This thought was triggered by a confluence of a relatively recent statement on climate change by NZ Super Fund (here), and the relatively old writing of JM Keynes. NZ Super have classified climate change as representing an ‘undue risk’ which then obliges them to manage it – we believe this marks them out as the leader on this issue among institutional asset owners, and we applaud them for it. The title of the linked article includes the phrase ‘multi-faceted climate change strategy’ and the article goes on to highlight several ways in which they will change what they do. However, one phrase is relevant for this thought piece, namely “targeted divestment”.
In chapter 12 of his General theory of employment, interest and money, Keynes writes about investment. Specifically, in our present context, he writes: “the Stock Exchange revalues many investments every day and the revaluations give a frequent opportunity to the individual (though not to the community as a whole) to revise his commitments”. And for emphasis, slightly later he writes: “there is no such thing as liquidity of investment for the community as a whole”.
So, let us assume for the purpose of this thought experiment that climate change is real, and that it will materially disrupt business models, seriously harm certain asset values and have other detrimental social impacts. These conditions would also create significant opportunities for new investment. So the ideal outcome for society – the whole of the human race in the case of climate change – would be for some business operations to stop immediately (let’s say any that cause carbon to be emitted into the atmosphere) and for others (say zero-carbon) to instantly achieve appropriate scale. It is reasonable to assume that the existing capital stock could not be converted to the necessary new purposes without some cost (possibly complete write-off). Therefore, what society (the end savers) should ask of its agents is to write-off the ‘bad’ assets – this would require shareholders to force company management to shut down the necessary operations, causing the value of the related assets to fall, likely to zero. Simultaneously society should ask its agents to fund new ‘good’ assets that do not harm, or positively protect the planet.
Clearly the real world does not work this way. NZ Super will address both sides through targeted divestment of ‘bad assets’ and they “will intensify our efforts to actively seek new investment opportunities” in ‘good assets’. IF they are correct about climate change and in their analysis, then they will earn a significant first mover advantage – selling assets now that will eventually go to zero (by the assumptions of our thought experiment), and buying assets that will become increasingly valuable. Society however will not be so lucky. The ‘bad assets’ will still exist, and will still be run to produce a financial return. Only now they will be owned by someone else – the community as a whole cannot divest.
If the risk of climate change is real, it could well (eventually) require some degree of deliberate – forced or voluntary – stranding of existing assets. Price action alone may not be enough.