years around the turn of the millennium. That was the technology bubble. Beyond the burst of the bubble, all of the indices track together again, as if nothing had ever happened.

But basically, all of those 10 variations of the index track between 1989 and 2017 as if they were the same. So we decided to see what happened if we chose a different period, incase there was something extraordinary about the past 28 years. We extended the analysis, first to start from 1957, and secondly to begin in 1925.

Source: same as chart above

You will see in chart above that changing the period of analysis does not make much difference. The difference between the best and worst is 54 basis points instead of 50. So over 90 years, it would not have cost an investor to have divested from any one of the sectors.”

Grantham further writes:

“Who knew that the stock market was that efficient? It may be hopeless in bubbles and busts, but it has evidently priced these groups of big companies pretty well. And there is no advantage to an investor of choosing the high-growth information technology sector over, say, utilities. Utilities are priced down and information technology is priced up, but they produce the same returns. It is amazing.

What does this mean for divestment? It means that if investors take out fossil fuel companies from their portfolios, their starting assumption should not be that you have destroyed the value. Their starting assumption should be until proven otherwise. that it will have very little effect and is just as likely to be positive by 17 basis points as negative. That is an amazing contradiction to what every investment committee has ever said, as far as I am concerned.

It obviously takes a major miscalculation to move the dial when it comes to divestment. I think that decarbonisation is just such an event. And the reason I think that is that the oil companies and the chemical companies are not rolling with the punches. They are fighting decarbonisation tooth and nail. They are still funding obfuscation programmes in North America. And if you do that as a corporation, as a capitalist, you are likely to bite the dust if you are 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 bleed off their capital and pay big dividends. But they are not doing that.”

I’d like to add a thought or two on the theoretical framework here. There are two to note one is

The Active Law of Fund Management which suggests the bigger the investment universe the better the risk/return potential, and,

The Efficient Market Hypothesis which suggests information is priced in efficiently such that it is hard to outperform large diversified markets

Both are theoretical although backed up by certain lines of empirical evidence (I’ve been drafting a long blog on the EMH for a while, hopefully out one day), although both are not considered perfect to explain what we can observe empirically.

As Grantham alludes to, this suggests the power of reasonable large scale diversification, and time. It seems to suggest over long periods of time, no one sector has such strong outperformance that it significantly dwarfs a large fairly diverse group of companies/stocks. I’m guessing there are always 400 to 450 stock left in any one excluded portfolio.

It’s an interesting challenge to certain notions of thematic and smart beta ideas as well, although those assessed differently.

Many of us are in the forward looking future prediction game. Although again, this might suggest, as Warren Buffet and Jack Bogle do that the average investor is then best off in low cost trackers (although note possible limited stewardship??!!), and if they wish to lose a sector or two it’s not likely to be a big impact (perhaps a small plus or minus in the order of 25 to 50bps; and arguably hard to predict although as Grantham argues, it might be oil, chemicals but for business related reasons).

I actually see Grantham’s work replicated in shorter run indices. You can look them up put the ex-Tobacco or ex-fossil-fuel type indices over the last 5 to 10 years have all done better or in the same ball park than the standard index. 5 years is short run, but might suggest that something has happened in the last 5 years perhaps different to eras further back.

In any case, back to oil divestment, so you need to know Grantham has a long time  view (bias) here and sponsors the Grantham institute. Might mean he is right and has spent a long time thinking about this. He’s being doing investment (albeit more macro and asset class lens) for much longer than me.

Still, this is a decent evidence base and theoretical framework for arguing for the divest – stranded asset argument.  It also highlights the area for engagement, if it can help bend these companies at all. 

This all comes from a talk given in April 2018 at the LSE.

Source: LSE lecture (link here), although Grantham is quoting HSBC work

In the lecture, Grantham is mainly focused on climate, weather and food. Slides here, talk below.

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On climate  - click here for more carbon related  posts.  There's an argument made by risk philospher and Black Swan author Nassim Taleb on why we should lower pollution regardless of models.

The current Arts blog, cross-over, the current Investing blog.  Cross fertilise, some thoughts on autism.  Discover what the last arts/business mingle was all about (sign up for invites to the next event in the list below).

