Weekly clippings #20 - rejected models, tornado and disaster losses, Paris agreement losses, ESG realism, carbon premium, coal batteries

Thanks for meeting with me on Tuesday. It was clarifying to talk about how ESG reporting or similar mechanisms are not imposed upon the management teams, but rather you have set up a system where occasional queries might be made if a company is added to the portfolio, or a portfolio company is involved in some ESG-linked event or change. To me, and it appears to the investment management teams, independent thinking is valued above all and they must be free to disagree with the rest of the world, including management. This is comforting.

 A main purpose of my efforts through this discussion is to demonstrate how there are false assumptions relating to ESG built into some marketing or collateral materials. In this, your company is far from alone. This specifically applies to materials relating to the “sustainable” product shelf, so I hope these materials will not be presented as applicable to other fund management teams. Still, it concerns me that  many fund companies have money managers and materials based on incorrect assumptions that may harm the company's reputation and therefore spill over onto my practice.  As I’ve said, the dominant subject within “sustainability” or “ESG” is climate, which rests on the hypothesis that there is dangerous man-made global warming due to human CO2 emissions. This subject is being used to leverage all manner of harmful ideas and policies, impeding human prosperity, prolonging human suffering, and distracting humanity from actual issues that can be solved quite quickly with a tiny fraction of the funds being wasted in an effort to “stop climate change.” In fact, the money directed towards climate projects often works in opposition to the SDGs as it perpetuates poverty when we know that all the SDGs can be solved by creating wealth. The book “Best Things First” by Bjorn Lomborg that I gave you is filled with examples of how to meet the UN SDGs.

Yesterday I had the opportunity at the Investia national conference to see John Cook present his investment style and the main ideas driving his funds. I pointed out two things to him during the Q&A: first, that using the levelized cost of energy (LCOE) is an invalid measure of the price of energy on a grid. LCOE is like the marginal tax rate – it tells you how much the cost of the next electron is, but nothing more, and certainly tells you nothing about how expensive it is to add this energy source to a grid that must be precisely balanced with demand every second of the day. The correct measure to use is the full-system cost of adding the energy source.

 
John acknowledged the permanent problem of intermittency of wind and solar but did not integrate this into his statements about cost. When you have a grid providing stable, reliable electricity and then a solar panel adds power to it after a cloud has passed, the reliable sources must be reduced to balance the new power. Such increases and decreases make them less efficient, just as starting and stopping your car creates wear and tear on it. Further, since the solar power is unknown at any moment and can go to zero (as it does for most of the day when the sun is not shining), it requires 100% backup from a reliable energy source that can be turned up or down to meet demand. Thus, solar exists as an almost pure parasite on reliable energy sources and necessarily increases the cost of the grid while providing almost no benefit. Often, the profits of wind and solar companies are coming from times when they are asked NOT to provide their power because it will unbalance the grid, so we have the spectacle of having to pay for the reliable grid, then also for the NON-use of the unreliables. Madness.
 I plan to integrate this into a larger commentary on John’s presentation but note that I was pleased to learn that at least he is a value investor.

This week I bring you clippings in the science category that include a study just released by the official statistical agency of the government of Norway (like Statistics Canada) that examined the plausible explanations for variation in global temperature and the validity of global climate models compared to real-world measurements. Since we are still in the official hurricane season, I also included a couple of articles about disaster losses, which, no surprise to me, are decreasing.

In the investment/economics category I started with my (got around to it at last) comments on the John Cook podcast about batteries, an article circling back to the SDGs and the work of Bjorn Lomborg, then a smattering of ESG articles.

Finally, for absurdities this week we have a battery factory run by coal, a coal ship named Climate Justice, an EV charging station powered by diesel, and a shocking rise in the cost of insuring EVs. You can’t make this stuff up.

The National Statistical Institute of Norway just published a paper To what extent are temperature levels changing due to greenhouse gas Emissions?  In the paper they say “standard climate models are rejected by time series data on global temperatures” while the conclusions state “the results imply that the effect of man-made CO2 emissions does not appear to be sufficiently strong to cause systematic changes in the pattern of the temperature fluctuations.”  

Time trends in losses from major tornadoes in the United States  Both the severity of damage from individual events and the total annual losses from tornadoes are seen to have reduced over time. 

Making Sense of Trends in Disaster Losses  Take official historical loss estimates and adjust them for the fact that there are more people, more wealth and more structures exposed to loss. Just as with overall and major hurricane landfalls, there is no trend in normalized losses for the continental United States.

A quick analysis of the John Cook podcast interview 

Welfare in the 21st century: Increasing development, reducing inequality, the impact of climate change, and the cost of climate policies The Paris Agreement, if fully implemented, will cost $819–$1,890 billion per year in 2030, yet will reduce emissions by just 1% of what is needed to limit average global temperature rise to 1.5°C. Each dollar spent on Paris will likely produce climate benefits worth 11¢. The most effective climate policy is increasing investment in green R&D to make future decarbonization much cheaper. This can deliver $11 of climate benefits for each dollar spent.

 

Renaming ESG Won’t Make It Go Away Now, as concerns and criticisms for ESG are gaining ground, and companies are shying away from ESG affiliations, the business community must be alert for the next call to action featuring another do-good moniker. Centralized planning shows no signs of slowing down.

Money managers are shifting their attitude to ESG as ‘realism’ sets in, says S&P’s Dan Yergin 

Does the Carbon Premium Reflect Risk or Mispricing? Companies with higher scope 1, scope 2, or scope 3 emissions enjoy superior earnings surprises and earnings announcement returns; quarterly earnings announcements account for 30-50% of the premium.

ESG ETFs fail to shine over past 10 years Scientific Beta findings contradict view that sustainable strategies can steer investors towards ‘winners’.

EV Battery Factory Will Require So Much Energy It Needs A Coal Plant To Power It  The factory will require between 200 and 250 megawatts of electricity to operate. That’s roughly the amount of power needed for a small city.

A ship named the Climate Justice just loaded up with coal in Vancouver  

America's Largest EV Charging Station is Powered by - you guessed it - Diesel

Electric car owners may face shocking 1000% rise in insurance premiums during crisis  Cost and availability of parts, plus the expertise to do the work are major issues insurers are figuring out how to properly price.