Week 1: The time rebellion

In this issue: ▸ A rumbling volcano ▸ Roman Krznaric and the time rebellion ▸ Extreme climate events ▸ Pension funds need a radical rethink ▸ The $100 billion commitment ▸ Environmental credit risk

Dear all,

I hope everyone is well and ready for a new edition of ‘ESG on a Sunday’.

A rumbling volcano

2021 had barely begun walking, and already we were knocked down by images from the U.S. of the storming of Congress. It’s still felt around the world like the rumbling from a volcano.

That very night in Europe it was hard to fall asleep. It was that unpleasant feeling, that vibrating energy of anxiety. Not because I anticipated that something really bad would happen — the U.S. still has many sound people in government — more because of that feeling of how fragile democracy really is and how quickly things can change.

This happened within a week after one of the leading European nations left the European Union. It felt both odd and unreal.

Are we entering a decade of structural changes beyond what our eyes can see and our minds can comprehend? Yes, the world is always changing, but this time I wonder how profound these changes will be…

Roman Krznaric and the time rebellion

In my search for answers, I came across this:

I look at her face, her old face, and I walk over to the window and look at the world outside, and see what kind of world that is. I think of my daughter, or her great-grandchild, living well into the 22nd century — a time which is not science fiction, but an intimate family fact.

Roman Krznaric, an author and philosopher, is in search of unconventional ways of thinking about time, ones that aren’t tied directly to the clocks ticking all around us. In one exercise, he imagines his young daughter as a 90-year-old, cradling her first great-granddaughter in her arms.

It’s a sobering experiment for Krznaric, who, like a lot of people, has a “pretty dark” vision of the future. But most people don’t lose sleep over the fate of people who aren’t alive yet. More pressing concerns — the global pandemic, for example — have lodged themselves into our anxious brain spaces. The people of the future are merely hazy abstractions.

But billions of real people will likely be born in the coming centuries, and depending on what we do next, they might be very disappointed with us.

“Empathising with future generations may be one of the greatest of all moral challenges,” Krznaric writes in his recent book, The Good Ancestor: A Radical Prescription for Long-Term Thinking.

A broad, loose movement offering a new way of thinking about time has emerged in the last decade or so. Its goal is to preserve the Earth for its future inhabitants.

In The Good Ancestor, Krznaric calls this a “time rebellion”.

What is also interesting is that the language of legacy seems to motivate people across different social realms with different backgrounds. Krznaric has explored this in this piece.

Krznaric also argues that empathy is the most powerful tool we have to motivate people to take action on the climate crisis, an idea echoed in his 2014 book Empathy: Why It Matters, and How to Get It.

The extreme climate events of 2020

Speaking of the concept of time and legacy, this piece seems relevant. It tells us why it’s so important.

Alongside a deadly pandemic, 2020 delivered reminders of the severity of the climate crisis facing the world. Droughts, floods, heatwaves, wildfires and hurricanes continued to disrupt life for communities across the globe, in addition to and in spite of the challenges brought by COVID-19.

In the piece, you get a sense of 2020’s extreme climate events through a number of stunning NASA satellite images.

Pension funds need a radical rethink

Your pension savings say more about you than anything else.

Given the human lifespan, pension savings are a natural source of capital that can be tied up for 30, 40 or 50 years. In return, savers earn the premium that comes from volatile or illiquid assets, which is all the more valuable when interest rates are low. 

The best investment brains in the world spend their days trying to figure out which asset or region will perform the best. Those investing on their own don’t stand a chance (although they may choose to avoid risky options). Even if there was an infrastructure fund, or a venture capital fund, this structure would pose a problem.

The fund managers have no idea who their investors are, or when they are likely to retire. They just know that its pension money, and therefore likely to be “sticky”. But they still have to provide regular prices for the fund and keep cash on hand in case some investors suddenly cash out.

This structure is simply not suitable for illiquid, long-term sustainable investments, to the detriment of savers and the economy.

It is worth asking whether employer-based pensions still make sense?

In this very interesting and in many ways very radical article you can read about how we could change it and really deploy pension capital in a long-term sustainable way. 

The $100 billion commitment

What will be the legacy of finance industry? I mean aside from 2008 financial meltdown… This excellent report from Oxfam takes a good look at it.

Oxfam, the anti-poverty charity, found that nearly 80% of climate finance to developing countries took the form of loans, rather than grants: Poor nations were expected to pay richer countries back, often for investment in projects with weak climate credentials.

“The excessive use of loans and the provision of non-concessional finance in the name of climate assistance is an overlooked scandal,” the report says.

In 2009, rich countries committed to mobilise $100bn per year by 2020 to help vulnerable nations cut their emissions and cope with climate impacts. 

In total, rich countries gave just $12.5bn in the form of grants, $22bn in loans with better-than-market rates and around $24bn in loans with standard market rates.

Interest charges and payments to creditors were not deducted from donor countries’ climate finance figures.

The environmental credit risk is bigger than Japan’s GDP

But there is hope. And, according to scientists, there is still time. The question is more if we choose to do what’s necessary to stop global warming. Read more here.

Meanwhile, the financial risk posed to companies by natural disasters keep growing and growing, and the size of potential losses is just eye-popping.

Moody’s Investors Service said 18 sectors have a combined $7.2tr of debt with “high inherent exposure to  physical climate risks,” such as devastating wildfires, storms and other calamities.

To put that number in perspective, only two countries have a gross domestic product that’s larger: the U.S. and China.

Japan, the world’s third-largest economy, has a GDP of about $5 trillion.

When it comes to environmental vulnerability, seven of the 18 industries evaluated have overall credit scores of “very high or high risk” and the rest have “moderate credit risk,” Moody’s said.

The companies with the most at stake have a high concentration of valuable physical assets in what are deemed to be vulnerable regions. Those include coal, oil and gas, chemicals, mining, shipping and unregulated utilities and power companies. 

Environmental-related credit risks are climbing as “the transition to a low-carbon economy proceeds apace and the adverse effects of physical climate change become more evident,” Moody’s said.

These developments will be of increasing relevance for global capital markets.

That’s it for now. Have a great week!

All the best, Sasja