My Op-Ed in the Financial Times  (My Financial Times opinion article) about asking long-term questions surrounding sustainability and ESG.

Some popular posts:   the commencement address;  by Nassim Taleb (Black Swan author, risk management philosopher),  Neil Gaiman on making wonderful, fabulous, brilliant mistakes;  JK Rowling on the benefits of failure.  Charlie Munger on always inverting;  Sheryl Sandberg on grief, resilience and gratitude.

How to live a life, well lived. Thoughts from a dying man. On play and playing games.

A provoking read on how to raise a feminist child.

Plastic Problems

Continue to be amazed at Humans poor skills in thinking long-term (I include myself here) or perhaps simply valuing short term convenience (packaging!) over unseen consequences. This applies to investing, as to much of life.

Along side many other problems, we seem to have been sleep walking into a plastic ecological disaster. Let’s hope human ingenuity can bend this problem away.

Marine life is facing "irreparable damage" from the millions of tonnes of plastic waste which ends up in the oceans each year, the United Nations has warned. 7 Charts from the BBC.

Beaches that were covered with pristine sand in the 1990s are today littered with plastic debris, washed up from countries around the Pacific Rim and beyond — an estimated 37 million pieces, weighing 18 tonnes. (Independent article)

“This is just the tiniest snapshot of our problem with plastics. Every year an estimated eight million tonnes of the material flow into the oceans. And, over the past few months, there has been a huge increase in public and political concern about this marine pollution, to a level where it is approaching climate change as an environmental issue.”  A detailed look in the FT (behind pay wall) in a very good long read.

Another summary of the problem from the UK Natural History Museum.

Is ESG sustainable investing going global?

Is ESG investing going global? Is sustainability / ESG truly mainstreaming? A Bloomberg article (ref i) argues 2017 is the year ESG went global. There are some surface data supporting that. Ex, the amount of money flowing into “ESG” funds (ref ii), but other facts suggest we have ways to go. The article suggests 4 asset managers (AUM > $10,000,000,000,000 yes, that’s $10 trillion, est $1tn+ in equities) finally voting for a climate related proposal is positive.

Personal View: the counter is that it has taken until 2017 for 4 of the most significant asset managers in the world to vote for the FIRST TIME for such a proposal, + the voting record is behind the median industry view (which some argue is below where it should be).

I’m discouraged that these votes are so little + so late. That might sum up where we may be on climate (cf. Vaclav Smil on climate, ref iii).

If ESG is mainstreaming, then that doesn’t square with the lack of mainstream reporting of the largest RI/ESG investment conference (UN PRI). No mention in FT, WSJ or others. Very very few “mainstream” portfolio managers attending. Hmmm.

I often put myself in an optimistic camp. But, we have to be true. I remain uncertain if sustainability has gone mainstream.  Links and more in comments.

Finally, investor surveys (ref iv) show 27% investors ignore ESG, 35% are unsystematic, thus only 35% systematically incorporate ESG. I’m unsure it counts as mainstream. I question what type of ESG participants define. One of the assets mngrs above states “Actingon material environmental, social and governance (ESG) opportunities or risks in our investments.” So it would self-define itself as integrate ESG. Some would argue its record on voting is not aligned to this. Other might want to know its engagement record.

Ref i - https://newsletters.briefs.bloomberg.com/document/wjZIuqmna7F.0H-sfcWRmg--_9ez2hhvxnqgzbspk5q/year-ahead

H/T Gregory Elders, photo source via Bloomberg which sources Ceres

Ref ii  https://www.ussif.org/files/publications/sif_trends_14.f.es.pdf

US SIF suggests $1tn to $4tn from 2012 to 2014 for US-dom funds with ESG tilt.

Ref iii  https://www.thendobetter.com/investing/2017/7/19/vaclav-smil-energy-expert-awesome

Ref iv  https://www.thendobetter.com/investing/2017/10/26/esg-survey-cfa-amel-zadeh

Note: Personal view. No organizational endorsement.

Nassim Taleb. Climate Change Risk.

On climate change… we should ask “what would the correct policy be if we had no reliable models”? writes Nassim Taleb and co-authors (see below).

We have only one planet.  This fact radically constrains the kinds of risks that are appropriate to take at a large scale. Even a risk with very low probability becomes unacceptable when it affects all of us - there is no reversing mistakes of that magnitude.

