The AIQ Podcast: Climate emergency

Ben Moss, Aviva:

It’s been more than forty years since a senior NASA scientist Dr James Hanson told US Congress of concerns about human activities disrupting the climate. In this AIQ podcast, we visit leading scientists to ask what they know, and see how the financial sector is responding to warnings of an impending climate catastrophe.

But before we do that, let’s start with Greta Thunberg, the world’s best-known climate campaigner, with a reminder of how she thinks the issues are being handled on the world stage:

Greta Thunberg, Environmental Activist

“As long as the science is being ignored, as long as the facts aren’t being taken into account, as long as the situation is not being treated as a crisis, then the world and business leaders can of course continue to they can ignore the situation as they are not being held accountable…”

[Audio: Extinction Rebellion drumming fades to sound of atomic explosion]

Ben Moss, Aviva:

So – what links climate activists calling for attention and the enormous blast of a nuclear explosion? Well – think of the bomb dropped on Hiroshima in 1945, then scale it up 400,000 times –  and you have a sense of the daily energy imbalance that is causing the world to warm and threatens environmental breakdown.  

Just like Thunberg, this alarms Dr. Hansen. Now in his 70s, he claims efforts have been made to silence him as he highlights human impacts on the planet. In particular, by burning coal, oil and gas, carbon locked up for millennia has been released, sending atmospheric carbon dioxide to its highest level for 800,000 years.

That has created a giant-sized problem, as Dr. Hansen explained to an audience at Williams College, Massachusetts back in March 2017.

 Dr. James Hansen, former NASA scientist & Climate Campaigner

“You’ve got a challenge, and it’s a big one. We old people are leaving you a frigging mess, with a climate that is on the verge of running out of control…”

Ben Moss, Aviva

Hansen says the simplest way to think about it is as if humans are ‘throwing blankets on the bed’, heating up the planet and altering natural equilibria. As well as carbon dioxide, methane in the atmosphere has been increasing too, leaking from gas distribution networks, rotting food and ruminating animals. Fluorinated gases and nitrous oxide are also being emitted from industrial processes, and they all have warming properties. But the full impacts are being concealed, because of nature of the climate system. Here’s Hansen again:  

“The reason it is urgent is because of the inertia of the system. It does not respond quickly. 4 kilometre-deep oceans, 3 km deep ice sheets don’t respond quickly when we apply these forcing gases which act liked a blanket and tend to warm the surface. There are amplifying feedbacks, so there is the possibility of losing control.”

Ben Moss, Aviva:

This means the window for action is short. So, what does the science actually say?

Professor Richard Tol, University of Sussex; former member of IPCC

“The evidence that the climate is changing is overwhelming. And the evidence that humans are a major – if not the main cause – is also overwhelming. We see that through different lines of evidence. We see it in the paleo record and in the instrumental record. We've seen it in well-calibrated, complicated climate models, and we see it in simpler models that are essentially based on the first principles of physics. All these lines of evidence indicate that climate is changing and that humans are the main cause.”

That was Professor Richard Tol from the University of Sussex, a former winner of the Nobel Peace Prize for his work on the Intergovernmental Panel on Climate Change. The consensus view is that human actions have shifted the climate into a new era where the pace of change is startling. Although the earth has experienced phases of heating and cooling for millennia, atmospheric temperature is increasing around ten times faster than ever before, too fast for many plants and animals to adapt. And the processes that have already been triggered have some way to run, according to Professor Tol:

Professor Richard Tol, University of Sussex; former member of IPCC

“Even if we were to stop emitting CO2 now, the world would continue to warm for another 50 or 100 years.”    

Ben Moss, Aviva

For now, the warming is obvious in shrinking sea-ice and glaciers. Satellite images of Greenland suggest over 270 gigatons of ice is melting each year, releasing enough water to fill more than 110,000 Olympic swimming pools. And as the earth below it is exposed, it can absorb more of the sun’s energy than the ultra-reflective ice surface it has replaced.  

With more energy in the atmosphere, circulation patterns are changing, bringing hotter and drier weather in places, but heavier rainfall and flooding in others. Extreme temperature events have become about 20-times more likely since 1950, touching new records. With higher temperatures, hurricanes intensify more quickly, making them ‘bigger, wetter and more deadly’, according to Professor Michael Mann from Penn State University.

Meanwhile, population growth continues to alter the natural world.  

Felling forests – around one football pitch every second – and clearing peatlands releases carbon dioxide and reduces future uptake through photosynthesis – so the Earth’s potential to self-regulate is being diminished. With ecosystems degrading, extinction rates are said to be running more than one hundred times faster than the ‘background’ rate, where one to five species are being lost a year. Erosion and soil degradation are widespread; so topsoil is being lost around ten times faster than it is being replenished.

All this means that multiple parts of the biosphere are being altered simultaneously, ringing alarm bells for those – like Extinction Rebellion – concerned for the natural world.

Extinction rebellion demonstration, Australia

“We are the majority and we demand change.”

