In my previous post, I discussed some of the implications for investors of a world with net zero carbon emissions and of the energy transition that will be necessary to make that happen.
That’s not the only possible future, though. Maybe we will see not-zero, rather than net zero, by 2050. Maybe governments will fail to take the necessary regulatory steps, or maybe whatever they do won’t be enough to create a global economy that no longer pumps out greenhouse gases. What then? If we fail to keep total CO2e emissions between now and 2050 below 400 gigatonnes, and if the atmospheric blanket around the earth keeps getting thicker – what would that mean for investors?
The big picture here, of course, is that what it means for investors isn’t really the main story: the political, social and human cost of continued planetary warming is not a story that will be mainly written on the financial pages. But this is an investment blog, so I’ll stick to that.
Even if we only focus on investment impact, the implications of of not-zero reach far beyond typical analysis. It’s a scenario that fundamentally disrupts everything around us. The list of factors that can potentially drive economies and markets gets much longer.
And the fact that the implications of not-zero are so much broader means that the models that work best to understand the implications of net zero (an economic transition scenario) become misleading in the context of not-zero (an environmental impact scenario).
Not-zero implies extreme weather events, massive loss of biodiversity, rising sea levels, geopolitical upheaval, and a long list of other direct and indirect consequences that we can only partially anticipate. These are not variables that usually need to be considered in investment forecasting models; environmental stability and the broader social context can generally be taken for granted. So these models can’t be used for not-zero; they omit the things that will matter most, hence missing the point. Things which are not economic variables in most scenarios become economic variables in not-zero; we can no longer ignore the tails of the distributions.
In TCFD-speak, net zero is about transition risks, but not-zero also brings in physical risks. It’s a whole different ball game. This is the type of uncertainty that cannot be quantified or engineered. Not only are there more sources of variation in investment outcomes, there are more channels through which these sources can be manifest. It’s not just that the prospects for certain sectors or securities might improve or deteriorate (the normal analysis we are all accustomed to), but infrastructure holdings might flood or be lost to fire, litigation risk may loom as compensation for climate-related losses is sought, assets may be seized due to political or even military action: the range of possibilities explodes.
It can be difficult to move beyond the models and the techniques that we are most familiar with. But investors who fail to open up their thinking are going to miss the full potential impact of a not-zero scenario.