Charting COP-26 — I know you are disappointed

“I know you are disappointed”. That was UN Secretary General Gutteres’ message to “young people, indigenous communities, women leaders, and all those leading the charge on climate action” as COP-26 adjourned in Glasgow. From the perspective of those four groups, representing rather a large percentage of the planet’s population, “disappointed” might be the diplomatic understatement of this century as they cling to the edge of an existential cliff. Can an institution that by design is meant to move (extremely) slowly and deliberately and with total consensus actually address something with this much urgency?

Perhaps the issue is one of framing. From the UN’s perspective, if they were presented with an international conflict where food systems were to collapse, millions of lives were to be at risk, millions were to become refugees, hundreds of billions of dollars of infrastructure were to be destroyed, and this catastrophe would know no borders and respect no nation, law, or military might, what would it do? Guns pointed at each other is actually one of many societal byproducts of climate change, but for this thought experiment we should focus on the magnitude of devastation and hardship that is happening without a shot being fired. If slowing things down is the UN’s true nature, what can it slow down to forestall the full impact of this emerging catastrophe while it finds a permanent fix? What resources would it mobilize?

197 nations are signing the “Glasgow Climate Pact”, but the two most populous countries insisted on a language change from “phase out” to “phase down” coal. That fundamentally changes the coal question from one of “when” to one of “if”. Again, looking at other activities that pose imminent threat to life and land that bring UN involvement, say, nuclear weapons development or massing troops on a national border, the distinction between “phase out” and “phase down” would be of monumental import. We are mired in process over outcome.

On the UN’s news feed for November 3rd, they reported “It’s ‘Finance Day’ at COP26, and the spotlight is on a big announcement: nearly 500 global financial services firms agreed on Wednesday to align $130 trillion – some 40 per cent of the world’s financial assets – with the climate goals set out in the Paris Agreement, including limiting global warming to 1.5 degrees Celsius.” At the UN above all other institutions, words mean something. What does “align” mean? Is this another “phase down” vs. “phase out” situation? For what we do on a regular basis as allocators of capital within that ecosystem of global financial services firms, we are forced to ask if this is a commitment to the largest greenwashing campaign in history. As we have written and spoken about repeatedly, we are looking to see whether this is the first step of many along a path to more sustainable capital allocation, or window dressing to manage optics. Intentionality is everything.

As noted previously, it is going to take the mobilization of private and not government capital to reach the intensity and scale of development necessary to forestall the worst effects of the climate crisis. Governments, who already failed to live up to their prior pledges to deploy $100 billion annually, should instead pivot to facilitating marketplaces and lowering barriers and allow the free market to do its work. Shifting capital to a regenerative model for food, energy, water, and infrastructure could unlock an economic boom and broaden participation in a way which would be historic in defining the 21st century.

Charting COP-26 — Is that a pie in the sky?

Today at COP-26 we received a declaration entitled “INTERNATIONAL AVIATION CLIMATE AMBITION COALITION”. Commercial aviation is a non-trivial contributor to GhG emissions. The widely cited statistic is that, if the industry were a nation, total output would rank it 7th after Germany. From a climate policy point of view though, we are asking whether the focus is correct on the part of policymakers and signatory nations. The International Civil Aviation Association (ICAO) already set goals a decade ago of improving efficiency by 2% per year, which was not out of line with historical trends. Improvements in jet engine efficiency along with innovations in avionics and lighter airframes have led to steady increases in efficiency per passenger seat for decades. It makes absolute commercial sense because of the amount of the economics of air transportation consumed by fuel costs. Each generation of aircraft upgrades provides significant improvements. Fuel burn for new aircraft fell by nearly half from 1968 to 2014. We are questioning the focus because unlike other industries like power generation, there are no viable alternatives on the visible horizon. Coal plants can be decommissioned in favor of natural gas, or going all the way to wind, solar, hydro, etc. ICE cars and trucks can be replaced with EVs. There is no EV plane (yet). The industry is doing its part in terms of innovation and of course there is room to do more. The real burden is behavioral though, and yet that is nowhere to be found in the COP statement. There are commitments to alternative fuels and technologies, but nothing about curbing unnecessary air travel, making more efficient aircraft affordable for developing nations rather than selling them hand-me-down decades-old aircraft, or changing the business mix to favor flying larger and more efficient airframes over the explosion in use of small, less efficient, commuter aircraft for many routes. [chart from International Council on Clean Transportation, Fuel Efficiency Trends for New Commercial Jet Aircraft: 1960 to 2014, Anastasia Kharina, Daniel Rutherford, Ph.D.]

