Irony doesn’t get any better than this. Environmentalists and farmers fighting the expansion of coal mining and coal seam gas across Australia are protecting the Australian economy. If they are successful in slowing down or reversing these sectors in Australia, future governments will be spared an economic mess, Australian workers will have much improved employment prospects and our big banks will be spared major losses.
That’s because, while not their intention, such campaigns are the only thing likely to moderate the rude economic awakening we face when the global carbon bubble bursts and the fossil fuel industries start their inevitable and terminal decline. While the world economy will be impacted, Australia is particularly exposed and, with the active support of our governments and financial institutions, coal and gas companies are doing their best to increase this exposure.
Fortunately for Australia’s economics prospects, these green campaigns are amongst the most strategic and effective ones we’ve seen from the NGO community for many years. Unlike traditional environmental campaigns that tend to raise an issue and demand government intervention, these campaigns are displaying a more sophisticated approach, taking on the industry with a clear view of how markets work.
They recognise that government will not be an ally in this case, with both major parties showing overwhelming support for the expansion of Australia’s fossil fuel dependency. So they are instead going direct to the market, targeting each development with legal and other delay tactics, attacking the reputation of lenders and suggesting investors think again about financial risk.
In Australia, the campaign will be given a major boost in coming months when one of the United States’ most effective climate campaigners, Bill McKibben, visits Australia. McKibben’s 350.org has been credited with revitalising the grass roots climate efforts in the US with his divestment campaign arguing that fossil fuel investments are immoral as well a poor investment choice.
Super funds in Australia are not likely to respond to the moral argument, but they will take notice of delays and risks to new projects. And they’re not likely to miss the growing mainstream market interest in the carbon bubble, with the argument starting to land as a material risk. Investors don’t pay much attention to anti-coal campaigners in developing their investment strategy, but they start to listen when analysts like Citi Group and HSBC raise concerns. HSBC argued recently that some of the world’s oil and gas majors could lose 40-60 per cent of their market cap if the carbon bubble scenario plays out.
For many years I have been arguing that there is a global financial risk in the carbon bubble, as have many others – such as the folks at Carbon Tracker in the UK. A few years ago, these concerns were dismissed as very long term in impact. But with economists like Sir Nicholas Stern and investors like Jeremy Grantham at GMO now coming on board, seeing it as a systemic financial risk, the game is changing.
Why the shift?
Previously these concerns were analysed with the assumption that a global agreement on climate change would be the key driver of a market shift on climate. The conclusion was, therefore, that no government action equals no carbon investment risk. But in the last few years, the dramatic price drops in solar and the severe disruption to the coal-fired utility business model created by the boom in rooftop solar have put carbon risk into a very different context.
The markets now have a very real and live example of how shifts can occur unexpectedly in carbon exposed sectors, with great destruction of value for companies that aren’t prepared. They are also seeing the opportunities in the upside, with companies in the rooftop solar installation space going to very successful IPOs. Investment shifting from coal to solar is no longer a theory but a live trend that will accelerate.
So if this is all so clear, why are our governments and our big banks acting with such disregard for the economic risks involved in increasing Australia’s exposure to the carbon bubble?
It’s the same reason bubble’s tend to burst rather than deflate, and is well argued by the legendary investor Jeremy Grantham, whose status comes not just from having $100 billion under management, but also from his success in forecasting so many of the major investment bubbles of the past four decades. He says it simply – “aversion to bad news”. He continues: “The investment business has taught me – increasingly as the years have passed – that people, especially investors, prefer good news and wishful thinking to bad news; and that there are always vested interests to offer facile, optimistic alternatives to the bad news.”
Politicians and investors who are benefitting from the carbon bubble are not going to be the ones who help it come to a calm end. They simply don’t want to see it, for the reasons Grantham explains. This will not change and so we shouldn’t expect it to. That’s why bubbles burst and it’s why this one will too.
This brings me back to the importance of the environmental campaigners protecting our economy. While I believe it is inevitable the bubble will burst, the smaller it is when it does so, the better off our economy will be. The less stranded infrastructure we have built, the fewer mines that have to close and the less miners lose their jobs, the less risky the broader economic impact.
So while I wouldn’t normally recommend taking financial recommendations from an environmental NGO, I think the CEO of The Climate Institute John Connor provides some pretty sound advice to investors: “Investments in Australian coal rest on a speculative bubble of climate denial, indifference or dreaming.”
It’s time for investors, particularly our super funds, to wake up. Maybe the best way they can secure our retirement savings is take some money out of coal investments and send it to climate campaigners!
