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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 GMO’s 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 world’s 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 London’s 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.

“I’m 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 Earth’s 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 fish.”

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 wouldn’t happen in a year or two or three or four or five.”

“And what’s 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 don’t 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, we’re 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 investors 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 I’d had with a billionaire hedge fund manager early last year (more on that later), I had come across dozens of small, specialized 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 hadn’t 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 haven’t really looked at climate change,” says Marc Fox, a Hong Kong–based 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 their businesses.

It’s easy to see why the investment community has been slow to the party. Climate change is measured over decades, and most investors 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 it’s 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 emissions, investors typically say they’d prefer to wait until it happens to adjust what they do.

The intransigence of the asset management industry is illustrated by Grantham’s 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. “There’s 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 won’t comment on the reluctance of GMO to incorporate climate change and resource efficiency into its research process, he is clearly frustrated that he hasn’t been able to win over more people within the firm.

But asset managers like GMO may want to rethink their inaction. A global study published in September 2013 by New York–based Sustainable 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. “There’s 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.

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