Ben Moss, Aviva

Several major impacts could follow. Large parts of the globe might become so inhospitable that whole societies are disrupted. Rick Stathers, responsible investment analyst and climate change specialist at Aviva Investors, says signs of this are evident already:

Rick Stathers, responsible investment analyst & climate change specialist, Aviva Investors

“Think of the recent groups of migrants leaving Syria for Europe or the Central American migrant caravans heading to the United States that President Trump has been so vocal about. Drought is certainly not the only factor, but it is a strong factor.”  

Ben Moss, Aviva

Floodplains and coastal areas might also be threatened if extreme weather events become more common and sea level continues to rise. Vulnerable areas include those housing some of the world’s megacities, each populated by more than ten million people. Low lying areas of China, India, Japan, Indonesia, Bangladesh and the United States are all high-risk zones. Conversely, well-used waterways like the Rhine, one of Europe’s longest rivers, might decline and become impassable to shipping if the glaciers feeding them keep shrinking and European summer temperatures rise.

But not all climate impacts will be negative: That will depend where you are, what you are doing and what timeframe you are looking at. Imagine a U-curve representing temperature impacts. In very cold temperatures, some negative impacts increase – for example, more people experience poor health. Very high temperatures can be problematic too. The sweet spot is in the mid-zone. Higher temperatures shift the imaginary curve to the right – but the outcomes vary, depending where the journey began.

One uncomfortable thought is that the poorest are most vulnerable in periods of environmental upheaval. For some, the only solution is a less growth-driven world, where aspirations are modest and excessive consumption is frowned on. Is the way forward ‘bottom-up’?  Billions might make small-scale changes, eating food produced locally to reduce unnecessary energy consumption, insulating buildings to prevent heat loss, and recycling?

An alternative response would be strongly top-down, through carbon price or quantity controls, to internalise the externalities. Where carbon taxes have been introduced, most governments have pitched way below the Paris climate Agreement. Steve Waygood, chief responsible investment officer from Aviva Investors, believes existing commitments are simply not enough:   

Steve Waygood, chief responsible investment officer, Aviva Investors

“The Paris Agreement was made on the basis of countries making voluntary commitments. When you add up all of those commitments, they do not get us anywhere near two degrees; it gets us nearer to 3.2 degrees.”

With the outlook so opaque, some are hoping new technologies will emerge to reverse or counter the impact of the build-up of warming gases. These include geoengineering – making deliberate, large-scale interventions in natural systems to counter climate change.

Some of these potential ‘solutions’ have a sci-fi feel about them, like using space reflectors to block incoming solar energy. Other ideas include compressing and injecting carbon dioxide deep underground. That’s already been carried out at small scale, but there are fears that scaling up might trigger earthquakes, ultimately allowing the gas to leak back out.

It’s nothing less than a minefield for the policymakers.  

Meanwhile, academics are grappling with the processes that drive the climate, to improve insights into what might happen next. In the last forty years, climate models have developed enormously, just like the supercomputers that run them, which can now carry out around 14,000 trillion operations per second.

But forecasting is still riddled with uncertainty – not least because we humans can be so unpredictable. How we all collectively respond to the threat of climate change will have major implications for the models. If swathes of people change their behaviour, the equations might change radically. Combine this with how climate might vary anyway, and the way different climate models function, and you can appreciate why no one knows quite what might happen next.

[Storm winds]

Some of the best minds are turning to climate attribution – modelling extreme weather events and comparing that to an imagined scenario where human impacts are removed. The question is: what exactly have we, as humans, done?

Dr. Friederike Otto, Acting Director of the Environmental Change Institute at the University of Oxford, believes human actions have made the chance of European summer heatwaves much greater. In other situations, human actions seem to be making extreme events less likely; less spring-time flooding associated with melting snow, for instance. In other cases, it is just not possible to say.

So – given what we know now – can we allocate blame, if human actions contribute to more extreme weather and losses follow? The answer from climate modellers – where researchers have looked at both country and company-level attributions – is a qualified yes. But there are a lot of practical considerations to bear in mind, according to Dr Otto:

Dr. Friederike Otto, Acting Director of the Environmental Change Institute, University of Oxford

“There are a lot of political, social and legal questions that bear a large influence on the outcome of these studies. For example, when we did the study looking at different countries, you could use all the emissions from the US since the beginning of the industrial revolution, Or you could say ‘Well, you can’t say that people really knew about climate change at the time. Are they really responsible for it? Maybe we only take the emissions from 1990, when the first IPCC report was published.’ You can do that as well, and of course you will get a different number. There is a large difference between the two. Scientifically you can do both, and both make sense, but which one is the one you might want to use in court, or whatever you want to do with this number?”

