Erste Asset Management Investment Blog

Climate risks: Is climate change that bad?

Climate risks: Is climate change that bad?
Climate risks: Is climate change that bad?
(c) unsplash
Share post:

This year’s September went down as the warmest in recorded history, and for many people in our region it was a wonderful extension of the summer. Climate change is not as bad as they say! Ok, at Christmas there will be no snow in (Eastern) Austria again, but hardly anyone remembers a white Christmas anyway. Besides, snow is only nice to look at for a short time before it turns into a brown mess.

Let’s fight inflation first instead of making fossil fuels more expensive. 1.5 degrees or 2 degrees or 3 degrees more, you probably won’t feel the difference anyway. Let the others do something first, if we humans have any influence at all – after all, who really knows?

A worrisome discovery

More than 50 years ago, the scientists of the largest oil companies made a worrisome discovery that called their entire business model into question: the burning of fossil raw materials causes an increased concentration of greenhouse gases in the atmosphere, as a result of which the sun’s rays can no longer be reflected back into space, as if by a mirror, and the earth will be heating up increasingly.

Subsequently, this will lead to the melting of the polar ice caps and thus to a rise in sea levels. The increased air temperature will cause more moisture to be absorbed, resulting in less regular rainfall and instead torrential downpours. Welcome to the year 2023!

The most successful lobby in human history

From the oil companies’ point of view, this news was worrying because it meant that if they were forced to change their business model, all capitalised, on-balance sheet fossil reserves would suddenly be a complete write-down and thus worthless (N.B. at that time, oil companies were among the largest companies in the world by market capitalisation).

This had to be prevented at all costs, and so the Petroleum Association was convened, which developed a very effective counter-strategy: disinformation. Through media campaigns, the existing scientific knowledge of man-made climate change was called into question and doubts were fuelled (N.B. California filed a lawsuit against the largest oil producers this year based on these practices. [1]) With extraordinary success that continues to this day.

The approach is quite simple: pseudo-scientific studies are placed in daily newspapers or TV shows with wide coverage, and only few people in the audience question the seriousness of the sources. The commissioned agencies would already be experienced in disinformation, as they had previously prevented non-smoker protection for years on behalf of the tobacco industry, with the argument that nicotine was not harmful to health.

CO2 is like hypertension …

… you don’t realise you have it until one day you suffer a stroke. This also made it easier for the disinformation campaigns because the concentration of greenhouse gases in the atmosphere, which was increasing every year, would hardly have any noticeable consequences for a very long time.

This has changed abruptly in recent years. We are the first generation in human history to notice a change in the climate over our own lifetime. This is less great than it sounds, because it means that the first signs of the impending stroke are already there.

Greenflation vs. brownflation

Still, those parties that continue to deny climate change and advocate for fossil combustion vehicles in an open-minded manner are currently experiencing a particularly strong influx. There are probably two central reasons for this: On the one hand, the prices of fossil fuels have exploded in the course of the Ukraine war. In the process, it became (briefly) clear that my heating not only harms the environment, but also supports authoritarian regimes. Instead of switching to green, domestically produced energy with local jobs, renewable energies are blamed for the high inflation. It is not the price increases for fossil fuels (which received record subsidies of USD 1,000bn worldwide last year[2]) that have driven inflation. Instead, the necessary expansion of renewables is apparently to blame for the fact that at the end of the day less remains in the wallet, i.e. the so-called greenflation.

Always shoot the messenger

The second reason is that the multiple crises create great discomfort. It is deeply human to listen to those who allay these fears and provide arguments why others are to blame, and nothing really needs to change anyway (“Who knows if climate change is real?”). This quickly turned the mandatory change in Germany’s heating system into a so-called “heating hammer” (“Heizhammer”) and, with the help of the tabloid media, warned of the downfall of democracy. Before the Ukraine war, few people thought about how their heating system worked. Since the “heating hammer”, however, many people know that it must not be a heat pump under any circumstances – no matter the heating costs in the end. Let them stop building coal-fired power plants in China first.

The other China – the one not in the headlines about coal-fired power plants

While the headlines in Europe regarding China were dominated by coal-fired power plants, many people failed to see that China was making massive investments in research into batteries, solar power, wind energy, and electric cars. With the result that they are now world market leaders in almost all areas and we Europeans are dependent on Chinese suppliers on the road to green transformation. Yet there used to be a German solar industry that dominated the market. Unlike the fossil industry, however, it did not find the corresponding political support.

