Should fund managers endorse a low-carbon economy?

Fund managers seem to be rapidly adapting to the current consensus on climate change. Some are pragmatically seeking investment opportunities created by the shift to a low-carbon economy, while others have explicitly endorsed Tony Blair’s approach. Unfortunately, few seem to be questioning the current orthodoxy on dealing with the challenge of global warming.

It is important to distinguish between the science of climate change and the appropriate human response. Climate science is a complicated topic best left to specialists. Pronouncements by non-specialists only create confusion.

The vast majority of climate scientists believe both that global warming is happening and that human activity contributes to it. The scientific debate focuses more on the rate at which it will occur and more detailed questions.

Contrary to much media reporting, most sceptics do not question the existence of global warming. The debate is over whether the approach embodied in the Kyoto Protocol – the 1997 United Nations agreement endorsed by most of the world’s countries – is the right one. Is restricting carbon emissions the best way to tackle climate change?

The emphasis at the recent G8 summit was on curbing emissions. But the sceptics argue that other approaches, such as adapting to climate change or devising high-technology solutions, are likely to prove more fruitful.

Of course fund managers are not generally preoccupied with the politics of climate change. Their concern is making good returns for their investors. However, there are two reasons to question the industry response. First, even though the shift to a low-carbon economy will provide investment opportunities, it is likely to slow economic growth overall. Second, some fund groups have themselves made political statements on the question.

No doubt many fund managers are tweaking their portfolios to take advantage of the shift to a low-carbon economy. The declared aim of the Merrill Lynch Energy Technology trust, run by Robin Batchelor, is to target “companies that focus on technology for alternative and new energy”. Among more mainstream managers Andy Crossley, UK Smaller Companies manager at Invesco Perpetual, recently announced he is investing in renewable energy.

Meanwhile, fund managers are examining the investment impact of the Kyoto Protocol and the European Union Emissions Trading Scheme. Neil Murray, a corporate bond manager at the Scottish Widows Investment Partnership, has written on the subject for Fund Strategy. Frances Hudson, an investment strategist at Standard Life Investments, has also considered the topic elsewhere.

Investec carried out a survey of the views of FTSE 100 companies on climate change earlier this year. However, the discovery that 78% considered climate change an issue for them was hardly surprising considering the current consensus. If anything, the surprise was that it was not 100%.

F&C and the HSBC Group have gone further than most of their peers in endorsing the government’s approach. The heads of both firms, along with several other top business leaders, wrote to Tony Blair to offer their support for a low-carbon economy.

F&C and HSBC are entitled to back the government. But if they do so they should recognise that they are supporting one of several possible responses to climate change.

Bjrn Lomborg, an associate professor of statistics at the University of Aarhus in Denmark, is probably the best-known sceptic. Last year he organised for eight of the world’s top economists, including three Nobel laureates, to rank the costs and benefits of dealing with the key challenges facing humanity. The panel concluded that the Kyoto Protocol, along with proposals for carbon taxes, offered the worst balance of benefits and costs.*

In contrast, the best opportunity out of 17 possible challenges was in the control of HIV/Aids. By spending $27bn (15bn) the panel estimates that 30 million new infections could be averted by 2010. Other areas that they estimate could offer high benefits for relatively low costs include providing micronutrients to counter hunger, control of malaria and the development of new agricultural technologies.

But there is an argument that Lomborg’s relatively technical economic approach underestimates the dangers of the Kyoto approach. It is not just a question of the most efficient use of a given amount of resources. Reinforcing a climate of restraint – in which holding back on economic growth is seen as somehow desirable – has high costs.

It should be recognised that fossil fuels are still far cheaper and more widely used than renewable forms of energy such as solar power or wind farms. Therefore, limiting the amount of carbon emissions means substantially increasing the costs of energy to firms. As a result some projects will become more expensive, while others will not be undertaken at all. Economic growth will therefore be slower than it would otherwise be.

Nor should it be forgotten that most of the world’s population is still desperately poor. For example, two billion people do not have access to modern energy services. Although the Kyoto Protocol is not binding on developing countries, it creates an intellectual climate in which growing energy use is viewed with suspicion.

If restraint is flawed, then alternative strategies must be considered. One is adaptation. For instance, in Bangladesh it would be possible to build modern flood defences, as they have in the Netherlands, to counter the effects of a rising sea level. To be fair, adaptation was mentioned in this month’s G8 communiqu瞭 but it has a much lower profile than curbing emissions.

Another possibility is high-technology intervention. Carbon sequestration – taking carbon dioxide out of the atmosphere – is already being widely discussed. Longer-term possibilities include nuclear fusion, injecting dust into the atmosphere or erecting a giant lens over the earth to divert some of the sun’s rays. Some of these are science fiction today, but over a span of decades much can change.

In contrast, the pursuit of restraint runs counter to such an approach. The current orthodoxy not only threatens growth but also, ironically, undermines the ambitious thinking needed to counter climate change.

The low-carbon economy offers the possibility of niche investment opportunities to fund managers. However, it also threatens our ability to create a richer world in which human beings have greater control over the climate.* See