Jeremy Grantham won't win many friends among people who believe climate change is a hoax. On the other hand, those investors and fund companies who see dollar signs when they think of climate change also may be disappointed, albeit a little less so, in his views.
Grantham, chief investment strategist for mainstream global investment management firm GMO, included six essays in his July quarterly letter, including one entitled "Everything You Need To Know About Global Warming in 5 Minutes." My colleague, Financial Advisor Editor-In-Chief Evan Simonoff, writes about some of Grantham's other observations and prognostications in his blog also posted today.
In his essay on climate change, Grantham notes forecasts range very widely on how much temperatures will rise from increasing carbon dioxide in the atmosphere, from "a harmless negligible rise to a potentially disastrous +6 degrees Fahrenheit or higher within this century. The main danger of the CO2 interaction with water vapor is the high probability that it will cause a great increase in severe precipitation episodes."
Skeptics argue, why act when there's such a wide range of uncertainty? Gratham says penalties rise hyperbolically at the tail and this greater range implies a greater risk with more expected costs. "This is logically and mathematically rigorous and yet is still argued," he adds.
The cost of lowering CO2 output, he maintains, "appears to be equal to foregoing, once in your life, six months' to one year's global growth-2% to 4%, or less. The benefits, even with no warming, include: energy independence from the Middle East; more jobs, since wind and solar power and increased efficiency are more labor-intensive than another coal-fired power plant; less pollution of streams and air; and an early leadership role for the U.S. in industries that will inevitably become important. Conversely, what are the costs of not acting on prevention when the results turn out to be serious: costs that may dwarf those for prevention; and probable political destabilization from droughts, famine, mass migrations, and even war."
In general, it may be an excellent idea to rely more on private enterprise rather than government to solve problems, he says. "But global warming is a classic tragedy of the commons-seeking your own individual advantage, for once, does not lead to the common good, and the problem desperately needs government leadership and regulation. Sensing this, [right-leaning] think tanks have allowed their drive for desirable policy to trump science. Not a good idea."
On climate change skeptics, this is what he has to say: "Why are we arguing the issue? Challenging vested interests as powerful as the oil and coal lobbies was never going to be easy. Scientists are not naturally aggressive defenders of arguments. In short, they are conservatives by training: never, ever risk overstating your ideas. The skeptics are far, far more determined and expert propagandists to boot. They are also well-funded. That smoking caused cancer was obfuscated deliberately and effectively for 20 years at a cost of hundreds of thousands of extra deaths. We know that for certain now, yet those who caused this fatal delay have never been held accountable. The profits of the oil and coal industry make tobacco's resources look like a rounding error. In one notable case, the obfuscators of global warming actually use one MIT professor who also defended tobacco! The obfuscators' simple and direct motivation-making money in the near term, which anyone can relate to-combined with their resources and, as it turns out, propaganda talents, have meant that we are arguing the science long after it has been nailed down. I, for one, admire them for their P.R. skills, while wondering, as always: "Have they no grandchildren?"
Gratham concludes his essay by saying climate change will be the most important investment issue for the foreseeable future. But he admits he hasn't yet figured out how one makes money on this issue. "Marketing a 'climate' fund would be much easier than outperforming with it," he says.
But it's puzzling to me how one can be so passionate about this topic and call it the "most important investment issue for the foreseeable future" and not address how one considers this issue in investment management. I tried to get more insight from Grantham on this question, but no luck.