Investment

Family offices – don’t plant trees to save the world because they aren’t stopping climate change

Family offices who plant trees believing they will reduce levels of carbon dioxide in the atmosphere ought to know that the approach is becoming less effective. 

According to research boutique Curation: “A fertilisation effect that has seen rising carbon dioxide levels stimulate plant growth has declined more quickly than computer models predicted, according to satellite records.”

To meet global climate targets we will need to rely more on direct action to reduce emission and less on the natural world

The volume of carbon dioxide entering the atmosphere – plus changes in nitrogen, phosphorus and soil water – are factors behind the problem. 

Stress means a fifth of the Amazon rainforests could be emitting carbon dioxide rather than absorbing the gas. Scientists warn that the dark albedo of forests planted near the Arctic is warming the earth by absorbing sunlight, not cooling it. 

Leaves are still good at absorbing carbon, but they are expected to drop earlier as temperatures rise leading to reduced carbon storage.

Curation, founded by ex-investment banker Nick Finegold, says slower sequestration could lead to reductions in carbon offset programmes expected to hit $800 billion a year by the United Nations. 

Dimitri Zenghelis is chairman of a responsible wealth committee set up by multi-family office Capital Generation Partners.

Trees apart, he says: “There’s a whole load of stuff in the pipeline big enough to bite us, if you monkey around with core drivers.  

“You get people that say some parts of the world benefit from longer growing seasons. But what happens when you get a weird beetle that decimates local crops because the winters aren’t cold enough?” 

He believes we should also focus on the carbon sensitivity parameter, which suggests that large amounts of carbon dioxide in the atmosphere could compound up to produce global warming way beyond current expectations. 

Curation says: “To meet global climate targets we will need to rely more on direct action to reduce emission and less on the natural world.”

Zenghelis’ take is that it would be a really good idea to deal with climate issues really quickly before they trigger more unforeseen problems.

Zenghelis is a senior visiting fellow at the London School of Economics who previously carried out research for Jeremy Grantham and Nicholas Stern who used it to alert society to problems relating to climate change and resource shortage.

He describes himself as a conditional optimist believing we are witnessing a change in the nature of capitalism, where climate will weigh on every investment decision. 

There is now a growing political conviction that the world needs to hit net zero carbon emissions by 2050. Incoming US President Joe Biden says climate change is “the number one issue facing humanity”.  Aware of the need for action, after years of inertia, he is hitting the ground running.

Institutions are troubled by the risk it poses to the value of their assets. Central banks are scared by its impact on the books of business retained by insurers and banks.

Family offices have been keen to back social impact strategies, as Family Capital explored on 5 November 2020. But Zenghelis argues climate issues will run deep into every portfolio, rewarding saints and punishing sinners.

“Investors should be aware of the kinds of changes that can happen. You need a risk management and hedging strategy that allows you to be resilient.”

He is delighted by the deployment of clean energy, battery storage and electric cars, while wishing they had arrived earlier.  He expects movement in other sectors, ultimately embracing direct air capture.

Larry Fink, chief executive of BlackRock, the $7 trillion asset manager believes the movement in capital will be “seismic.” After initial hesitancy, he has backed sustainable audits which are being discussed by the accounting profession. 

Peter Harrison, chief executive of Schroders, has written to UK-listed companies, requesting them to share their plans to conform with net-zero emissions.

He said: “For most companies, climate change is the greatest impact they will have. We believe that good plans, carefully considered, will benefit company valuations and help in the fight against climate change.”

Under the Biden administration, the US will almost certainly swing its weight behind carbon pricing, thus putting a value on carbon footprints, as well as efforts to reduce them. This will lead to more carbon taxes, carbon trading, or both. 

According to Zenghelis: “There is going to be a mainstream realisation that achieving decarbonisation through resource efficiency is something that not only can be done – it can be profitable. “Every sector that can transition will do so in its own way. You’re looking at a mix of electrification, efficiency, demand response and smart integration.”

Analysts will need to change the way they assess companies: “Investors will want to know your forward-looking strategy, and where your business strategy can deal with carbon pricing, tax adjustments and clean technologies coming in.”

And companies will need to change shape to deal with all this: “Within an organisation, people don’t like change. Are your quarterly review statements going to handle it?  

“Should people be paid for finding the time it takes to undertake sustainable changes, and learn new skills? And are they going to be rewarded for it?” 

If not, any efforts companies make to embrace change could be diminished. 

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