Fund Balance

By Walter Borden

Science and Sustainability

We at Fund Balance are concerned that the only mention of climate change in President Barack Obama’s 2012 State of the Union address was “The differences in this chamber may be too deep right now to pass a comprehensive plan to fight climate change.”

President Obama, State of the Union address 2012.

The U.S. National Academy of Sciences states, “The world is heating up and humans are primarily responsible. Impacts are already apparent and will increase.” Greenhouse gas (GHG) induced climate change is a clear and present threat to our civilization and way of life. Its continued politicization is dangerous. We accept the consensus of the world’s scientific community which is summarized well by the American Chemical Society:

Careful and comprehensive scientific assessments have clearly demonstrated that the Earth’s climate system is changing in response to growing atmospheric burdens of greenhouse gases (GHGs) and absorbing aerosol particles. (IPCC, 2007) Climate change is occurring, is caused largely by human activities, and poses significant risks for—and in many cases is already affecting—a broad range of human and natural systems. (NRC, 2010a) The potential threats are serious and actions are required to mitigate climate change risks and to adapt to deleterious climate change impacts that probably cannot be avoided. (NRC, 2010b, c).

We further acknowledge and accept the conclusions of our medical community. The American Medical Association (AMA) urges that we as a society confront the health issues of climate change now.

Scientific evidence shows that the world’s climate is changing and that the results have public health consequences. The AMA is working to ensure that physicians and others in health care understand the rise in climate-related illnesses and injuries so they can prepare and respond to them. The Association also is promoting environmentally responsible practices that would reduce waste and energy consumption.

We see that escalating carbon emissions are seriously damaging our oceans depleting them of oxygen and acidification. Carbon dioxide emissions caused by human activities over the last century have increased the acidity of the world’s oceans far beyond the range of natural variations, which may significantly impair the ability of marine organisms to live. We realize that rapid deforestation increasingly impedes nature’s ability to buffer carbon dioxide concentrations in our atmosphere and thus keep our air suitable for breathing.

The time is now for President Obama and Congress to heed science and pursue evidence based policy formation in addressing the real and gathering dangers of Climate Change. Putting a price on carbon is a critical first step.

Economics and Energy
We concur that our nation must responsibly transition away from fossil fuels. We reject the notion that all forms of potential energy are equal in a world confronted with destabilizing weather patterns driven in many instances by atmospheric warming from accumulated GHGs. Oil supply likely has peaked at 75 million barrels per day in spite of price increases of 15 percent each year. The externalities, or outside costs, of coal are a major problem with this energy source and they are not reflected in its market price. While we seemingly purchase and burn coal cheaply, in reality society pays a much higher cost from the perspective of the present and the next generation. Those who benefit from this relatively lower costs of electricity don’t pay for these externalities directly, but the public eventually has to pay in the form of medical bills, real estate depreciation, as well as water and soil detoxification. We call on the President to commission a full cost accounting assessment for the life cycle of coal and all energy sources that incorporates these externalities.

With these principles in mind, we also challenge the conventional wisdom that Natural Gas is a cheaper and cleaner alternative to coal given its requirements for large amounts of fresh water and currently dangerous engineering requirements for extraction from U.S. shale formations. We challenge industry to meet head on the impacts of existing hydroelectric and nuclear baseload sources on fresh water and food supplies.  Safe nuclear still requires a massive uptake of fresh water and the limits of hydroelectric are evident in an overtaxed watershed. Solar technologies must reduce the toxicity of manufacturing and waste, and wind sources must be continually improved. Energy requirements underpin every of sector the economy that sustains our civilization. Only technological breakthroughs combined with carbon pricing can deliver the advances required for our common good.

We see that choosing strategic renewable energy development does not mean impeding job formation or damaging labor markets. We subscribe to the conclusions of Google.org in its report utilizing the McKinsey & Company’s US Low Carbon Economics Tool:

1. Renewable Energy Innovation Benefits Jobs, GDP, Emissions, and Security
2. Delaying Innovation = Delaying Benefits
3. Innovation and Policy Enhance Each Other

Breakthroughs in clean energy technology will reduce the cost associated with clean energy policies implementation, effectively growing the economy while decarbonizing our energy use. These challenges can be met by our public and private sectors. Such efforts will doubtless yield additional benefits just as the internet emerged from the space age.

Policy Making
We further acknowledge the world’s policy making community as codified by the Kyoto Protocol and the United States Department of Defense that has concluded that Climate Change should be elevated to a U.S. national security concern. We contend that since the United States only has ~2% of the world’s oil reserves that pursuing policies of further subsidizing their extraction is a waste of resources.

