An interview with Al Gore – The role of responsible capital

What is the impact of climate change on the global economy and financial markets?

All of human civilization since the beginning of the first cities, ten millennia ago, has been built within a very favorable set of climate conditions that came into being after the end of the last Ice Age. And a threat to those conditions is a threat to the global economy and to civilization itself. If you look at the climate related extreme weather events in 2017 alone, there were more than USD 300 billion worth of losses in just one year. And those losses are steadily increasing year by year on average. The profound changes that accompany the climate crisis also pose specific financial risks to the holders of potentially stranded assets. Everyone remembers that sub-prime mortgages were the fuse that lit the credit crisis and led to the great recession. There was a mass delusion about the value of millions of mortgages that had been given to people who could not make the payments on those mortgages. When the truth was perceived, those assets were stranded and the financial harm was quite severe.  We have seen the loss of most of the market cap in the coal sector of fossil fuels. While it is generally considered a fool’s errand to predict the price of oil and gas, there are actually a number of pathways to the stranding of trillions of dollars of fossil fuel assets. Just look at the technological changes that are bringing down the cost of renewable energy down, month by month to new lows. Look at the Paris Agreement and the movement by countries all around the world to speed up the shift to alternatives to fossil fuels. And these extreme events are threatening their license to operate in some regional and even some national jurisdictions. France for example, has said it is going to outlaw any further exploration. India has said that within 12 years 100 per cent of their new cars will need to be electric vehicles by law.

How have attitudes to climate change altered in the last 10 years and how do you see that developing in the next 10 years?

In the last 10 years there have been three big changes

Number one. The climate related extreme weather events have begun to be much more frequent and more severe. And that has had an impact on attitudes about the climate crisis even with those who are not comfortable using the phrase global warming or climate change.

Secondly, we have the solutions now. They were visible on the horizon ten years ago and the technology experts would assure anyone who would listen that they were coming down so rapidly in price that they were going to have a big impact. But now they are here and they have crossed the so-called grid parity threshold. If you look at new electricity generating capacity, for example, here in Europe, virtually none of it last year was from fossil fuels. Most of it was from solar and wind energy. The majority in the US has been from solar and wind. The majority in China is now from solar and wind. This also has changed attitudes about the climate crisis because when people can see a pathway to a brighter future then they are not locked in the frustrating situation where they hear that it is going to be a catastrophe if we don’t act. Now we can act.
 

The third change is the Paris Agreement. It’s not enough but it is impressive. Every county in the world has agreed to it. Even the US. In spite of Trump’s announcement, the US cannot legally withdraw until the first day after the next presidential election. And the new president could give 30 days notice and we are right back in. And we are going to meet and exceed the commitments made. When the entire world signals a profound shift, that changes attitudes towards the entire matter. You’ve heard the old cliché: The train is leaving the station. Are you on it or not? Everybody wants to be on this train now.

But Trump’s intention to withdraw must have implications for financial liabilities?

The part of the Paris agreement that was represented by pledges by wealth countries to help developing countries is going to go forward. The US participation will be less than many had hoped. But honestly the developing countries, in the last 10 years, have developed an impressive amount of sophistication. They have realised the political challenges in wealthy countries, that are no longer feeling as wealthy as they were, and are instead feeling challenged by the fast emerging economies in the developing world. I do not want overstate this because the public positions are still unchanged. But the passion, behind this insistence that every pound or dollar be paid in, has diminished because of this new sophisticated understanding. And because they now also see the massive flows of private investment capital that completely dwarf any nation-to-nation aid.
 

Is climate change now firmly embedded in how capital markets value companies and financial assets?

No not yet. There are firms and, of course, Lombard Odier and Generation are two examples of firms that have embedded it and are serving their clients more effectively because of that decision. And the percentage of firms that are coming around to this point of view is growing steadily. But where markets  generally are concerned, there are too many firms that are still in a learning process and have not yet realised that the nature of fiduciary duty has changed. For many years, people would say, I would like to take ESG  (Environment, Social, Governance) factors into account but my fiduciary duty does not allow me to do so. But now there’s voluminous academic research demonstrating that those asset managers that do integrate ESG are on the whole performing better. Coupled with other factors, this has led to an emerging definition of best practice that says if you do not integrate ESG you are in violation of your fiduciary duty. This is a hinge. And we are seeing this door open wide and people hear the creaking of the hinge. Some have not noticed yet but more and more are beginning to walk through to this new understanding.

