IN DE­TER­MIN­ING THE GREEN GROWTH SIG­NALS VER­SUS THE NOISE IN 2019

Financial Mail - Investors Monthly - - Section 12j - JON DUN­CAN HEAD OF RE­SPON­SI­BLE IN­VEST­MENT

Part of the skill of in­vest­ing is about sep­a­rat­ing the sig­nals from the noise and 2019 will be no dif­fer­ent. What will be in­struc­tive, though, is the ex­tent to which global pol­i­tics, trade war rhetoric, and in­ef­fec­tual Brexit ne­go­ti­a­tions dom­i­nate our col­lec­tive ef­forts to fix the econ­omy, so­ci­eties and our planet.

The risk is that the noise from these in­creas­ingly loud de­bates drowns out an im­por­tant set of sig­nals be­ing gen­er­ated by sci­en­tists, pol­icy mak­ers, as­set al­lo­ca­tors, in­vestors, con­sumers and the mar­kets. Col­lec­tively these sig­nals point to­wards the emer­gence of green growth not only as a sci­en­tif­i­cally bounded eco­nomic idea but also as a set of glob­ally con­sis­tent con­sumer pref­er­ences. Do­ing more with less has al­ways been a good idea, as has car­ing for the en­vi­ron­ment along with be­ing a good neigh­bour. Sim­ply put, the no­tion of green growth tries to work with these ideas in the cap­i­tal­ist con­text, while at the same time ac­knowl­edg­ing plan­e­tary sys­tem bound­aries1.

CLI­MATE RISK TO GO UN­HEEDED?

Dis­count­ing the sec­ond law of ther­mo­dy­nam­ics2 has never been a good idea and 2019 shouldn’t present any sur­prises in this re­gard. As a con­se­quence it is prob­a­bly not a bad idea to pay close at­ten­tion to find­ings of the Spe­cial In­ter­gov­ern­men­tal Panel on Cli­mate Change As­sess­ment Re­port3 on a 1.5 de­gree Cel­sius fu­ture global warm­ing sce­nario. The re­port looks at the re­duc­tion in risk and costs that can be achieved by step­ping up global am­bi­tions to 1.5 de­grees. This rep­re­sents a 25% in­crease on the level of am­bi­tion above the 2 de­grees “tar­get” agreed by way of the Paris Ac­cord. Not sur­pris­ingly the re­port in­di­cates that risks are lower for a 1.5 de­gree warm­ing sce­nario ver­sus that of a 2 de­gree sce­nario. From an en­tropy per­spec­tive less hot is bet­ter for the sta­bil­ity of our global cli­mate sys­tem, bio­di­ver­sity re­silience and col­lec­tively for hu­man­ity. This is an im­por­tant con­tri­bu­tion from the sci­en­tific com­mu­nity. The im­pli­ca­tions for our food en­ergy and trans­port sys­tems are ma­te­rial. Take en­ergy, for ex­am­ple. To stay within a 1.5 de­gree limit would re­quire car­bon diox­ide emis­sions to be­gin de­creas­ing im­me­di­ately, a dou­bling of in­vest­ments in re­new­ables, a 25% de­cline in in­vest­ments in the fos­sil fu­els in the next 20 years and a 66% de­cline in coal fired elec­tric­ity by 2030.

Given the eco­nomic im­pli­ca­tions of the sci­en­tific con­sen­sus around cli­mate change, it is not sur­pris­ing to see the fi­nan­cial ecosys­tem seek­ing out ways to min­imise mar­ket risks, while at the same time cap­i­tal­is­ing on the emerg­ing op­por­tu­nity set. Im­por­tant mar­ket sig­nals here in­clude the de­vel­op­ment of a dis­clo­sure frame­work through the Fi­nan­cial Sta­bil­ity Board’s (FSB) Task Force on Cli­mate-re­lated Fi­nan­cial Dis­clo­sures (TCFD) 4. Backed by in­vestors with roughly $25 tril­lion in as­sets un­der man­age­ment, the TCFD is vol­un­tary self-reg­u­la­tion by the mar­ket, for the mar­ket. What is sig­nif­i­cant is that there is firm recog­ni­tion by the mar­ket of sys­tem lim­its im­posed by cli­mate sci­ence on the global econ­omy. At the same time we see con­tin­ued cap­i­tal flow­ing to re­new­able en­ergy in­fra­struc­ture, sup­ported in part by in­no­va­tion in the Green Bond mar­ket, which con­tin­ues to grow.

