I’ve always thought that ‘bubble’ was quite an inadequate word for describing a market force with the power to destabilise the global economy. However, the imagery attached to the word works, we can picture the bubble getting larger and then bursting, then… the comparisons end. When a soapy bubble bursts, it just simply ceases to be, but the other kind? Well, you will probably remember the sub-prime mortgage bubble bursting? The immediate aftermath saw the collapse of Lehman Brothers bank, panic in most financial markets, job losses, central banks and governments in chaos and vast sums of money effectively being sprung out of nowhere, generated into the system through quantitative easing in order to stave off the end of the world. We’ve had years of austerity in the UK, impacting millions of people who had never held an investment or mortgage or product which had directly supported the sub-prime mortgage market. The Bank of England alone created £435 Billion through its QE programme as a response to this bubble bursting. For context, that is £435,000,000,000, enough money to build over a thousand new hospitals!
Economists justifiably refer to it as the worst financial disaster since the Great Depression of the 1930s. Quite a bubble.
And all of this happened due to a breakdown in regulation and oversight combined with the natural phenomenon of human greed playing out in a relatively small sector of the market. Since it happened, measures have been taken to prevent it ever happening again. Banks can no longer hurl money at people who would never be able to prove they were capable of making the repayments. Levels of cash being held by banks has risen to ensure that central banks will not need to bail them out. The mortgage process from start to finish came under intense scrutiny for years. And yet… As is so often the case, we learn a hard lesson and fail to apply that learning more broadly. Hindsight is a wonderful thing, and usually very badly applied. We want the good times to continue, so we carry on doing specific things which ‘work’, until those specific things stop working.
Which leads us to carbon.
One way of looking at this is that ‘everything is fine’. Most pension funds invest in gas or oil or other forms of fossil fuel and it makes sense as to why they are - it costs much less to extract than what it sells for, and there's profit to be made at every step along the supply chain. This is how it’s always been. You could go so far as to say that our entire economy would grind to a complete halt without a supply of oil. Not only are we dependent on it, we’ve been heavily dependent on it for decades. It’s an ingredient in plastic. Its energy helps us produce everything. It helps us transport everything.
It is a very much larger part of our lives, our economies and our investments than the sub-prime mortgage market ever was.
And yet there is now a scientific consensus that our use of fossil fuels will destroy the ecosystems which support our existence on this planet. Unless we make swift, large scale changes in how we go about our lives, we are possibly not going to have a future as a species. This is a very uncomfortable thought and since we are not seeing the consequences (or not enough of us are) yet, because things have not actually broken down and because the bubble has not yet burst, we are ignoring the problem. The problem is even more difficult to deal with because it is still providing heating but also profit for us. We are addicted to fossil fuels on one hand, and inert, either through our laissez faire nature or fearful avoidance of contemplating the sheer scale of the problem on the other.
This, however, does not mean the problem is going away, or that the bubble will not burst.
Perhaps now would be a good time to explain why we are referring to a ‘carbon bubble’, and why in some ways this offers a glimmer of hope.
As we’ve alluded to, the investment world is welded to the world of fossil fuel exploitation in a way which is incomparable to most other asset classes. If you look ‘under the bonnet’ of almost any pension in the UK for example, you will find shares in more than one oil company. Your own pension, wherever it is held, is unlikely to be an exception. It would be fair to say that there are thousands of people in this country alone, who’s professional lives are spent watching, analysing and commenting on the price or movement of fossil fuel assets. People in the financial services industry, like us, know very well what sort of factors have what effect on what asset. It’s not rocket science, you do not need to be an economist to predict what will happen to the price of a product if, for example, a rival company comes up with a demonstrably better equivalent product.
We refer to a carbon bubble because we know that our use of fossil fuel cannot continue as it has done in the past, yet it continues. We understand that if the assets (oil fields, coal mines etc) which currently exist on the balance sheets of fossil fuel companies are monetised, the global climate will be pushed above a threshold where our survival is possible. We know that clean energy sources are becoming cheaper and more efficient with each passing week. In other words, we know that change must happen.
We see three potential outcomes. Firstly, no change in our behaviour, we carry on exactly as we are until it is too late, at which point the value of investments will no longer be a priority for anyone. We’ve seen tiny examples of how powerful a small change in global climate can be. It has resulted in floods, fires, hurricanes, water and food shortages which has displaced millions of people, led to conflict between nations and shaken the insurance industry. Larger changes will be cataclysmic. The second potential outcome is that the bubble bursts. Potentially we have enough time to address the climate problem, but the realisation of this and action comes too late, and much too swiftly to stop a huge economic collapse. It is estimated that $20 Trillion of fossil assets which we already know about, need to stay in the ground for human life on the planet to continue. If this is accepted by the markets in a sudden, panicked reaction to a final admittance that man-made climate change is real, the infamous bubble will burst. The recent sub-prime mortgage bubble will be a picnic by comparison. When credit dried up, we were able to replace it with money from nowhere, despite the ensuing problems. The same rules do not apply to a tangible asset which is present in almost every good and service we consume.
The third way is to begin a global move away from a reliance on fossil fuels, as swiftly and smoothly as possible. This move will need to take many forms. From switching to renewable energy for our cars, homes and businesses, to cutting our reliance on plastic, to sourcing more of our food and goods at a local level. Every part of our modernised way of life will need to move within the parameters of the natural world, and we have to admit this. Clearly, this is the preferable option, and even more so clearly, we are not ready for it yet. One way of beginning to speed up the transition to a sustainable, carbon neutral economy/existence is to move money directly away from damaging areas such as fossil fuel exploration and extraction. This will have two immediate positive impacts for the planet. Firstly, less ‘bad stuff’, secondly, more chance of the money being used to find and improve alternative solutions which will speed up the positive change. From an investors perspective (and anyone with a pension is an investor), you can safeguard your money from the potential bursting of the carbon bubble, and help bring about positive change, simply by ensuring that your pension is not still deeply involved in fossil fuel exploration and extraction.
Our portfolios are now fully divested, ensuring that our clients’ pensions and ISAs benefit from all of the research and attention you would expect from a wealth manager, whilst helping the transition to a sustainable economy and relationship with the world.
For more than one reason, now might be a good time to check where your pension or ISA money is actually invested. You can contact us today for a no obligation conversation about how we might be able to help you, and you might be able to help the wider world.