WCM Chart of the Week for November 10, 2021

There were several positive aspects of last week’s BLS report on labor market conditions. Unemployment fell to 4.6% showing steady progress towards the multi-decade lows experienced prior to the pandemic. However, the overall labor market participation rate, at 61.6%, may be stagnating. Segmenting key age group participation rates (shown in this chart) unmasks a troubling trend — younger workers in the 18-24 year age bracket and prime aged workers in the 25-54 year old demographic are steadily returning to the workforce while older workers are not. Furthermore, participation in this older segment of the labor pool has receded to pandemic lows. There are several reasons for this, ranging from the natural consequence of an aging population to credible fears of viral and variant infections compounded by a booming stock market that has inflated retirement accounts potentially advancing planned retirement dates. Fewer people working, whether by choice or not, leads to lower tax receipts at a time when the US has persistent fiscal deficits. [chart courtesy of BLS, Bloomberg LP © 2021]

Charting COP-26 and The Global (In)Action Agenda for Innovation in Agriculture, November 9, 2021

On November 6th, we got a clever hashtag mention — #climateshot – and a “Global Action Agenda”: Increase investment in agricultural research and innovation to create more climate-resilient, low-emission technologies and practices; Focus at least a third of agricultural research and innovation investments deliver demand-driven solutions across food systems, to protect nature and limit climate change; Showcase successful business models and promote public-private partnerships that deploy these innovations on the scale needed to meet the climate and food security challenge; Forge consensus on the evidence of what works, and facilitate inclusive dialogue among food and climate champions around the world. A lot of the right stakeholders (160 institutions, NGOs, countries and companies) are at the table, and there are four key initiatives: “The 100 Million Farmers Multi-Stakeholder Platform, led by the World Economic Forum. The Global Research Alliance on Agricultural Greenhouse Gases (GRA) initiative, which brings countries together to find ways to grow more food without growing greenhouse gas emissions. The new CGIAR organisational structure, research and innovation strategy and portfolio of initiatives. ClimateShot allies from the impact investment community comprise over 20 investors, funders and initiatives, including innovative funds aiming to mobilise over US$5 billion in financing to transform agriculture for people, nature and the climate.” And that is where it all falls down. 20 investors, funders and initiatives and $5 billion in capital is not going to transform anything. (Re)Learning from our world indigenous communities how to shift, or shift back, to regenerative agricultural practices has the potential to address a major carbon problem while also making significant strides in stewardship of water systems, all the while feeding the planet and providing economic opportunity to individuals, families, communities, companies and countries. It starts at the grassroots. This graphic, courtesy of Marc Barasch and Green World Ventures, is a hand illustration of a regenerative approach to smallholder farming already employed in Nigeria which at scale addresses a myriad of economic, nutritional and climatological challenges. What is old is very much new again, and requires activation of those 100 million farmers as well as activation of sufficient capital, from far more than 20 stakeholders, to catalyze a global change.

Charting COP-26 and the Path to Zero, November 5, 2021

Yesterday a consortium of mostly Anglo and European countries signed a statement affirming a commitment to “deliver sustainable, green and inclusive economic growth to meet the challenge of decarbonising our economies, in line with limiting the global average temperature increase to 1.5°C above the preindustrial levels.” The statement covers six categories of targets — Support for workers in the transition to new jobs, social dialogue and stakeholder engagement, economic strategies, local, inclusive, and decent work, supply chains, and Paris Agreement reporting. The important thing we note in this statement is the recognition of the necessity of public/private partnership. The path to zero requires industry and market-wide activation of capital and corporate infrastructure in the private sector and regulatory and reporting frameworks from the public sector that facilitate the private sector’s work. This chart from a May 2021 International Energy Agency (IEA) report “Net Zero by 2050: A Roadmap for Global Energy Sector” provides an excellent overview of the business and industry targets that must be met with the facilitation and support of both governments and NGOs over the next 30 years. The signatories to the statement make sense in that these are many of the wealthiest industrialized nations that have both the capital to pursue this agenda and a high degree of responsibility for having brought us to the climate precipice. However, the lack of presence from Australia, China and Japan is concerning as they must help lead among the community of nations as the most developed and prosperous (polluting) countries of the Asia-Pacific region.

Charting COP-26, Take 2, November 3, 2021

Jair Bolsonaro isn’t there either. While the President of Brazil is not in attendance, the country is still represented, but one is forced to wonder what the degree of commitment is when the boss chooses not to attend for “strategic” reasons. On the positive side of the ledger, even with Bolsonaro’s absence Brazil signed on to the pledge between 100 signatory countries to end deforestation by 2030. And reinforcing our point about the real action being with private enterprise and not with government, dozens of global financial services companies also are committing to discontinue investment in and financing for businesses and other concerns engaging in or profiting from deforestation. Today’s charts look at the trends and patterns in Amazonian deforestation. Brazil made great positive strides over the past decade dramatically improving over the prior twenty years. However, with Bolsonaro’s election we observe a significant jump in activity in 2019, and expect similar increases in 2020 and 2021 (not yet reflected in the data). The second chart from NASA provides a visual representation of reduction in vegetation in the Amazon in a period between 2000 and 2008 to illustrate the patterns of destruction. Ironically, note that the pattern looks like leaf veins, propagating from main roads to local roads and spreading out into the forest until larger and larger tracts of land are cleared. Crops like soy account for much of the native vegetation cleared, and one of the biggest importers of Brazilian soy in the last couple years is China. No Bolsonaro. No Xi. Starting to see a pattern there too? 

