Morningstar - Q3 2021 - 47

Kapoor: You've been laying out the case for
climate change and its effect on asset
valuations for more than a few years now. At our
conference three years ago, you made a very
compelling case for why it could be bad news for
companies that don't start to pay attention
to some of the risks and what it might mean for
their operations in the long run.
One thing that has stood out for us, at least
in the period since, is that a lot of investors
have started to engage with companies
and starting to talk about these issues more
thoughtfully than was previously the case.
But there's also a school of thought that disavows
engagement and believes that divestment
is the better option when it comes to companies,
particularly in sectors such as energy and
mining. I'm interested in your perspective on
whether engagement or divestment is the
better strategy or whether they both have a role
in how you think about them.
Grantham: I think engagement for the routine
concerns is the way to go, and for many people,
engagement is suitable. I think oil is somewhat
the exception, because the oil industry ran
a deliberate campaign of obfuscation, political
propaganda to mislead the world. They
funded dozens of organizations to put out basically
fake news that it didn't really matter-that
climate change was a hoax, etc. The oil money
was behind all of the above-and some coal
money-when it comes to that. They've played
a very big political role to confuse the issue
on climate change. That should be criminal. I mean,
it certainly has had a very damaging effect.
I think they did it very well. You might even
say brilliantly. They're very good, the merchants
of doubt, as the tobacco guys were. Just as
it cost 10 years of hundreds of thousands of deaths
in tobacco, it's cost the world perhaps as
much as 10 years of progress on climate change
action and government support and sensible
regulation to move us in the right direction.
This is absolutely a threat to our existence as
a stable global society.
And we're not willing yet, by any means-
the year with the biggest increase in carbon
dioxide, in the particles per million, was
last year. We haven't even started to decrease
the rate of increase. It's increasing faster
than it ever has. This is 20 years into the battle,
and it's still accelerating, and everything
that one reads about is accelerating: The rate
of glaciers melting is accelerating. The
rate of the ocean warming is accelerating. The
last 30 years are three times the warming
of the 30 years prior.
These are really alarming rates. The flooding has
gone up very steadily in terms of numbers
over the last 50 years. And simultaneously, forest
fires. It's not that there is less rain. In fact,
there's more rain. What there is are higher
temperatures, so it evaporates the available water
supply in parts of the world like Australia and
the southwestern United States. It evaporates
the water more quickly and leaves it more
vulnerable to fires.
All these disasters are accelerating, and we're
simply not winning. So, we have to treat
climate change as the mother and father of all
exceptions. Really, we need a wartime-like
effort to get behind it-at least a Manhattan
Project. We need to put masses of money
into research and development, into nuclear,
too-into fusion research. Can't afford to
miss a trick. You don't know, in the end, what may
save our bacon.
I would engage with every situation that I could
do, but with oil companies, I think they're simply
too cynical and too clever for engagement to
count. Some of our universities said they would go
for engagement, and I sit with bated breath
to wait for their engagement program. We'll get
behind you, dear leading university. But nothing
happens. When you get down to it, there
have been very few special climate-change-type
engagement programs.
For routine situations, though, voting greener,
voting better is a very powerful tool, and
BlackRock BLK and the boys en masse are moving
at least steadily in that direction. Slower
than I would have liked, a bit slower to start, but
now they're moving faster. And they are to
be commended.
A Matter of Survival
Kapoor: What I also heard you say through
those comments is in some ways, if you're a
fiduciary, it is also a matter of fiduciary risk, and
getting behind these issues actually helps
you fulfill your fiduciary duties. Yet I think you
would agree that this is one of the hottest topics.
There's probably not a day that goes by
when there isn't something on The Wall Street
Journal editorial page arguing that you're
ignoring your fiduciary risk if you do take ESG
considerations into your analysis.
So, where do you fall on the argument
around fiduciary risk and how fiduciaries should
be thinking about this and talking about
it with investment committees, with folks whose
money they have been charged to take
care of? How can that dialogue be a little bit
more productive and a little less siloed
than it is today?
Grantham: I suspect that E, S, and G are all going
to be indicators of better management, and
the ones that move quicker and position their firms
will get more of the bright kids signing up, will
have more customers in the end. I suspect
it will be good for business. But that is not my
area of expertise.
When I go to an ESG conference, I say, " Guys,
S and G, they're terrific. Some of my best
friends are S and G. What's not to like about good
behavior? " But E is a matter of survival. And it's
clear that if you ignore E, you're likely to wake
up and find that the biggest industry loss of value
in history is behind you, and you missed it.
And wasn't that subtle, by the way? There was
never a year where people came out and
said, " The oil industry is collapsing-watch your
tails. " By the way, in 1982, it was 23% of the
S&P 500. But 10 years ago, it was 15%. And then
irregularly-14%, 13%, 12%, 11%, 10%, all
the way down to 3%-actually hit 2.5% for a while.
That all happened without people pounding
the drums that it's going to happen. Yes, I was
pounding the drum about climate change,
and I was saying you should sell oil because it's
the right thing to do. But very few people
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Morningstar - Q3 2021

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