Celebrating London Climate Action Week, this article features as part of IFA Magazine’s editorial campaign throughout this week, which aims to highlight key issues, news and views in the field of climate action.
Back in 2008, the global financial crisis (GFC) provided a glimpse over a precipice. Governments and central banks moved to stop the financial system from collapsing, cutting interest rates to zero and creating a protected financial environment to enable recovery. It worked, but left the moral hazard of ballooning asset prices and abnormally low financial risk.
Psychologically, this stability and prosperity has left many investors (and their financial advisors) with a strong desire for things not to change – an even stronger status quo bias than is the normal human condition. But that post-GFC world is gone. The world is now gripped by inflation, war and possible famine.
Climate change and other environmental risks can no longer be ignored. Nature has given us ecosystems, species, freshwater, land, minerals, the air and oceans, for free. But without financial value, they are not measured in the economy, and businesses and consumers have been overusing this natural capital at such a rate that nature can’t replenish it.
Our rate of consumption is unsustainable and climate change is just one indicator of extreme planetary distress.
What does this mean for financial advice?
Simple though it would be to focus only on the financial factors, and hope that the steady rise in equity, bond and property values will continue, it is time to change. It is not just global events but regulators that require advisers to shift beyond the ‘single materiality’ of finance and, in future, to plan and report investment in the context of ‘double materiality’.
This means that all of the adverse impacts caused by companies in making their profits, which affect both the planet and society, now need to be measured and considered.
Clients are increasingly aware of these wider issues. Protecting and growing their wealth is still the primary objective but a responsible wealth management approach is increasingly expected – a desire not to profit from causing problems. This is a major upheaval in the finance industry and adapting to it will be challenging, especially as definitions, data and regulations are still missing.
However, it is the concepts that really matter, together with a change in mindset.
Challenge the status quo
From small changes in our daily lives, to entire business strategies or major government policies, changing the status quo can seem difficult. Behaviour easily becomes entrenched.
One example of an economic status quo that on the face of it seems unlikely to change, but when reconsidered through a responsible lens may shift rapidly. It is how policy can change to respond to rising food prices.
The background is that food prices have been rising since 2019. The world supply and demand of grains are out of balance and this has led to the prices of wheat and corn doubling since 2019. The world is now facing a food crisis. It is tempting to start with a simple assumption that Russia’s invasion of Ukraine disrupted food supplies and caused the problem. However, a significant part of the price rise occurred before the war.
This issue is more complicated than interruption to one part of the food supply. It is also about the demand for food too. It also raises moral, environmental, energy security and economic policy questions.
Why has the demand for food expanded?
Since the time of the Pharaohs, governments have intervened to balance food supplies and prices. The decidedly more modern intervention in markets to mandate the blending of crop-based biofuels into transport fuels was introduced to increase demand for grains and so support prices that had been moribund for decades, falling to very low levels in real terms.
Governments across the world require oil refiners to blend bioethanol, made from grains, and biodiesel, made from vegetable oils, into vehicle fuel. The typical standard is up to a 10% blend, which requires a vast quantity of crops. Last year, 155 billion litres of biofuels made from different crops were burned, and European countries alone turned wheat equivalent to over five billion loaves of bread into bioethanol.
But with food prices now punishingly high, it must be time to consider a reversal of that policy intervention. A critical question to answer is: what would happen to grain prices if biofuel mandates were cancelled entirely?
Such a move would reduce demand for grains and provide a strong signal to the market, changing the behaviour of market actors and farmers. Opinions will differ on how much it would affect prices but some might speculate that the change would be sufficient to move the market for grains from shortfall back to surplus. Next season farmers would switch from growing fuel crops towards more food crops. Fertiliser prices would fall too, as less would be needed for non-food use.
The moral question
A consequence of key grain prices doubling since 2019 is that the number of people facing acutefood insecurity has more than doubled over this period, according to the World Food Programme.
Many people filling their cars in high-income countries are unaware that they have no choice in buying fuel containing a blend of 10% biofuel made from food crops. Many almost certainly don’t appreciate the true level of poverty experienced by billions of less fortunate people around the world: lower middle-income countries have an average GDP per capita of less than $2,500 per annum, and it is less than $1,000 p.a. in low-income countries.
For these 3.8 billion people, a high proportion of spending is on food and there are growing warnings that millions of people in many
countries are at risk of famine. It will be very hard for the role of biofuels in this crisis to remain off the front pages. A staggering calculation by Gro Intelligence is that the total amount of crops used annually for biofuels is equal to the calorie consumption of 1.9 billion people.
In the last food crisis in 2007-08, when biofuels consumed much less of the world grain output, they received a share of the blame for contributing to rising prices. And there is another large-scale precedent of moral indignation against food insecurity that might well resurface.