Is the world toast?

Is the world toast?

“The truth does not change according to our ability to stomach it”.
Flannery O’Connor

The human brain is an amazing thing. There are approximately 100bn neurons in the human brain, which funnily enough, is currently not far off the total number of humans that have ever lived (108bn). These brains – the things that began helping monkey’s outwit jungle enemies – have sent us out from our own planet and can now understand how the universe began.

And yet they are flawed is so many ways. Psychologists and the field of neuroscience has done a lot of research into how we think we are making rational decisions, yet we know those decisions often hurt us and we look back with remorse and regret not long afterwards. Just think of the last time you ate too much chocolate or drank too much.

Another type of behavioral bias is how we react to what we perceive as “incremental change where there is no immediate feedback. As such, climate change is the worst type of all behavioral problems for humans to face. It is both incremental and difficult to isolate how one’s actions can have an effect.

THIS HAS BEEN DISCUSSED FOR YEARS – WHY NOW?

I won’t labor the point here, as many readers will be well aware of this already and this article isn’t on the details of climate change. Instead, I present one chart on this below. Because after years of steady change, the world’s rate of change in temperate is now accelerating higher. That is the changes are happening even faster in the last 3-4 years. This would be consistent with the IPCC previously discussed levels of 400ppm of CO2 being a tipping point.

FIGURE 1 – CHANGES IN GLOBAL TEMPERATURE ARE ACCELERATING

Source: climate.nasa.gov

WHAT CAN WE DO?

Rather than look at the negatives of this scenario, I’d like to draw your attention to a Ted Talk on making a toaster. Don’t laugh – it’s quite funny (and yet serious). It starts with the author reading The Hitchhikers Guide to the Galaxy and thinking “Could I make a toaster if I had to?”. I won’t ruin the story, but it turns out to be harder than first thought!  The point is that there is no one person on the planet who can make a toaster from scratch and yet every morning we eat our Vegemite on toasted Turkish bread.

In it lies the moral of the solution to climate change: the harnessing of capitalism; the use of the brilliance of millions of minds working independently towards their own selfish goal, to deliver the outcomes that the world needs but that no one person can do:

1. The first approach is for consumers to change their buying behaviour. Companies or governments may not believe in climate change, but they do understand what selling less product looks like and they don’t like it. Companies want to make a dollar and they will do what they need to for it. That’s not being moralistic, it’s just using their self-interest for the betterment of all.
2. The second type is allocating capital and therefore lowering the cost of capital, to businesses that are investing in renewables, which should enable those businesses to invest more into renewables or sustainable sources. As such there has been a rise in investments from the private sector in renewable energy.
3. The third type of change is to use your savings in financial markets to change companies cost of capital (think share price and cost of debt). This can be pressuring superannuation funds to divest assets from things such as coal producers.A recent example is that there was a student campaign at US colleges to force their universities to disassociate their endowments from carbon emitters. Just last week at Columbia University one of their endowments voted to force their asset managers to divest assets saying they will “distinguish between companies based on their behaviour and willingness to transition to a cleaner economy.”Why could this work? Because the aim is over time to drive up the cost of capital and drive down the share prices for these businesses.

Ideally governments would assist by pricing carbon and using legislation and this would speed up the process.

But the over-arching point of the Toaster talk is that one doesn’t need to “guess” which renewable source is the winner. It doesn’t need a government to mandate or price carbon, as capital markets and consumers force this outcome on companies. Businesses move by their own selfish forces to better outcomes.

CONCLUSION

I grew up in Papua New Guinea. Whilst most of you know the country, less people know that it contains the 3rd largest rainforest in the world. On our own doorstep sits one of the greatest biodiversity sinks in the world, home to 800 of the world’s 7500 languages. And yet at current rates most of this rainforest will be gone in 15 years, sold to loggers for mere cents. This happens not because local people are greedy, rather the world doesn’t price their rainforest correctly. It only prices the value of the timber and this is a tragedy.

But harnessing capitalism to price outcomes correctly can result in just as powerful change in the other direction. We’ve seen that with things such as the Free Range egg campaign through to the removal of ozone emitting gases from refrigerators that the world can be changed by consumers.

So rather than despair at lack of government action, use your money to harness the power of capitalism. Harness those billions of brains and trillions of neurons. Be the toaster.

ABOUT THE AUTHOR:

CHAD SLATER
Joint CIO, Morphic Asset Management
17 years experience in financial markets.
Chad co-founded Morphic Asset Management in 2012. He was previously a Portfolio Manager and Head of Currency and Macroeconomics at Hunter Hall for five years. Prior to this, Chad was an Investment analyst at BT Financial Group including a secondment to Putnam Investments in Boston. He began his career as an Economist at Australian Federal Treasury.