Without any precise models, we can still reason that polluting or altering our environment significantly could put us in uncharted territory, with no statistical track-record and potentially large consequences...

While some amount of pollution is inevitable, high quantities of any pollutant put us at a rapidly increasing risk of destabilising the climate, a system integral to the biosphere. Ergo, we should build down CO2 emissions, even regardless of what climate-models tell us.

Push a complex system too far and it will not come back. The popular belief that uncertainty undermines the case for taking seriously the “climate crisis” that scientists tell us we face is the opposite of the truth.

Properly understood, as driving the case for precaution, uncertainty radically underscores that case and may even constitute it. [My emphasis]

I think this case could be pushed more strongly given 3/10 Americans disbelieve manmade climate change. Even with this disbelief, most believe the climate is likely changing and an understanding of the risk framed in Taleb’s view should underscore the need for climate policy.

Source: Taleb's twitter feed

Nassim Taleb is not known for liberal left leaning views (although his politics are more complex to easily fit in the left-right axis; his local-global or libertarian axises are - in my view - more important) still this puts Nassim Taleb as a core anti-mainstream-left-thinker and Gregory Mankiw as an economist associated with the Republicans, strongly suggesting (1) Climate change should be taken seriously (in Taleb’s case) and (2) Carbon taxes or some form of Pigovian tax on carbon (in Mankiw’s case) should be enacted.

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More from Nassim Taleb thinking on the ethics of stuffing.   or Nassim Taleb's commencement address.  

A post thinking about the pros/cons of a carbon tax (and dividend).

A long thought about various sustainability ideas.

Infant Mortality, Slovakia catches up to US over 25 years.

I take a look at infant mortality trends in a few developed nations.  3 patterns to note.  

1. All countries have improved, you can see this globally (data to come, or see HDI data).  

2. Certain countries like Slovakia have made vast improvements over the last 25 years

3. While the US has improved, its improvement lags that of many of its peers.  Slovakia catches up in 25 years. While US is a rich nation on many measures eg GDP/capita, it lags on many HDI measures and continues to slip behind on overall HDU.  (UK to some extent as well, though not so much on infant mortalilty)

Warren Buffet and a test of time

I wrote this quoting Warren Buffet 10 years ago (in the first iteration of my blog, fascinating to note what has stood the test of time or not):

"A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the low-cost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies whose moats proved illusory and were soon crossed." 

What he wrote in 2007 in his investor letter, still seems true today. 

Charlie [Munger] and I [Warrren Buffett] look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t available, though, we are also happy to simply buy small portions of great businesses by way of stock-market purchases. It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.

Perhaps 10 years is not a long enough passage of time, but it is notable to me that advice given 10 years ago still seems relevant today (and probably 50 years ago as well).

10 years not even long enough to grow an oak tree.

Daniel Loeb of Third Point did criticise Buffet in 2016 suggesting:  Buffett "has a lot of wisdom, but I think we need to be aware of the disconnect between his wisdom and how he behaves."

However, I am always cautious of such lines of arguments.  If a murderer says “Don’t murder” do we not listen to his advice or wisdom because of who he is? While background can give weight or not to the evidence or wisdom (or lack of) said, the wisdom or message itself needs to be evaluated somewhat separately from the person.

If not then maybe we should never read the works of Ezra Pound.

Buffet investor letters here:   http://www.berkshirehathaway.com/letters/letters.html

Some other great nuggets… on customer service:

"The most important development at Berkshire during 2015 was not financial, though it led to better earnings. After a poor performance in 2014, our BNSF railroad dramatically improved its service to customers last year" in the 2015 letter.

This runs through the heart of Amazon as well – relentless focus on customer – serve the customer well and earnings will follow.

On culture…

The 2010 letter quoted Churchill saying, "You shape your houses and then they shape you."

For better or worse, every company has a culture. I’d go so far to say that every family has a culture too.

For better or for worse, you should assess what that culture is.

On valuation…

"As much as Charlie and I talk about intrinsic business value, we cannot tell you precisely what that number is for Berkshire shares (nor, in fact, for any other stock)," 

A company is more than just its numbers… and many things can not be counted, numbers simply can’t properly express value in many situations.