What role can investors play in tacking climate change?

Choosing asset managers who are on the cutting edge of this dramatic and historic change is the most powerful decision that asset owners can make. And they should ask firms seeking their assets for management whether they are integrating ESG or not. And they should not be satisfied with a simple yes or not answer. They should pursue it and seek specific examples of how these factors are being integrated.

And the imperative is because it’s their pressure that going to effect change?

Absolutely. And by the way many asset owners are playing that role quite impressively now.

What are the main investment implications of climate change? Is it generating returns? Protecting from risk? Helping to change business practices?

The full integration of sustainability into investing is certainly a risk management tool. But it is also equally important as an opportunity recognition device. It is almost as if these questions allow our asset managers to see more deeply into the nature of companies than they would otherwise. There’s another factor. The brightest and most passionate young women and men going into asset management are actually not satisfied simply with a good income. They want a good income but they also want to feel as if their work is about more than simply making money. And so those firms that make a wholehearted commitment to the integration of sustainability have the advantage in recruitment and retention of getting the very best and most talented young people. 

Do we need to go through a global food revolution in order to fight climate change?

I would say yes because the percentage of global warming pollution that comes from agriculture, particularly animal agriculture, factory farms, industrial agriculture is quite significant and upwards of 15 per cent. When you look also at the obesity epidemic spreading from developed to developing countries and the health costs associated with the Western fast food diet, you see more than one reason why there is now a food revolution. Alternate sources of protein, better farming techniques, less reliance on fossil fuels in agriculture, less reliance on synthetic nitrogen fertilisers, which are 90 per cent natural gas. For our part, we have spent a great deal of time trying to constantly improve our understanding of this food revolution. But it is certainly far advanced now, particularly with young people.
 

What role do China and India play in tackling climate change?

China is by far the largest emitter of greenhouse gases. India will soon be the third. And both of their economies are growing fast. So any solution to the climate crises must obviously include dramatic changes in China and India. The good news is that dramatic changes are indeed underway in both countries. Both countries have an incentive to move quickly. Because the co-pollutants along with greenhouse gases that come from burning fossil fuels, have created an air pollution crisis in the cites of China and India and people are demanding clean air. This has become a major political issue in both countries. Again, the happy news is that electricity from solar and wind supplemented by more efficient and affordable batteries and extended into the transportation sector by electric vehicles is giving China and India an opportunity to move very quickly. The air in China’s cities is being cleaned up. India may not be far behind. They just had a meeting this days ago of this International Solar Alliance that Narendra Modi [Prime Minister of India] has established. I am quite optimistic. I wish my country was moving as fast as India on electric vehicles.
 

One other point, we, at Generation, believe that the world is in the early stages of a Sustainability Revolution that is powered, in part, by the new digital tools that foster hyper efficiency (the Internet of Things, Machine Learning and Artificial Intelligence). We believe that the Sustainability Revolution has the magnitude of the Industrial Revolution but the speed of the Digital Revolution.  And it is not starting in one corner of England and spreading slowly outward. It’s being jumpstarted in developing and developed nations alike. And it’s giving executive teams the ability to manage atoms, molecules and electrons with the same precision that IT companies have used in managing bits of information. The Google server farms, to pick an example, have reduced their energy use by 56 per cent with no changes in hardware simply by applying AI to the optimisation of the flow of electrons in, through and out of these farms. This is happening with material science and in every sector of the economy. Partly, as a result, we have seen the decoupling of CO2 emissions and economic growth. This is a very hopeful development.

Former Vice President Al Gore is the cofounder and chairman of Generation Investment Management. He is a senior partner at Kleiner Perkins Caufield & Byers and a member of Apple Inc.’s board of directors. Mr. Gore spends the majority of his time as the chairman of The Climate Reality Project, a nonprofit devoted to solving the climate crisis. Mr. Gore was elected to the U.S. House of Representatives in 1976, 1978, 1980, and 1982 and to the U.S. Senate in 1984 and 1990. He was inaugurated as the 45^th vice president of the United States on January 20, 1993, and served eight years.