After weeks of feinting with the pundits, the S&P 500 stock market index finally surged to its all-time record last Wednesday. The moment was symbolic, as the previous high, recorded in October 2007, marked the end of innocence of toxic banking. Many in the financial services industry will sense a return to the halcyon days when investment charts headed relentlessly towards the top right hand corner.
So much for the carbon bubble, the fetching idea that declared reserves of fossil fuel companies, so important to their share price, are destined to become stranded or sub-prime assets. This inference of overvalued markets draws on expert opinion, led by the International Energy Agency, that most of these reserves need to stay in the ground if dangerous global warming is to be avoided.
Since the touchstone report Unburnable Carbon – Are the world’s financial markets carrying a carbon bubble? was published just over a year ago by the Carbon Tracker Initiative, many influential voices have supported its hypothesis.
The leading climate change economist, Lord Stern, referred to the “fundamental contradiction between current valuation methods and declared world climate policy” in his recent speech at the IMF. And the green philanthropist, Jeremy Grantham, admired on Wall Street for his track record of anticipating stock market upsets, was reported by the Guardian last week as stating that “the carbon bubble is the biggest he’s seen.”
Ironically, Grantham himself perfectly represents the gap between talking and walking the carbon bubble. The massive GMO investment funds under his direction continue to hold conventional assets in the oil and gas sector.
We have to recognise the reality here. The idea that political action on cutting greenhouse gas emissions might be sufficiently tough to strand oil and gas assets in the ground is treated as a joke by thriving world stock markets.
Evidence against the carbon bubble theory is in plentiful supply. ExxonMobil enjoys a Triple-A credit rating, superior to that of the United States government.
Thirty year corporate bonds issued by the oil and gas sector continue to be favoured by investors who see nothing incongruous at the prospect of drilling-as-usual in the 2040’s. The UK Oil and Gas strategy, published by the government last month, makes no bones about its goal “to ensure that the productive life of (North Sea Oil) stretches out beyond 2050.” New government subsidies support this ambition.
Why is mainstream investment analysis failing so utterly to understand the implications of global warming? I posted here in February suggesting that the Carbon Tracker Initiative’s estimate of the safe carbon budget for the private sector was over-generous. This may in part have contributed to the timid conclusion of the otherwise welcome response by Standard and Poor’s Rating Services, What A Carbon-Constrained Future Could Mean For Oil Companies’ Creditworthiness.
Whilst acknowledging grounds for change in their metrics, the analysis decreed that the method of rating major oil companies can be regarded as sound at least until 2016-2017.
There’s a more fundamental weakness of these studies which may allow wriggle-room for the investment analysts. They both treat climate change as the only blindspot of modern economics.
Yet scientists increasingly refer to broader global environmental change, the damage to critical ecosystems brought about by the loss of biodiversity, pollution of the oceans and disruption of natural cycles of water, nitrogen and phosphorus. It’s not just the fossil fuel companies that are overvalued through ignorance of so-called externalities.
Remember those excuses offered by economists and investment analysts for their failure to spot the stock market bubble back in 2007? As experts in their narrowly allotted fields, they protested their inability to assess the bigger picture. Do we likewise have too many climate specialists, unable to hook up their models with other planetary stresses?
The UK now has a Financial Policy Committee dedicated to identifying systemic issues that threaten the whole financial system. Not unreasonably, the folks at the Carbon Tracker Initiative have argued that this Committee “must urgently address the carbon bubble.” Perhaps such demands would carry greater weight if framed by an equivalent systemic environmental watchdog.
Markets are going to be talked up over coming weeks in the euphoria of the S&P500 record. I recall a favourite tip from the easy-going days of the old London Stock Exchange. “Sell in May and go away” provided cover for gentlemanly stockbrokers to spend their summers enjoying corporate hospitality at Wimbledon and Ascot.
These days I wonder whether the old adage should be amended a little: “sell in May and stay away.”
What A Carbon-Constrained Future Could Mean For Oil Companies’ Creditworthiness from Standard and Poor’s Ratings Services
Unburnable Carbon – from Carbon Tracker Initiative
Jeremy Grantham, environmental philanthropist – Guardian interview