Today we’re witnessing a global Climate Strike led primarily by children because – according to science – the future of our planet is in peril. So it’s probably a good time to ask why most of us are willing to carry on our daily lives as normal. I don’t mean to be melodramatic here… it’s a genuine question. We are all guilty parties and my behaviours are probably no better than the average developed market human (i.e. bad).
Is it wilful ignorance? Is it political intransigence? Or is it corporate conspiracy and media manipulation that prevents change? Some studies in behavioural psychology indicate that being able to ignore or suppress the really bad stuff is a helpful evolutionary trait. It helps protect us against hopelessness and depression. Perhaps it’s that! But what if it’s not about ignorant politicians, propaganda or evolutionary mental health? What if it is just about time? I mean to say, that what if the future just doesn’t cost us very much?
Catastrophic climate breakdown imminent…..
The legendary investor and environmental campaigner Jeremy Grantham calls this “the tyranny of the discount rate”. What does he mean by this? It’s a way of saying that by systematically discounting the value of each future year, we are making it less important. And this is a tyranny because it engenders a kind of future blindness. When we are dealing with multi-decade or multi-century problems, our reaction is kind of… ¯\_(ツ)_/¯
We live in a world largely measured on the wrong short-term measures of value. I addressed this in GDP’s Dirty Little Secret, because this measure of human economic prosperity is clearly not fit for purpose. But when measuring the value of human achievement according to this measure you suddenly learn that human achievement is apparently worthless. Worth nothing! Not less than it should be or shockingly little….. N-O-T-H-I-N-G! The arithmetic is very simple, and it plays out in the chart below.
On this economic basis, the economic value of my future grandchildren is literally inconsequential today. The history of our planet is measured in billions of years, yet the future value of its current economic output is worth zero in the blink of a geographer’s eye.
Climate catastrophe according to economists
Imagine this global protest against climate change shut down air travel for one week. Imagine that it cost airlines $6.5 billion in lost revenue (3 million flights a day x $300 a ticket). Imagine the second order multiplier effect on business and consumers worldwide amounted to 80 times that cost (a wild exaggeration). The lost GDP now with 100% probability and zero discounting applied would be $526.5bn. There would be a lot of angry people out there. Very angry! But ultimately, this is one week of lost air travel and we would survive it.
But then imagine there is a 90% probability of catastrophic climate breakdown in 50 years. And imagine that the estimated cost of that catastrophe is 50% of global GDP. This is “apocalyptic-nightmare-end-of-civilisation-and-perhaps-our-species” type stuff. Yet, discounted at 8%, this future event only costs us $540 billion in today’s terms. The same as the hypothetical air travel strike above. That’s about half the market value of Apple Inc. today or 0.6% of global GDP. And if catastrophic climate breakdown can be pushed out another 50 years by buying electric cars and eating less meat, that particular catastrophic climate breakdown is only worth $8.4bn in 2019 or 0.001% of today’s GDP. Just a few years on from that and the cost of climate breakdown / GDP = #DIV/0!
In defiance of tyranny
“The market mechanism does not solve for the appropriate allocation of attention when everything is seen through the lens of capital. Human history is littered with misallocation of attention. From the Aztecs to Easter Island, we have a habit of being distracted and seeing the scale of a problem too late” Albert Wenger (Investor & Author of World After Capital)
We are guilty as charged. But whilst children strike, we’ll try to do our (tiny) bit by allocating our client’s capital as sustainably as we can and shouting about it from our small soapbox. We will try to back companies which we think have the best chance of disrupting the status quo and pivoting us to a non-catastrophic (and perhaps even wonderful) future beyond the next quarterly reporting season. But let’s be realistic, this tyranny of future blindness that we have built for ourselves needs an overhaul. Our species is having more impact on the world than any other in the last 4.5 billion years. We need a new framework for thinking about the future costs of the damage being done today. One which is measured in geologic rather than socioeconomic timescales. Our current decision making system which is anchored to a flawed concept of economic value and discounted to nothing in a human lifetime is not it. But neither is anarchy. Anyone got any good ideas? I’m thinking they probably need to be radical, collaborative and disruptive.
About the author
Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.
He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience.
*As at 30 April 2019.