Stuart Kirk, former journalist for the FT and now former banker at HSBC got into trouble last week for suggesting that climate change risks are overblown.
Before his suspension, he was the head of Responsible Investing for HSBC asset management.
Here is his presentation. It’s worth a watch.
In his presentation he says:
- Climate change risks are overblown
- The “markets”, in all probability, already priced in climate change risks
- Climate change adaptation is more pragmatic and likely cheaper than mitigation
- By the time climate change hits, we will all be dead anyway. So why bother?
I found the presentation interesting and a little horrifying – in the drunk uncle holding forth – sense. He makes some good points – about the short term nature of markets and investing, about the necessity of climate change mitigation, for example. But the general attitude can be summarised as 🥱🤷♂️.
I am still surprised that after 2008, after COVID, Ukraine and all the other shocks, people like Mr Kirk still think in terms of normal distributions. I.e. the probability of events can be modelled as a bell curve – with very bad or very good events having low probabilities, and predictable “average” events being the most common.
Or to channel mathematician, philosopher and truculent Twitter warrior N. Taleb, the likes of Mr Kirk believe that the impact of climate change to be an ergodic process while it is most definitely not.
Doing a Google search for “Ergodicity” will lead you to baffling mathematical and statistical explanations. But it is, at its core, an intuitive concept. In a non-ergodic system, things that are true for the aggregate may not be true for the individual.
In Mr Kirk’s presentation he plots economic growth from the 1930s to the present day and states, pretty much, that the “line goes up” despite world wars, economic upheaval, recessions etc. He uses this trend to assert that we will be fine despite the risks of climate change. The benefits of a growing economy will overcome the downsides of climate change.
However, the story of aggregate growth over the last 100 years hides tales of individual ruin.
For example, someone who invested all their savings in tech stocks in 2002 probably didn’t have anything left to make money when the market finally moved up. For those unlucky investors, it was game over. Therefore, we are modelling a process that is non-ergodic (individual outcomes can be radically different than aggregate outcomes) as an ergodic process.
So, what does this have to do with climate change?
I believe that the effects of climate change make our economic system even more non-ergodic. It makes it much more likely to have extreme events – heat waves, wild fires, hurricanes, droughts, etc. This makes modelling based on aggregate probabilities a little suspect. Sure, you could increase insurance premiums for coastal communities to account for higher flooding risk. This is what Mr Kirk means by the risk being “priced in”. But what happens when entire communities are wiped out due to an unprecedented storm surge, or heat wave, or forest fire?
Climate change adds more chaos to a complex system. It heightens the likelihood of extreme events that have catastrophic outcomes. Adaptation measures are necessary but they will do little to mitigate the impact of “black swan” events. So it doesn’t matter how complex your modelling is, and how sophisticated your investment strategy is. If you die due to a freak hurricane, you are done.
The likes of Mr Kirk are making a category error. The only way to “win” in an non-ergodic system is to survive. We should be thinking of what can be done to ensure that we don’t face catastrophic loss, so that we can continue to reap the benefits of growth in the future.
Further Reading
• An excellent primer on Ergodicity