The Mother of All Themes

Updated: Aug 3

Understanding the basic science behind man-made climate change can give investors an edge. However, for the non-expert, gaining such knowledge can be a daunting task.

"The mother of all thematic trends appears to just be getting started"

On a related but distinct matter, an appreciation of humans’ intransigence about tackling what is a very real, albeit slowly evolving, crisis is also useful. In other words, there are both natural and behavioural science aspects to the issue at hand.


As far as the natural science is concerned, models of future climate change require an understanding of climate change in the distant past, the last few hundred million years, say. Air bubbles trapped in polar ice cores enable us to examine past climate directly, but only the last 800,000 years.


Further back, the chemical and physical composition of rocks and fossils can give us an indirect record. For example, the ratio between heavy and light oxygen atoms – isotopes – over time in rocks formed from marine organisms tells us how global temperatures varied in the past.


A paper published in 1983 set out what became known as the Earth’s thermostat hypothesis – also known as ‘Blag’ after the authors, Berner, Lasaga and Garrels. The paper proposed that the Earth had a built-in thermostat: when it became too hot, a natural mechanism kicked in to cool it, and vice versa.


A carbon dioxide-soaked atmosphere and thus hot climate meant abundant vegetation and rain, both of which remove carbon dioxide from the atmosphere, leading eventually to cooling. Conversely, a planet covered in ice had little vegetation or rain, so carbon dioxide emissions from volcanoes would at some point drive a rebound in temperatures.


Scientists have been able to reconstruct both past carbon dioxide levels and temperatures. Not only do the records confirm the ‘thermostat’ hypothesis but they also indicate a very high correlation between the two.


This latter observation also makes sense theoretically. Molecules of greenhouse gases (GHGs) like carbon dioxide (3), water vapour (3) and methane (5), comprise more atoms than molecular oxygen (2) and nitrogen (2), so trap more heat.


However, while the link between rising global temperatures and man-made GHG emissions is clear, we will not be able to rely on Earth’s thermostat to come to our rescue with respect to the current warming. During the last thermal maximum 56m years ago, it kicked in after global temperatures had risen around 7C. Such a rise this time round would be disastrous for many species – including us.


Which brings me to the behavioural science angle.


It is clear from annual temperature records that not nearly enough is being done to reduce GHG emissions, past as well as present. Many believe that, at least in theory, we have the capacity to start doing the needful from tomorrow, though this would involve great sacrifice. In other words, we are unwilling to make the necessary sacrifice. Why is this?


Behavioural scientists have put forward various answers to this question. At the heart of the matter is that while we are hard- wired to make sacrifices, even the ultimate one, for our own children, the children of others don’t get the same treatment.


They do not even get our support, at least not nearly enough of it. Former US Treasury secretary Steven Mnuchin’s very public criticism of climate activist Greta Thunberg last March is a good example. Life is hard enough as it is. Let’s not allow these pesky youngsters to make it worse.


We are not even prepared to tolerate the higher fossil fuel prices that are a necessary part of the transition to a sustainable future. I was dismayed to see in a respected financial newspaper recently the headline, ‘Gas crisis shows why we must stop demonising fossil fuels’. Such ignorance is unhelpful.


Perhaps deep down we believe that when things get truly bad, there will be measures we can take to buy us time, such as launching solar heat reflectors into the upper atmosphere or beyond. Indeed, such a belief may be well founded considering humanity’s record of solving big problems.


Regardless, while we are not doing nearly enough today to reduce emissions, we are at least doing something. And this is where investment opportunities lie.


Since its inception eight years ago, the MSCI ACWI Climate Change Index has outperformed the broad World Index by 10% and been less volatile. What may well prove to be the mother of all thematic trends appears to just be getting started.


Published in What Investment





The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

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