Do I have to be a do-gooder to be interested in climate risks?

Three years after the introduction of Erste AM’s ESGenius-score, we in the Responsible Investment Team have developed a Climate Score that allows us to identify the best performers in all sectors, i.e. those companies that are better positioned in a worsening climate crisis in comparison with their peers. Erste Group has also produced a climate report for the first time, transparently showing how climate risks are taken into account in the banking business. 

It would be a great pleasure if our climate focus turned out to be irrelevant, because this would mean that climate change has been stopped. However, current policy changes and discussions unfortunately do not suggest this conclusion.

Read more articles from the ESGenius Letter on the topic of “Climate Risks” here!


[1] California sues oil companies claiming they downplayed the risk of fossil fuels | California | The Guardian

[2] Fossil Fuels Consumption Subsidies 2022 – Analysis – IEA

For a glossary of technical terms, please visit this link: Fund Glossary | Erste Asset Management

Legal note:

Prognoses are no reliable indicator for future performance.

DOSSIER

RESPOND TO THE ARTICLE

Legal disclaimer

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. The language of communication of the sales offices is German and the languages of communication of the Management Company also include English.

The prospectus for UCITS funds (including any amendments) is prepared and published in accordance with the provisions of the InvFG 2011 as amended. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in conjunction with the InvFG 2011.

The currently valid versions of the prospectus, the Information for Investors pursuant to § 21 AIFMG, and the key information document can be found on the website www.erste-am.com under “Mandatory publications” and can be obtained free of charge by interested investors at the offices of the Management Company and at the offices of the depositary bank. The exact date of the most recent publication of the prospectus, the languages in which the key information document is available, and any other locations where the documents can be obtained are indicated on the website www.erste-am.com. A summary of the investor rights is available in German and English on the website www.erste-am.com/investor-rights and can also be obtained from the Management Company.

The Management Company can decide to suspend the provisions it has taken for the sale of unit certificates in other countries in accordance with the regulatory requirements.

Note: You are about to purchase a product that may be difficult to understand. We recommend that you read the indicated fund documents before making an investment decision. In addition to the locations listed above, you can obtain these documents free of charge at the offices of the referring Sparkassen bank and the offices of Erste Bank der oesterreichischen Sparkassen AG. You can also access these documents electronically at www.erste-am.com.

N.B.: The performance scenarios listed in the key information document are based on a calculation method that is specified in an EU regulation. The future market development cannot be accurately predicted. The depicted performance scenarios merely present potential earnings, but are based on the earnings in the recent past. The actual earnings may be lower than indicated. Our analyses and conclusions are general in nature and do not take into account the individual characteristics of our investors in terms of earnings, taxation, experience and knowledge, investment objective, financial position, capacity for loss, and risk tolerance.

Please note: Past performance is not a reliable indicator of the future performance of a fund. Investments in securities entail risks in addition to the opportunities presented here. The value of units and their earnings can rise and fall. Changes in exchange rates can also have a positive or negative effect on the value of an investment. For this reason, you may receive less than your originally invested amount when you redeem your units. Persons who are interested in purchasing units in investment funds are advised to read the current fund prospectus(es) and the Information for Investors pursuant to § 21 AIFMG, especially the risk notices they contain, before making an investment decision. If the fund currency is different than the investor’s home currency, changes in the relevant exchange rate can positively or negatively influence the value of the investment and the amount of the costs associated with the fund in the home currency.

We are not permitted to directly or indirectly offer, sell, transfer, or deliver this financial product to natural or legal persons whose place of residence or domicile is located in a country where this is legally prohibited. In this case, we may not provide any product information, either.

Please consult the corresponding information in the fund prospectus and the Information for Investors pursuant to § 21 AIFMG for restrictions on the sale of the fund to American or Russian citizens.

It is expressly noted that this communication does not provide any investment recommendations, but only expresses our current market assessment. Thus, this communication is not a substitute for investment advice, does not take into account the legal regulations aimed at promoting the independence of financial analyses, and is not subject to a prohibition on trading following the distribution of financial analyses.

This document does not represent a sales activity of the Management Company and therefore may not be construed as an offer for the purchase or sale of financial or investment instruments.

Erste Asset Management GmbH is affiliated with the referring Sparkassen banks and Erste Bank.

Please also read the “Information about us and our securities services” published by your bank.

Subject to misprints and errors.