Tuesday 30 December 2008

What is happening in Australia?!

How is it that the Rudd Government can have been doing so well in most areas, but have got targets for greenhouse gas emission cuts so wrong? At 5% by 2020 (on a 2000 base, not even 1990) it makes the country a laughing stock, using up precious international political capital built up by finally signing Kyoto last December.

Sure, it is better than the lost Howard years, but .... (the political leaders who deliberately blocked steps to address climate change will one day be regarded as climate criminals, along with those corporations who funded the anti-intellectual efforts to deliver changes needed to stop climate change).

The Australian Government has been arguing that its targets are "in fact better than Europe". This is based on saying that our "per capita cuts will be greater than European countries".

Yes, but Australia's base was so low (it being the world heavyweight champion emitter) that it isn't exactly a big leap being taking. The new climate policy isn't even trying hard on energy efficiency measures - the most RoI-efficient emission reduction wedge, where McKinseys tells us we can save millions while reducing emissions 20-30%!

The country has plenty of room to move much faster on emission cuts with zip-all impact on the economy.

Essentially the Government is not properly pricing the risk involved in not taking drastic action to reduce emissions. The country needs to be worrying what a 1 metre rise in sea levels, with increased flood surges on top of it, is going to do to our coal export market: look at this map of the Pearl River delta under 1 m. That's a stalled economy. Then think the same across northern China, Wuhan, Calcutta, etc.

It was all looking so sensible for awhile there ... then the Garnaut Report came and, somewhere between finishing off the (excellent) science and diagnosis parts of the report and writing the recommendations, Ross got hit on the head with a mallet and ended up putting in stuff that bore little relation to the nature of the problem he had described. And I don't think saying that "we can't do much because the rest of the world isn't going to" is an acceptable get-out-of-jail card - Australia should be in there leading, not dragging global plans back. (It's been embarrassing being told Australian was a recalcitrant in Poznan, working with Canada, the US and Japan, to hold back decision-making on key clauses ... a bit like the Howard years.)

Still, one ray of light: my mates at Climate Risk have been modelling forward emission impacts, and they think Australia might just be able to make 90% cuts (which will be the target by the end of this game) starting with 15% by 2020. That's good news, although it still doesn't help us get to declining global emissions by 2015. If we don't do that any future cuts look to be a waste of time.

Sunday 2 November 2008

What does the financial crisis mean for responsible investment?

Responsible or sustainable investment is about getting returns over the longer term, about avoiding short-term benefits that sacrifice the medium and long-term.

Most commentators agree that the current crash is rooted in the focus on short-termism over long termism. Of rapidly expanding sub-prime portfolios with, it's now clear, not enough focus on the sustainability of returns; of incentive schemes that demanded sacrificing long term outcomes by maximising quarterly results; of pushing leverage to the max without allowing for inevitable market shocks.

We need incentives, governance and regulation aligned to recover the balance between sustainable investment and the necessary energy of liquid markets.

The crisis has shown that longer term horizons require looking at the ecosystem supporting investments and at ensuring economies will be robust enough to continue to give us returns. We know that improved governance gives, on average 1-2% better returns over the longer term ; we know from the Stern Report that tackling climate change will costs the economy 1-2% of growth versus not tackling it costing us 10% of growth.

The crash is more likely to push back the extreme short-termist virus that has infected society, and shift funds to responsible investment.

Saturday 11 October 2008

Interesting comment by Alan Greenspan

The article is an excerpt is a from his new chapter in the updated edition of "The Age of Turbulence", published 10 September 08.

As Greenspan says, it’s all about underpricing risk. Mind you I'd say it was really about underpricing the risks involved in misaligned incentives (that allowed, for example, Freddie Mac's CEO taking US$14 mil the month before they implode!). And it is becoming about underpricing the risk of environmental collapse if climate change isn't addressed.

But is Greenspan right in suggesting that periodic bouts of euphoria, followed by depression, are part of the human conditions, like some sort of economic bi-polar syndrome, and that all we can do is be flexible enough to be ready for the alternating shocks?

I'm only an amateur in this area, but was surprised at him saying: “I was appalled and shaken when the financial system failed to protect itself more effectively against a euphoric boom. We at the Federal Reserve had always counted on banks in particular to avoid the most troublesome risks”. A weak comment in the face of, again, obviously misaligned incentives.

He then lays down the challenge with “I know of no regulatory system or degree of protectionism that can transmute irrational exuberance or debilitating fear into a stable growing economy.”

Has he missed a key point? The implied, albeit often disputed or ignored by some classes of market theoreticians, role of government as guarantor of last resort has been brought out into the open in a way not seen for 70 years. Sustainable financial systems depend on an over-riding framework of governance and guarantee that both limit cannibalising activity when things get particularly torrid and ensure the broader needs of society are figured in decisions about how the sector goes forward.

(I've just been reading Nick Robins' sobering book on the East India Company, with its description of the ghastly outcome of corporate behaviour without governing frameworks when the Company manages to both create and then make worse through short-termist behaviour the vast Bengal famine in the late 18th century.)

Long-term investors such as pension funds, to ensure the sustainability of their returns, surely need to make sure (improved) governing frameworks are in place that will protect and enhance those returns. They have a vested interest in pushing governments to design and manage systems accordingly; but, in a intellectual environment to date dominated by the servants of short-termism, they’re going to have to contribute more to the thinking behind this.