Time for green swan investing?

The Bank of International Settlement has coined the phrase: ‘green swan’ event.’ Apparently this event could trigger a systemic financial crisis. But for investors, there is an opportunity to make money while simultaneously doing good

Article updated: 24 January 2020 12:00pm Author: Michael Baxter

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Nassim Taleb made the idea of black swan events famous, but it was the philosopher Karl Popper who influenced him. Popper, whose contribution to philosophy and indeed science lies with his work on falsification once said: 'No number of sightings of white swans can prove the theory that all swans are white. The sighting of just one black one may disprove it.'

Taleb isn’t the only disciple of Popper, George Soros is a fan too. But Taleb suggested in his book ‘Fooled by Randomness,’ and in more depth in his book, ‘Black Swan’ that such events are more common than is generally supposed, and that a good investment strategy is one that bets on black swan events, because when they occur, the potential rewards can be enormous.

Of course, the 2008 crash was a typical example of a black swan event — it was said to be impossible — just like a black swan — until that is, it occurred. Taleb advanced his ideas of black swan events before the crash and so it was that his place in the history of ideas was sealed. Some say Taleb predicted the 2008 crash, in fact Taleb argued that the future is unpredictable, all he said was that big shocks will happen, and every time they do, the consensus will not have prepared for them.

The Bank of International Settlements (BIS), which is often described as the world’s central bank has joined the chorus of voices warning about climate change, and in doing so it has tried to make its words rhyme with Taleb’s. A new report from the bank, stated: "Green swans or ‘climate black swans’ present many features of typical black swans...Traditional approaches to risk management consisting in extrapolating historical data and on assumptions of normal distributions are largely irrelevant to assess future climate-related risks.”

At the risk of sounding pedantic, I don’t think the black swan analogy works. The whole point about Taleb’s theory is that the specifics of future black swan’s are unknowable. The BIS thinks it knows what the problem is — climate change — and let’s face it, it is not exactly an obscure belief. The idea that climate change poses a threat is so well known that I think it is more like a white swan with a green tinge.

Semantics aside, the BIS is right, but then that this is right has been obvious to anyone who took an objective look at the data for years. Incidentally, William Nordhaus, who won the Nobel Memoriam Prize for Economics in 2018 for his work on climate change has himself come under criticism for understating the dangers. Part of the criticism aimed at Nordhaus relates to the so called discount rate applied to future costs of climate change. He introduced the idea of discounting future costs at a certain rate of interest to give a net current value. Nordhaus assumed a discount rate of around five per cent, meaning that something that costs $10 trillion in 100 years time, would have a net current value of just $100bn — ergo, it’s not worth fighting climate change if in doing so there is even a modest hit to GDP. Not many people would agree with that conclusion.

There is another problem, economic models projecting future costs of climate change, typically apply assumptions about increases in average temperatures. But it is not rising average temperatures that pose the more serious risk, it is the rise in extreme temperatures— as Australia’s recent experience shows.

It happens to be my personal belief that we are greatly underestimating the potential damage that climate change might cause. I really do think it poses an existential threat to human civilisation.

Yet, bizarrely, I am optimistic. We can win the war, without paying an enormous economic cost, we have just got to stop being stupid, and put an end to this ridiculous climate change denial, which, in its latest version, entails vilifying Greta Thunberg.

To be clear, the cost of climate change will be enormous, companies that make insufficient efforts to combat it risk creating a public backlash that could lead to their bankruptcy. Oil companies that don’t accept this won’t last. Linked to this, companies that are major contributors to plastic pollution are the villains of the future. Coca Cola’s recent decision to continue selling its drinks in plastic bottles could cost the company its very survival, in the long run, since the court of public opinion can be viscous indeed.

What the war against climate change needs is investment, and on a massive scale. Because the global aggregate demand has been weak for decades (as illustrated by the failure of ultra low interest rates to create inflation), this investment can be financed, perhaps funded by the money printing press, without creating inflation.

During times of war, we don’t ask too many questions about how it can be funded, why do we ask those questions about fighting the war against climate change? If a war coincides with a period of weak demand, the end result is often economic boom. We saw this after both the Napoleonic war and the Second World War. Both wars were followed by an extended period of what at that time, was record growth, both wars saw the UK government run up debts in-excess of 200 per cent of GDP.

Investing in green economics

So, how do you support the creation of a fix and make money while you are at it?

Tesla remains an obvious candidate.

And by the way, watch out for news of Tesla’s battery that can last for one million miles, I can’t begin to emphasis how disruptive (in a good way) this could be. 

In the UK, from a renewable energy perspective, I am impressed with Drax

Another option is to invest in funds that specialise in renewables or energy storage, such as the Gore Street Energy Storage Fund and Gresham House Energy Storage Fund or Greencoat Renewables, Greencoat UK Wind or the Aquila European Renewables Income trust.

Many of these funds are big dividend payers.

The new kid on the block is the Octopus Renewables Infrastructure Trust — The Sunday Times forecasts a three per cent yield in year one, rising to double that in future years.

 


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

 

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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