The im­pli­ca­tions here are hard to ig­nore – Bloomberg New En­ergy fi­nance in­struc­tively points out that what makes re­new­able en­ergy so dis­rup­tive is that it is tech­nol­ogy driven and not ham­pered by min­ing of fuel sources. And since it is a tech­nol­ogy is­sue, learn­ing5 rates ap­ply. For re­new­ables and bat­tery stor­age, this rate is in the high teens, and that will force a pro­found change in the world’s en­ergy mix in the com­ing decades6. These are im­por­tant sci­en­tific and tech­no­log­i­cal sig­nals to not lose sight of in 2019.

CHI­NESE’S GREEN ECON­OMY SIG­NALS VER­SUS NOISE

Not all sci­en­tific and tech­no­log­i­cal ad­vance­ments are dis­counted by politi­cians and it ap­pears that Chi­nese pol­icy mak­ers have learnt some­thing from the past three decades of re­source-in­ten­sive growth. China is now the world’s sec­ond largest econ­omy and although its growth tar­gets have been mod­er­ated to 6.5%, this is still well above global, and many de­vel­op­ing world, av­er­ages. Con­se­quently, how China chooses to man­age its growth path will have pro­found im­pli­ca­tions for the planet. It is in­struc­tive to note the evo­lu­tion and in­te­gra­tion of Green eco­nomic think­ing into the 11th, 12th and now 13th five-year econ­omy plan­ning frame­works pub­lished by the Chi­nese Gov­ern­ment.

Pres­i­dent Xi Jin­ping has put China on a path of be­com­ing an ‘eco­log­i­cal civil­i­sa­tion’ that is ‘mod­er­ately pros­per­ous’ and guided by five key prin­ci­ples of “in­no­va­tive, co­or­di­nated, green, open, and shared de­vel­op­ment”. This is in stark con­trast to the noise we hear com­ing from the lead­er­ship of the largest global econ­omy.

An im­por­tant sig­nal re­gard­ing Chi­nese green econ­omy in­tent is how­ever the evo­lu­tion of the coun­try’s en­ergy mix. In par­tic­u­lar, the growth of its coal fleet. Re­search pub­lished by CoalSwarm7 in­di­cates that 259 Gi­gawatts (GW) of new ca­pac­ity is un­der de­vel­op­ment in China, com­pa­ra­ble to the en­tire US coal fleet (266 GW). If built, the new plants would in­crease China’s cur­rent coal fleet of 993 GW by 25% and over­whelm the 1100 GW coal cap set in the coun­try’s cur­rent Five-Year Plan. Any cen­tral gov­ern­ment de­ci­sions to can­cel or re­duce this coal ca­pac­ity would have the po­ten­tial to free up US$210 bil­lion in cap­i­tal ex­pen­di­ture, enough to build nearly 300 GW of so­lar PV or 175 GW of wind power. The im­pli­ca­tions would be far reach­ing and send a pow­er­ful sig­nal to global coal mar­kets.

So, will sen­si­ble ideas about green growth find a po­lit­i­cal voice in both the Eastern and West­ern economies in 2019 or will this im­por­tant set of long-term sig­nals re­main shrouded by the short-term, very noisy noise?

https://www.stock­holm­re­silience.org/re­search/plan­e­tary-bound­aries/plan­e­tary-bound­aries/about-there­search/the-nine-plan­e­tary-bound­aries.html The sec­ond law of ther­mo­dy­nam­ics says that when en­ergy changes from one form to another form, or mat­ter moves freely, en­tropy (dis­or­der) in a closed sys­tem in­creases. Dif­fer­ences in tem­per­a­ture, pres­sure, and den­sity tend to even out hor­i­zon­tally af­ter a while. http://www.ipcc.ch/re­port/sr15/ https://www.fsb-tcfd.org/ Rate at which costs de­cline with each dou­bling of in­stalled ca­pac­ity Bloomberg New En­ergy Fi­nance – En­ergy Out­look 2018 + En­ergy Tran­si­tion Out­look 2018 – A global and re­gional Fore­cast to 2050 – by DNV CoalSwarm is a global net­work of re­searchers de­vel­op­ing col­lab­o­ra­tive in­for­ma­tional re­sources on fos­sil fu­els and al­ter­na­tives. Tsunami Warn­ing - Can China’s cen­tral author­i­ties stop a mas­sive surge in new coal plants caused by pro­vin­cial over­per­mit­ting?

For fur­ther in­sight into the big trends we ex­pect to in­flu­ence the in­vest­ment in­dus­try, global econ­omy and fi­nan­cial mar­kets in 2019, visit our web­site, www.old­mu­tu­al­in­vest.com and down­load our In­vest­ment Out­look 2019 pub­li­ca­tion.

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