Over the coming year, trading in the U.S. stock market is likely to be driven by issues over corporate earnings, Federal Reserve policy, and geopolitical issues like trade.
Over the coming decades, however, the biggest driver of the global economy could be an issue that investors are no doubt well aware of, but which may represent a massive threat that will be extremely difficult to address.
‘Fossil fuels will either run out, destroy the planet, or both. The only way out is the complete de-carbonization of the economy’
Jeremy Grantham, the co-founder and chief investment strategist of GMO, sees climate change—and the resultant impact it will have on the global environment, particularly with respect to agriculture—as the biggest issue that humanity will face over the long term. And while he said this issue offered some potential investment opportunities, particularly as green-energy technology improves by leaps and bounds, he also said that capitalism itself was one of the biggest hurdles the species faced in addressing it.
“Fossil fuels will either run out, destroy the planet, or both. The only way out is the complete de-carbonization of the economy,” he said at Morningstar’s annual investment conference, in a presentation entitled “the Race of our Lives.”
“Capitalism and mainstream economics can’t deal with these problems. Given how corporations are driven to maximize profits, it’s nearly impossible for them to give up profits in order to address this” and focus on sustainability.
“Capitalism has a problem with the very long term because of the tyranny of the discount rate,” he added. “Grandchildren have no value.”
In referring to climate change, Grantham specifically cited the massive amount of carbon dioxide that has entered the atmosphere over the past century, a trend that has accelerated since 1950. This has resulted in average temperatures steadily rising, which in turn has led to an increase in what he called “extreme weather events,” including floods, droughts, wildfires, and heavy rain. The last was of particular significance to his analysis, as heavy rains can increase soil erosion, reducing crop yields.
“Agriculture is the real problem with climate change,” he said, citing statistics from the United Nations that estimate the global population could reach 10 billion by 2056. “It would be hard, if not impossible, to feed that many people even without climate change.”
In a wide-ranging speech that touched on fertility levels, population growth, and the impact that chemicals have on insect population and crop yields, Grantham was particularly critical of what he called the “Merchants of Doubt,” or organizations out to obfuscate the issues of climate data and the need for action. The Republican Party was named as a such a group; many Republicans claim climate change isn’t real, including President Donald Trump, who has called it “a hoax invented by the Chinese.”
Last year, Trump withdrew the U.S. from the Paris climate accord, a global agreement to reduce greenhouse gases. Trump is also a vocal advocate for coal companies; coal is one of the dirtiest forms of energy production.
Grantham did see some trends that could mitigate the worst potential impact of climate change, notably the improved efficiency of green technologies like wind and solar power.
“The technology people have no idea how bad the environment is, and the environmentalists have no idea how quickly the technology is being developed,” he said. “In the next decade, wind will be cheaper than the operating cost of coal and nuclear power plants,” he said, adding that “improvements in battery technology will make electric cars much cheaper to both build and run.”
Despite this, he was adamant that these trends wouldn’t be enough to reverse warming trends by themselves.
“A lack of green energy will not be what drags us down. We’ve already wasted 40 or 50 years, and by the time we’ve decarbonized we’ll have an extra 2 degrees [in average Celsius temperature]. A great deal of damage will be done. Ice caps will melt for centuries and oceans will continue to rise by several or perhaps many feet.”
Grantham said that 98% of his net worth was either in or committed to two foundations committed to tackling climate change, and he recommended divesting from fossil-fuel related companies, arguing that avoiding particular market sectors like energy had basically no impact on long-term investment returns, relative to the performance of the S&P 500
“We’re racing to not just protect our grandchildren, but also our species,” he said. “If you do it, you will at least be able to look your children in the eyes.”