No investor understands the importance of career risk better
than Jeremy Grantham. As co-founder and chief investment
strategist of Boston-based GMO, which manages $117 billion in assets,
primarily for institutions, Grantham has built his career on
the conviction that the behavior of professional investors
is driven by the desire to keep their jobs. Although nobody
wants to lose money on a position, the logic goes, it is okay
if everyone else is losing money too. Not surprisingly,
investment pros tend to pay close attention to what other investors
are doing; the vast majority will go with the flow,
as Grantham likes to say. This herding drives securities prices
far above or below their fair value. Eventually, however,
securities and markets return to their fair
value. Grantham and his colleagues at GMO have long profited
from that reversion to the mean by identifying undervalued
securities and markets.
Career risk has taken on a somewhat different meaning for
Grantham these days, I learned when I met with him in January
at GMOs headquarters at Rowes Wharf in downtown Boston,
overlooking the harbor. I had spent the previous nine months
reporting a story on the investment implications of climate
change, and the 75-year-old Grantham, whose office is decorated
with a large, eighth-century stone Buddha and other artifacts
that point to a well-traveled life, has been one of the
worlds most active money managers around the issue. In
1997 he and his wife, Hannelore, created the Grantham Foundation for the Protection of the
Environment. In 2007 they funded the Grantham Institute for Climate Change at
Londons Imperial College; the next year they endowed the
Grantham Research Institute on Climate Change
and the Environment at the London School of Economics and
Political Science. In February 2013,
Grantham joined with his daughter Isabel and the Sierra
Club in Washington to protest the Keystone XL
Pipeline, which if completed would carry as much as 830,000
barrels of oil a day from the tar sands in Alberta, Canada, to
refineries in the Midwest and on the Gulf Coast.
Im a Johnny-come-lately, even though lately is
15 years, the investor told me with a chuckle.
Grantham has been writing about the
implications of climate change and its close cousin
resource scarcity for several years in his widely read
quarterly investor letters. The facts are simple, he says. The
amount of carbon dioxide in the atmosphere has grown by almost
40 percent since the industrial revolution and continues to
rise every year. The increase in carbon dioxide causes a rise
in the Earths temperature, which in turn melts glaciers
and ice sheets, raising sea levels. The warmer atmosphere holds
more water and contains more energy, increasing the likelihood
and severity of extreme weather events. The combination of
higher temperatures and shifting rainfall patterns more
droughts and flooding decreases crop yields. A
significant rise in temperature (generally defined as 2 degrees
Celsius) could have a devastating impact on food supplies, and
not just because of the drop in crop yields.
There are two deadly effects from carbon
dioxide, explained Grantham, who grew up in a coal mining
town in South Yorkshire, England, and has lived in the U.S.
since attending Harvard Business School in the early 1960s.
One, it has a greenhouse effect, and temperatures rise
when you put carbon dioxide into the air. We know that. Carbon
dioxide is also absorbed by the ocean, and it has a completely
separate effect. When mixed with water, it forms a mild
carbonic acid, and that eventually makes it impossible for
shell-producing creatures to prosper, one of which is the coral
reef, which is the nursery for something like 40 percent of all
Carbon dioxide is not the only greenhouse gas. Methane,
which is released by human activities like raising livestock
and natural sources like wetlands, is more efficient than
carbon dioxide at holding radiation and has a 20 times greater
impact on climate change over a 100-year period, according to the U.S. Environmental Protection
Agency. Billions of tons of methane are trapped beneath the
permafrost in the tundra and the continental shelf of Siberia.
Grantham says that if the northern ice continues to melt,
there is a distinct possibility that the Siberian shelf
will produce what one scientist has called the giant burp
a really dramatic sudden burp of methane. It contains
about as much damage as all the fossil fuels ever used. No one
can be sure it wouldnt happen in a year or two or three
or four or five.
And whats the effect of this burp? I
asked, not sure I wanted to hear the answer.
The climate shoots up, we have warm weather, and the
shit hits the fan, Grantham replied. Scientists
dont even talk about this because they would rather
protect against the slight risk of making an overstatement than
help the planet.
Listening to Grantham, I started to envision a dystopian
future à la The Hunger Games, with food
shortages, rioting and governments struggling to maintain
control. The longer we talked, the more I realized that the
odds are not in our favor.
The big problem is, were going to have a devil
of a time feeding the poor, Grantham told me. And
what that will do is create destabilized countries along the
lines of Syria. Did you know that the Syrian troubles were
preceded by the driest six years in the very long history of
Syria? The Mediterranean rim like parts of the Midwest
and Australia has been a real danger zone for climate
change in terms of taking the weather beyond the point where
you can grow crops at all.
Shifting the conversation back to investing, I posed to
Grantham the primary question I had come to discuss: What can
do, not only to avoid the risks associated with climate change
but also to capitalize on the opportunities it creates?
He answered with a question. I suspect you could do a
little boutique investment operation in which you spend your
life looking for the nooks and crannies and you could take
advantage of opportunities brought about by climate change.
Unfortunately, the more important question to ask is, What can
the great mass of money do about climate change? And that is
much, much harder to grapple with.
I could not have agreed more. During my reporting on the
meaning of climate change for investors,
which had begun purely by chance, as a result of a conversation
Id had with a billionaire hedge fund manager early last
year (more on that later), I had come across dozens of small,
asset managers, venture capitalists and private equity
shops looking to profit from alternative energy (biofuels,
solar and wind) and technologies for improving energy
efficiency and reducing fossil fuel emissions. What I
hadnt been able to find were many
asset managers, small or large, who were thinking about the
broader impact that climate change could have on the economy
and on the companies in their portfolios.
Nine out of ten portfolio managers just havent
really looked at climate change, says Marc Fox, a Hong
Kongbased research analyst. Fox worked at Goldman Sachs
Group from 2005 to 2012 as an equity research analyst, helping
the firm integrate environmental, social responsibility and
corporate governance (ESG) factors into its global investment
research. He has advised the Carbon Disclosure Project (CDP), a
London-based nonprofit that provides companies with a system to
measure, disclose and share environmental information about
Its easy to see why the investment community has been
slow to the party. Climate change is measured over decades, and
have much shorter time frames. In addition, the data related to
climate change reported by companies is erratic and difficult
to use. Last, regulatory uncertainty, especially in the U.S.,
makes it difficult for investors
to factor climate change into their decisions. Although most
experts think its only a matter of time before the U.S.
government institutes a price on carbon, either through a tax
or a cap-and-trade program to limit greenhouse-gas
typically say theyd prefer to wait until it happens to
adjust what they do.
The intransigence of the
asset management industry is illustrated by Granthams
own firm. Founded in 1977 by Grantham, Richard Mayo and Eyk Van
Otterloo, the value-oriented shop specializes in tactical asset
allocation and benchmark-free portfolios that aim to offer investors
the best mix of risk and return. Theres not a lot
of traction yet with GMO regarding climate change, says
Ramsay Ravenel, who joined the $400 million Grantham Foundation
as executive director in 2009 and helps manage its grants and
investments. They have not been in a
trying-something-new mode. Although Grantham
wont comment on the reluctance of GMO to incorporate
climate change and resource efficiency into its research
process, he is clearly frustrated that he hasnt been able
to win over more people within the firm.
asset managers like GMO may want to rethink their inaction.
A global study published in September 2013 by New
Insight Capital Management (SICM) and CDP found that
companies that did a better job of disclosing their carbon
practices had greater return on equity, cash flow stability and
dividend growth than their less transparent peers.
Theres a prevailing misconception that companies
that are focused on sustainability and climate change are
wasting their time, says Fox, who is one of the authors
of the study.