And proposals are now being developed to allocate climate-damages. The first assumed carbon dioxide and extreme climate events have a linear relationship – the impacts change in proportion to each other. In fact, climate events may have other kinds of relationships to contributory factors; they may be more extreme, with impacts increasing exponentially, or sigmoidal in shape – like a stretched out ‘S’. Here’s Dr Otto again:

Dr. Friederike Otto, Acting Director of the Environmental Change Institute, University of Oxford

 “What we can do with this attribution methodology is not only stop at the meteorology. We have done that for flooding. We have looked at the rainfall and the river discharge and the inundation and found that the relationships are indeed not linear. You could in principle do that for all sorts of damages.” 

Analysis of these relationships is quite new, and the implications are significant. For example, if you take an S-shaped emissions profile, depending on your assumptions and when the calculation is carried out, the attributable damage liability might be less than from a linear profile – or more than three times greater.

Tracking and understanding these sensitivities is becoming increasingly important for decision-makers around the world. There are specific physical risks owners associated with the changing climate; there are litigation risks that might come from those who believe they have suffered losses, and transition challenges that will come from the shift to a lower-carbon economy. Transition risks might be particularly high if the regulatory environment really tightens fast, encouraging lots of investors in carbon-heavy assets to try to head for the exit at once. Here’s Professor Tol from the University of Sussex again:

Professor Richard Tol, University of Sussex; former member of IPCC

“If we were to take the Paris targets seriously, the implication of that is massive destruction of capital. Coal-fired power plants have a lifetime of forty to sixty years; for gas fired power plants it’s twenty to forty years. Chemical plants – their lifetime is also measured in decades. If we are serious about getting emissions down, it means a whole lot of existing capital will have to be prematurely retired, long before the end of its technical or economic life.”

Taking a carbon-sensitive view will ultimately lead to a total reshaping of the economy. Recently, the number of institutional investors committed to cutting fossil-fuel assets out of their portfolios has risen sharply, from around 180 in 2014 to more than 1,100 in 2019. Norway’s sovereign wealth fund is one of them, planning to sell stakes in oil and gas explorers but keep exposure to clean energy technologies.

However, not everyone believes that exclusion is the way forward, as Frédérique Nakache, European equity portfolio manager at Aviva Investors explains:

Frédérique Nakache, European equity portfolio manager, Aviva Investors

“Some investors are already comparing the oil and gas sector to the tobacco situation. But – in my view – exiting could be an overly simplistic response. The sector could play a key role in the energy transition as it brings its knowledge and resources to bear in some key areas, like the transition from thermal coal to gas, from conventional energy to renewables and to bioplastics.”

As an investor, if you choose to exclude fossil fuel producers from your investments, you need to be aware that other companies might have quite high carbon footprints as well. Jaime Ramos Martin, equities portfolio manager at Aviva Investors, believes it may be more effective to target companies providing solutions, or those placed to speed the transition to a lower carbon world.

Here he is, talking about how it is possible to approach an industry, like autos, and seek out the winners as the shift to electric vehicles – EVs – accelerates.  

Jaime Ramos Martin, Equities portfolio manager, Aviva Investors

“By 2030, 50 per cent of passenger vehicles are going to have to be either full EV or partly electric – you know that, that needs to happen, and to be honest it probably needs to happen quicker than it is happening. And then we can go back through the supply chain and what it means in each industry – for the supplier industry, for battery industry, for example. We can define the winners and losers, within those.”

But, where the same companies are involved in established processes and industries, and potentially greener activities, the process is not straightforward.

Jaime Ramos Martin, Equities portfolio manager, Aviva Investors

 “We have been looking at precision agriculture. A lot of the names who are involved are also massively involved in normal agriculture. If you look at the US, 40 per cent of the land mass is used to plant cattle feed. That’s ridiculous, to be honest. If we withdraw support from that, it is a major hit for the providers of traditional agricultural equipment, who are also the providers of equipment for precision agriculture. We are more inclined to look at software or technology companies that might help with the provision of precision agriculture – that is something we have been researching.”

Ben Moss, Aviva

These changes imply that there is detailed work to be done, as financial institutions try to understand what the changing environment will mean. How might assets be impacted, and how might their actions influence others?

Climate change, above all, feels like the proverbial elephant in the room: something everyone is aware of but no-one has managed to tackle. Beyond the deniers, it has suffered from the tragedy of the commons and bystander problems: why act when others will hopefully act for you? But as evidence builds of how painful – or even impossible – ‘business as usual’ might be, it can’t be ignored.

There is now a real sense of urgency, with complex models being used to explore questions of human action and causation, and detailed mapping to track risk under various scenarios. But there is cause for hope too – because the opportunities to harness markets better and create a world where growth is achieved with a lighter environmental footprint are vast.

Here’s Steve Waygood again:

Steve Waygood, chief responsible investment officer, Aviva Investors  

“This is without question the biggest issue that we need to contend with this century. Our whole society is at risk; it is only by harnessing the powers of capitalism that we stand a fighting chance.”

Thank you for listening to the AIQ podcast. You can read the latest issue of AIQ magazine, a climate change special, online at Avivainvestors.com. Please stay tuned for future episodes.