Equity markets around the globe were on edge as February came to a close. The technology-laden NASDAQ fell nearly 7% from an all-time high on February 12th. The weakness in equity prices came despite very accommodative comments from US Federal Reserve Chairman Jerome Powell during his scheduled two-day Congressional testimony last week. Equity markets became unnerved as government bond yields began to rise at an accelerated pace in the US, Eurozone and particularly the UK. Benchmark interest rates have been rising since the beginning of this year and US interest rates have been climbing since last Summer signaling expectations of improving economic conditions in the months ahead. As long as the rate environment increases gradually, gains can continue in equity markets. But, as we witnessed over the past few weeks, a steep ascent in market interest rates will have an expected adverse impact on risk assets. [chart courtesy Bloomberg LP (c) 2021]
What does a pledge from China of carbon neutrality by the year 2060 actually mean, and how do we measure progress? There are various global targets for climate change mitigation that attempt to quantify what needs to be done so that the global system does not exceed the point of no return, generally seen as a rise of 1.5 – 2.0 degrees Celsius. Under the Paris climate accord, a number of nations committed to carbon neutrality in the next 30 years. China said 40, but as the largest economy on Earth how do we measure their progress? This week’s chart from the US Energy Information Administration country analysis of China (Sept. 2020) is just one hint at the structural challenges China faces in achieving the target. On a per-capita basis China’s carbon footprint is still smaller than the developed West, but their total footprint is more than a quarter of the world’s total output, and their energy mix is just 15% non-carbon and more than half coal. After the pandemic interruption that marked the period around the Lunar New Year, China’s carbon output returned to or even exceeded pre-pandemic levels. We are looking for the steps China will take now to level out carbon growth so that it can begin reversing the trend after 2030, and wonder, even worry whether another 10 years of increasing output takes us past the global point of no return.
By September of this past year, both California and Colorado had experienced record-breaking wildfires, exceeding previous history for the largest wildfires in their respective states. According to the National Interagency Fire Center, more than 7.5 million acres had burned across the United States by Fall 2020, surpassing the approximate 6.1 million acre 10-year annual average (NIFC, 2020). Why have we seen increasingly disastrous wildfires in recent years?
Enter stage right the mountain pine beetle. Approximately 5 mm in length with an average life span of one year, the mountain pine beetle may not seem like a formidable opponent, but like all ecosystems, each member is densely interconnected (USDA FS, 2011). An imbalance of one species always equates to consequences for another.
One of 17 species of bark beetles native to North America, the mountain pine is a wood-boring insect that has shaped the forest landscapes from Canada to Mexico for thousands of years (NPS, 2018). From July to August, adult pine beetles colonize forests in search of larger trees (typically no less than 3 inches in diameter). Affected pine species include Lodgepole, Ponderosa, Western White, Whitebark, Jack, and Limber pine. Once a suitable host has been identified, female beetles excrete a pheromone signaling other beetles to follow (Katz, 2017). Females then begin eating tunnels called galleries into the inner bark of the tree, extending up to 30 inches or more from the attack site. The eggs hatch and beetle larvae continue burrowing and feeding until winter freezing temperatures trigger dormancy. By June or early July, larvae pupate and emerge from the tree in search of new hosts to repeat the cycle. Within one year of invasion, infested trees can fade from green to red-brown and die (USDA FS, 2011).
Wilde Capital Management is proud to have been part of the Force for Good steering group and the team that prepared the new report, “Capital as a Force for Good: Global Finance Industry Leaders Transforming Capitalism for a Sustainable Future”, which was launched at the ‘Global Leadership in the 21st Century’ conference organized by the United Nations, Geneva and the World Academy of Art and Science, in support of the United Nations’ 2030 Agenda for Sustainable Development.
63 leading institutions in the global finance industry, representing over US$100 trillion, and nearly 30% of the world’s financial assets, are pointing the way for the industry as a whole to respond to major global challenges including climate change, financial inclusion and inequality.
The new report documents and analyzes their activity in terms of environmental, social and governance (ESG) polices, sustainability programs, and stakeholder engagement, whose cumululatve impact determines how they can be a “force for good” in the world. Taken together, these can have significant impact on driving sustainability in the world, both directly and and indirectly through changes in the way capital is deployed, driving up the cost for those that damage it.
What happens when one ESG priority comes into conflict with another? This week we examine a chart from the World Resources Institute (www.wri.org) of data from the Servicio de Información Agroalimentaria y Pesquera chronicling a decade of growth in avocado production in Mexico. Avocados play on ESG themes of healthy eating, job creation and economic opportunity. Unfortunately, the explosion of consumption, primarily in the US as a result of NAFTA, of Mexican avocados has fueled deforestation, draining of aquifers, soil degradation, increased CO2 emissions, threatens indigenous species and even triggers small earthquakes. According to various studies assembled by the World Economic Forum, avocado groves consume multiples of the water of indigenous forest, and the fruit has an end-point carbon emissions footprint many times that of bananas. As with other monocultures like palm in Indonesia, avocado has brought economic opportunity to areas that badly need it like Michoacán province, but at a profound and unsustainable cost. Conscientious consumption and deploying capital to find more sustainable methods of cultivation without depriving Michoacán of needed money and opportunity are examples of where ESG is headed to address whole-systems challenges rather than focusing narrowly on single issues or ideas.