With this in mind we call on the President and our elected representatives to address the real and gathering threats posed by the climate change with the same sense of urgency as the national debt. Climate change equally threatens the safety and security of our grandchildren and future generations. The world’s food supply and its stability is how we generate and create capital in the first place. And it is thus a moral responsibility of our leadership to take action to address climate change.

To this end we call for all elected officials to cease the politicization of the consensus of the world’s scientific community. In 2007 senators for both major parities in the United States were working together to implement policy to address the dangers posed by man made climate change and the coming Storm Age. Since that time Scientists have re-confirmed the IPCC’s assessment and moved on beyond the basic result that GHGs are warming Earth rapidly. The Republican Party however, once the party of Theodore Roosevelt, a party of Richard Nixon that ushered in the EPA, has moved in the opposite direction. As the scientific evidence has mounted and been re-confirmed by major studies such as BEST the contemporary leadership of this important American political institution has moved away from it.

Lastly, we at Fund Balance acknowledge that philosophical differences about the appropriate response exist. We are committed to rejecting ad hominem in dialogue with those we seek to convince. Some question if anything can be done. Others argue that warming will be better for human civilization. Still others say whatever the consequences, the world’s economic stability is too dependent on carbon emissions so transition away from fossil fuels can only bring wide scale food insecurity and disaster. We peacefully disagree and seek to forge a way forward utilizing a blend of measured transition to renewable energy sources, with research and development of clean alternatives, in concert with sustainable policy innovation. Such approaches do not hold a priori that economic growth in any form constitutes an overall good for humanity.

Burning Oil in the Gulf

The financial crisis that was precipitated in 2007 by structured finance (credit default swaps, collateralized debt obligations et al.) parallels the Deepwater Horizon spill in important ways. And indeed, the very first credit default swap was engineered to offset Exxon’s exposure to remediation, fines and legal costs resulting from the Valdez spill.

Experts and regulators from both industries acknowledge the lack of proven methodologies both for assessing the risks of derivatives and the risks of deepwater and ultra-deep water drilling platforms.

Both are examples of advanced engineering methods applied in advance of thorough testing and risk assessment.  The practitioners, policymakers, and stakeholders involved with deploying these systems either ignored or failed to understand the risk and potential economic impacts of these technologies on the world in which we live. As a consequence, their customers, constituents and the natural world have suffered greatly.

Both disasters are examples of the lax enforcement of existing regulations and the failure or unwillingness of regulators to keep up with the astonishing systemic complexity that emerges from 21^st century technology, whether software or hardware. For example, Warren Buffet famously called CDO and CDS’s, or derivatives, “financial weapons of mass destruction” and sought recently to protect Berkshire Hathaway’s holdings of certain tranches of derivatives, from new regulations on how to value them, since they are indeed so hard to value. As we can see, like deep-water drilling, the practitioners  and owners of these sophisticated technical financial instruments find them incomprehensible as well.

Interestingly, the SEC’s indictment of Goldman Sachs over its derivatives strategy and the havoc it caused dominated headlines in the weeks preceding the tragedy at Deepwater Horizon.

Economy Cube - Can This Puzzle Be Solved?

Until the government enacts legislation without multiple loopholes, euphemistically referred to as compromises, the public will continue to suffer and subsidize the failures of  untested and unproven technologies when they fail. One hears frequently about how top tier investment banks and petrochemical conglomerates attract the best and brightest. At Fund Balance, we want to see this amazing pool of human capital utilized to developing a sustainable economic future.

Mainstream media coverage of the critical depletion of key fish populations – and the serious economic threat it represents – echoes a key refrain at Fund Balance. Time Magazine covers how climate change is warming oceans and thus reducing their ability to support life, and CNN.com has a post by Fedele Bauccio addressing ways to halt overfishing.

Blue Fin Tuna

In addition the U.N. recently released new findings and recommendations for how humanity can decelerate the rapid depletion of the ocean’s biological capital.  Some key points:

• Blue Fin Tuna populations have dropped by 83% in the past 30 years.
• The annual 27 billion dollars in government subsidies to fishing, mostly in rich countries, is misguided since the entire value of fish caught is only 85 billion dollars.
• As a result, fishing fleet capacity is 50 to 60 percent higher than it should be.
• About 20 million workers will be displaced by ending these subsidies and thus retraining will be required.
• Fish populations can rebound quickly if no-fishing zones are expanded and their limits enforced; for example, by allowing tuna to live twice as long as they currently do, they are able on average to produce twice as many eggs.