Charting COP-26, November 2, 2021

We will spend a bit of time in the coming days highlighting charts we think are material as they pertain to the finance aspects of the UN Conference of the Parties (COP-26) taking place in Glasgow. Our starting point for expectations on outcomes for COP-26 is low. There might be a few more reasons for optimism than there were going in to and coming out of the last convening that Sec. Gen. Guterres basically labeled a failure. But, with two linchpins in the global climate machinery – Russia and China – not present, even total agreement by the attending parties amounts to a half measure. More importantly, we do not believe the answer to the climate challenge resides in the hands of nation-states at the governmental level. As can be seen by these charts from the OECD on how many billions of dollars annually are deployed globally to address adaptation and mitigation across sectors, this is the proverbial small-barrel solution to a big-barrel problem. Many estimates rise into the trillions of dollars USD per year that must be mobilized in order to achieve the stated goal of avoiding the 1.5 degree scenario and address the adaptation and mitigation needs for climatological changes that are already established. That can only come from markets and industry, so the best possible action in Glasgow would be for governments to agree to create the conditions for private (and public) enterprise to succeed and thrive in building a better climate future and then get out of the way. [Charts from Climate Finance Provided and Mobilised by Developed Countries: Aggregate Trends Updated with 2019 data, OECD iLibrary]

A WCM Seasonal Chart for October 15, 2021

The total return of the S&P 500 tends to be positive in the final quarter of the year, averaging nearly 5.2% since Q4 of 1989. The worst final quarters of the year occurred during the technology bubble, the financial crisis and most recently 2018. Let’s look at today’s headwinds. Inflation, which is near universal across the economy, works like a broad tax on everyone. Price increases in many segments of the economy are outpacing wage growth, and that is impacting consumption which makes up about 70% of GDP. Supply chain issues will likely persist into next year and perhaps beyond, continuing to pressure prices. Next, the Fed. Their actions or inactions will be scrutinized and probably criticized for years. Tapering will start soon, but liquidity and monetary support will still be positive, just less so. It is doubtful, even with so many Fed seats open, that President Biden will appoint hawks in this environment, so we expect that will keep the Fed accommodative for longer and rate hikes pushed out further. In the Fall of 2018, our last “bad” Q4, the Fed was in balance sheet reduction mode and in the midst of raising policy rates when Powell remarked that they were “not near interest rate neutrality” causing a rout in equities worldwide. Three years and a more seasoned Powell later means we do not expect the same rhetorical mistake will be repeated. We also need to watch the ECB. Inflation could be here for longer and that would fuel ongoing volatility. Bad for bonds but not necessarily stocks. For us, even with additional volatility, equities remain the default asset class at least over the next few quarters. [chart WCM © 2021, data from Bloomberg LP]

WCM Chart of the Week for October 8, 2021

The US Federal Reserve balance sheet currently stands at $8.51 trillion, doubling in size since the pandemic began. The Fed has recently suggested that it may begin to taper the current $120 billion monthly purchases of Treasuries and mortgages as soon as the November 2nd-3rd meeting. Progress in employment is a potential trigger cited by Chairman Powell for tapering, even considering September’s lackluster jobs report. It is important to note that the Fed will likely continue to expand the balance sheet. What they are talking about is lowering the amounts of new monthly purchases over time, so expanding less fast. Still, a reduction in monetary liquidity. Of bigger concern are the inflationary trends that may force the Fed to introduce less accommodative or even restrictive monetary policy. Prices seem to be increasing nearly everywhere, from energy to food to wages, and the Fed’s preferred inflation gauge, the PCE Deflator, is up 4.3% year-over-year as of August. A combination of higher policy rates and lower liquidity would pose a serious challenge for capital markets. [chart courtesy Bloomberg LP © 2021]

WCM Chart of the Week for September 29, 2021

Natural gas prices around the globe are elevated, and as the colder winter months in the Northern Hemisphere approach, prices will likely remain so. An unfolding potential crisis is most acute in the Eurozone where natural gas futures prices have increased over 500% in the past year, and conditions in the rest of the world are not much better. Calmer weather in Europe and thus lower wind turbine energy production has been cited as one reason for elevated prices, and rising demand for natural gas as a lower-carbon transitional fuel away from coal and oil is another. Unchecked, the higher price environment may lead to blackouts, heating shortages in colder regions, and forced plant shutdowns, and may exacerbate current and broader inflationary trends. Also, higher utility prices are effectively a tax on consumers (hitting lower wage earners the hardest) hastening an end to the global economic recovery that may be already moderating or even stalling in some parts of the world.

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