Carbon Bubble: The next financial crisis.
The movie “The Big Short”, based on the 2010 book The Big Short: Inside the Doomsday Machine by Michael Lewis, narrates how a small group of asset managers bet against the US housing market when they discovered that the loans given by banks had high probabilities of never being paid. The so called Subprime Loans were in danger of defaulting, but almost no one saw it coming...
The ripple effects these defaults had on the US housing market were devastating to the entire economy and financial world in general. The financial markets are becoming increasingly connected and intertwined with each other, hence whatever happens in one place, will inevitably have repercussions somewhere else.
In the movie, Steve Carell plays Mark Baum, an hysterical and paranoid asset manager who was one of the few people who saw the financial crisis coming and who is also my favorite character in the film. At first, he comes off a bit weird and eccentric, but as the movie unfolds, it's impossible not to empathize with him. He is a contrarian. He doesn't take conventional wisdom for granted. He seeks the truth. He is a free thinker. And he was right.
My father and grandfather died of cancer. Both were heavy smokers and addicted to nicotine. I was living in Spain when I learned that my father was diagnosed with lung cancer and was devastated by the news. I wanted to return to Chile and be with him, but my work was in Europe and I felt it was my responsibility to send money and help pay for my father’s expensive treatment and hospital bills.
Three years later my dear father passed away. He was in Chile and I was in Spain, 10.000 kilometers away. It was one of the saddest moments of my life and it has shaped my personality for ever.
A couple of years later, during a summer vacation in Menorca, I read a book by Naomi Klein called "This Changes everything: Capitalism vs Climate”. In the book, she describes how Big Carbon & Oil companies have kidnapped capitalism and democracy for their own benefit. She said that Big Carbon & Oil were following the same script that the Big Tobacco companies had used before. They weren’t just lying to the people, they were creating a powerful tactic of psychological war: Fear, Uncertainty and Doubt.
“Keep the controversy alive" by spreading doubt and confusion, even after a scientific consensus had been reached, was the basic PR strategy to influence the public’s opinion and defend the company’s interest: To profit no matter what the consequences.
When people are faced with contradictory arguments about one topic, it is very difficult to determine what is really the truth. Big Tobacco were the masters at creating “confusion” among people.
While reading Naomi Klein’s book, I also saw a documentary based on another book called “Merchants of Doubt: How a Handful of Scientists Obscured the Truth on Issues from Tobacco Smoke to Global Warming”.
I was scandalised by all of this. Like Steve Carell’s character in “The Big Short” I started to panic. I began researching and the more I read on this topic, the more shocked I was with the new findings. Naomi Klein was right. Big Oil & Carbon were using the same tactics as Big Tobacco. Disgusting!
I attended lectures and read articles by climate change deniers and skeptics downplaying the harmful effects of carbon emissions on the planet and felt it was an outrage. I remember one that specifically caught my attention: Patrick Moore, the Co-Founder of Greenpeace, a pioneer environmentalist activist had become one of these “merchants of doubt” paid by Big Oil & Carbon to create confusion among the public opinion.
I was perplexed when I realised the horrible tactics these companies used to deceive the people to make a profit with no regards to anything or anyone but their board of directors. I felt like I was living in the matrix, mentally asleep and accepting everything that was put in front of me without questioning anything.
Since then, I started with a different approach. I became much more skeptical about things that didn’t feel or sound right and began to rely on my own deep research to figure out the real truth behind everything. I felt like a contrarian on some views, but thanks to my research, my arguments are strong and delivered with high conviction. I became a “Free Thinker” and now I have the confidence to raise my voice and be heard when I feel it’s needed. And this is how I like it.
The Paris Agreement, that was sealed in 2015 and is set to begin in 2020, is not the first attempt to decarbonize our economy, but it is the last hope to do it on time. Global temperature has increased, in average, nearly 1,5°C, so it's extremely important to accelerate the transition towards renewable energies, electric transportation, and -even- eat less meat, among many other things we can do to decarbonize our economy and mitigate the effects of global warming.
The goal of the Paris Agreement is to reach Net-Zero-Carbon Emissions by the time we reach the year 2050. It's clear. Scientists around the world have confirmed it. If we don't reach this goal, civilization as we know it is under a serious threat. This is real. We need to act.
I believe Elon Musk described it the best: “It's "very important for the future of the world. It's very important for all life on Earth. This supersedes political parties, race, creed, religion, it doesn't matter. If we do not solve the environment, we're all damned."
The transition we are entering will have a big and deep impact on our economies and industries and it will affect almost everything and everyone.
Think about it.
The vast majority of Pension funds around the world, big institutions and retail investors have been investing in Index Funds that replicate the S&P500. Even though the S&P500 has been a great investment during the last century, it is not guaranteed that this will be the case in the future.
The S&P 500 includes many Oil & Carbon companies that will have to write-off existing assets, potentially unfolding an economic crisis like 2008. In their balance sheets, these companies hold vast amounts of assets (Oil & Carbon Reserves) that will -literally- be considered Stranded Assets, in other words, useless.
Like a domino effect, this will affect banks with high loan exposure to Big Oil & Carbon. Contractors, subcontractors, suppliers and customers, everyone will be affected by the Carbon Bubble.
Mark Carney, governor of the Bank of England and Michael Bloomberg, former mayor of New York, among many others, have been stressing the need for companies to highlight and disclose their exposure to these toxic assets.
US President Donald Trump has given Big Oil & Carbon the last chance to profit at the expense of the entire world - literally. Courage is needed to embrace this transition and accelerate the decarbonization of our economies. All countries should adhere to the Green New Deal.
One of the reasons I started Kaccelerator is because I strongly believe that saving our planet should be our number one priority and investing in green technologies and companies is one way to do it.
But it’s more than just a moral issue.
There is no doubt in my mind that the green revolution presents a great opportunity for investors to be part of exciting new companies that can be successful without compromising growth and returns.
It’s time to take responsibility and participate in the solution.
It’s the way of the future. So we need to act now!
Kaccelerator is a next-generation thematic investment fund focused on disruptive innovations that are changing the world for the better and that have long-term growth potential. We believe in the transformative power of allocating capital into mission-driven businesses that can deliver positive change and alpha.