We hope that the ongoing Gulf Coast disaster heralds a new time – one where:

• The false dichotomy between ecology and economy in the public mind is finally eliminated.
• Government and industry realize that an environment where pollution and unchecked exploitation are controlled and tightly regulated is an environment that supports healthy economic growth.
• People and governments vigorously address the fact that Climate Change is not the only impact of fossil fuel extraction and combustion, and that “market-based” strategies like cap and trade must be combined with other, precautionary and complementary policies.
• The public consciousness is imprinted permanently with the understanding that drawing down capital at a rate that exceeds one’s ability to replace it is economic and biological folly at best and suicide at worst, whether of banks or fisheries.

Watercress Darter

One of our focal points at Fund Balance is extraordinary local efforts to sustain the environment. Recently a story appeared in the Birmingham News covering a Pastor’s efforts in Powderly, Alabama to save the endangered Water Cress Darter (Etheostoma nuchale).  It chronicles a story of how faith and efforts to sustain ecosystems converge.

The Pastor, 90 year-old Bishop Heron Johnson of the Faith Apostolic Church, is quoted as saying “But he has reveled in the idea of saving God’s creatures. ..It has brought excitement to the church,” Johnson said. “You are a keeper of the animals, like Noah,” a Mr. Jackson told the Pastor on Sunday at the dedication for the Seven Springs Ecoscape Garden.

Another interesting element of the story is how the process of saving the fish also revived its habitat and has generated an eco-tourism and meditation park: a beautiful example of faith and sustainability converging at the micro-economic scale.

There is an important synergy emerging in principle between the London Accord, the World Bank, Central Banks and the Prince of Wales’ Rainforests Project. We recently learned that the World Bank is already working with the Rainforests Project to improve financing and investment opportunities in protected, living rainforests.

We encourage the Rainforests Project and the World Bank to work closely with the London Accord to move UK and International Treasuries and Central Banks, to adopt, issue and purchase climate, environment and socially responsible index-linked bonds.

The London Accord idea, as sketched out admirably in the Environmental Finance February Issue, is to issue sovereign bonds whose coupon rate is linked to climate and ESG policies. It’s pretty simple in practice: fail to meet your climate targets and your interest rate goes up. This type of market signal would allow investors in clean technologies, carbon offset projects and other climate mitigation and adapation businesses to hedge against government inaction and inspire governments, as the article suggests, to live up to their promises. In general, it helps to create a financial playing field tilted in favor of clean, green businesses, a prospect that would be cause for global celebration.

The April 2009 G20 communique was remarkable for its emphasis on climate, green jobs and a recovery powered by sustainable principles and business practice. Its concluding point was that: “We reaffirm our commitment to address the threat of irreversible climate change, based on the principle of common but differentiated responsibilities, and to reach agreement at the UN Climate Change conference in Copenhagen in December 2009.”

Because of their influence on the G20 agreement and implementation, the Bank for International Settlements and the Financial Stability Board need to get involved. We all benefit if they will just take the time to more intimately familiarize themselves with the work of the London Accord, the World Bank and the Rainforests Project on these types of issues.

Reading through the London Accord’s remarkable research, it has occurred to me that Central Banks might well have to be the first movers on this front. As the largest purchasers of government debt, it may be up to them to signal to governments that they would be interested in these types of securities.

Some are despondent after Copenhagen, concerned that the pace of change is insufficient to address looming challenges. Constructive engagement with the central banking community may well prove instrumental to persuading sovereign nations of the wisdom (costs) of failing to confront climate change, the business issue of the millenium according to those at Davos. We can’t wait for them, but neither can we afford to ignore them.

Fund Balance has been examining the Dead Zones occurring in coastal and estuarial zones over the last year. Their magnitude is striking. Their damage to ocean ecosystems, seafood supplies and business is severe. And they are connected to vital food supply economies in the Midwest. Nitrogenous run-off from fertilizer used in large scale agriculture binds up and removes oxygen in the Gulf.

Does it have to be one set of regional American economic interests over another? The answer is no. For example, research performed at Dauphin Island Sea Lab off the coast of Alabama develops “resource management strategies which will foster the wise stewardship of diminishing natural resources”. There are ways that such principles are being applied in the Midwest along the Mississippi river. The book, “From the Corn Belt to the Gulf” (Nassauer, Santelmann, and Scavia, eds., Resources for the Future Press), details how farmers and industrial agricultural operations could reduce the amount of nitrogen flowing into the Gulf of Mexico by 40 percent. And it is increasingly clear that by planting specific types of grasses and engineering buffers, grain production in the great American Midwest does not have to contract in order for coastal economies to thrive.

Scientists and policy-makers in the Midwest have been at the forefront on this work. The Science Museum of Minnesota has produced an excellent presentation on the Deadzone in the Gulf of Mexico.  Fund Balance is working with policy-makers and bankers on our capital markets strategy for dealing with this issue in Washington, DC.