The Climate of Business #5: A bubble? What carbon bubble?

I have spent the last 6 years speaking about climate change on daily basis which allowed me over time to see what “trending” in the minds of business owners, board members, and decision makers is. Sadly everyone has a rather different agenda when it comes to climate change, but an unusual shift emerged recently. Somewhat the discussions overlap although there is a slightly different angle each stakeholder is bringing to the table.

These last 7 days I heard greenwashing, carbon bubble (topic of this newsletter), natural resource shortages and limits on emissions suspiciously often. And the news confirmed why. New laws on greenwashing, aluminium shortages, concerns for a carbon-driven financial crisis made headlines across the board.

I am aware I live in my own bubble, where climate change takes a special place in my heart and daily agenda, but if 15 bankers call to ask about greenwashing, then I guess it is a rather different bubble we are talking about.

Climate Change Reality?

Madagascar is experiencing unprecedented hunger and climate change has to do with it (The Economist )

Bye, bye, leaded petrol. The last country on Earth just stopped the legal sale of leader petrol. (Chemistry World )

Countries start addressing the problem of plastic waste in oceans (AP )

One billion years missing from the geological record and scientists are not sure where it went. The nerd in me found this fascinating. (BBC )

People of colour hurt worst by climate change (Thomson Reuters Foundation )

New study makes a connection between climate change and polar vortex destabilisation (AP )

"Ida turns New York City into a front line of extreme weather supercharged by climate change" (CNN )?

Business Climate Reality

Could climate change be the reason for a financial crisis? (The Economist )

Cathie Wood’s Ark focuses on ESG (minus banks) with new fund (Financial Times )

Is hydrogen the fuel of the future? (The Economist )

Fresh funds going into carbon-emissions markets for energy traders?(Wall Street Journal )

Expectation of heavy climate protests at Europe's largest auto show (Clean Energy Wire )

“Regulators intensify ESG scrutiny as greenwashing explodes. The pressure is now increasing on fund managers to show they’re being truthful with customers about what they’re selling.” (Bloomberg )

Climate and energy tracker in Germany's election year (Clean Energy Wire )

How to invest in companies and funds that keep the environment safe? (CNBC )

Shortage of aluminium triggered by concerns over supply of the raw material needed to make the metal (Bloomberg )

Renewables make up 92% of new US electrical generating capacity in H1 (Renewables Now)

Southeast Asia’s shift towards green could lead to $12.5 trillion in gains (Bloomberg Green )

Reality Check: A carbon bubble in the making?

In preparation of this edition, I was stunned to find out there has been a talk about a carbon bubble since the 2010s. The term was first discussed by Carbon Tracker as a result of the Copenhagen Climate Summit negotiations, where the under 2 degree scenario did not allow a scenario for the future where all fossil fuels get to be exploited.

But let’s get the basis straight.?

What is actually a bubble?

"An?economic bubble?or?asset bubble is a case where asset prices appear to be based on an unrealistic, inconsistent, inaccurate vision for the future. Another definition could be “a trade in an asset at a price or price range that strongly exceeds the asset's?intrinsic value.”

What causes bubble?

Excessive monetary liquidity in the financial system, various social psychology factors (groupthink, optimism, moral hazard, etc).

What is a carbon bubble?

The carbon bubble (also "CO2 bubble") is an assumed overvaluation of fossil fuel companies resulting from the incompatibility of the 2°C climate target agreed at the Copenhagen climate summit and the exploitation and utilisation of large parts of the currently known deposits of fossil fuels such as oil, coal and natural gas. Representatives of this theory speak of a speculative bubble.

The proponents of the theory of an upcoming “carbon bubble” claim that if large institutions can be convinced of such risk, this could lead to the withdraw of investments in fossil fuel-heavy assets, creating a domino effect and eventually bringing a massive shift.

What is at stake??

$1 trillion. A research published in Nature Climate Change in 2018, and reported in BBC, said that the collapse in fossil fuel prices could wipe off “the global economy, if no new actions to limit warming to below 2C are taken – larger than the financial crash in 2008.

Further estimations increase the loss to to $4 trillion "if new policies to restrict emissions further are set".

What is causing this carbon bubble?

More policies from governments. Climate pledges. Divestment. Media attention on the topic.

This study is from 2018. Is it still valid?

I kicked off the discussion on the topic here as I have been increasingly in talk with people from the financial sector who are living the reality of climate risk being financial risk. Be it because of all the disasters we experienced over the last 18 months across the globe which are costly, be it because of market signals, be it because of real concern for the environment and the future of the next generations.

My 2 cents on the topic are rather obvious. While we might not have to go through a carbon bubble in the shape and form we know "bubbles", it is inevitable we will see the value of fossil fuel companies deplete, in the case there is no reinvention of innovation in the business model or from the investor perspective severe diversification.

I do get that my analysis could be perceived as flawed.

So here are some recent analysis and commentaries which make the argumentation of the potential of a carbon bubble more contemporary and removed from my personal opinions:

Why Investing in Fossil Fuels Is So Tricky? (New York Times )

The Powerful New Financial Argument for Fossil-Fuel Divestment (New Yorker )

Are the world’s financial markets carrying a carbon bubble? (Carbon Tracker )

Fossil Fuel Companies Are Losing Value Globally (Clean Technica )

Markets Are Divesting You From Fossil Fuels (Blomberg )

What the future holds for Exxon? (Yahoo Finance )

Climate change’s trillion dollar problem just got more urgent for investors (Independent )

Next week I will focus on COP26 as I would like to explain what this gathering means for the future of climate change, what and who you need to track until the end of October and what my contribution to the event will be.

In the meantime, share your thoughts in the comments or in PM (if you are shy) on how eminent the bubble threat seems for you. I am open to some disputes.

Double, double, toil and trouble;

Fire burn, and cauldron bubble!”

―?William Shakespeare,?Macbeth