One clear Macro trend is climate change. The impacts of climate change are being felt more frequently and more severely around the globe, resulting in pressure to decarbonise our society and economy – with demand for change coming from governments, business, and consumers.
Yet replacing fossil fuels, whose use is the primary cause of CO2e emissions, is difficult and expensive.
Backing the macro in this sense can be achieved through buying NZUs, the New Zealand unit of currency that represents a tonne of carbon equivalents (CO2e), or by owning a share of a forest that is sequestering carbon at a relatively low cost.
For investors, this creates a new horizon of opportunity – how to create value and economic benefit from these macro changes, whilst also helping to address the root problem, levels of CO2e in the atmosphere.
The following points support the positive macro environment for carbon sequestration.
Climate change is real. There is a scientific consensus1 that man-made activity is resulting in increasing emissions of CO2 equivalents and that this, in turn, resulting in a general warming trend and climate variability.
The public can now observe these outcomes. Locally we’ve seen increased incidents of storms (Gabrielle) and globally the two hottest months on record were observed in July and August 2023.
Responses to the crises are insufficient. Whereas some countries made positive reduction commitments as part of the Paris Accord, the sum of obligations suggests that even if these pledges were accepted, we are ‘way off track’2, with the world set to warm by 2.6C.
Decarbonisation is difficult to achieve. We often think of the transition to electric systems as being the solution. Scientist Vaclav Smil, in his book ‘How the World Really Works’3 identifies cement, steel, plastics and ammonia as “the four pillars of civilization”. Global production of these four “indispensable materials” requires 17% of the world’s primary energy and generates a quarter of CO2e emissions generated from fossil fuel combustion. These pillars are generated from fossil fuel use, which is not easy to design around.
Cross-party support remains for reducing emissions and pricing carbon via the New Zealand ETS scheme. While there have been ‘a few bumps in the road’ this year, the government has accepted the Climate Change Commission recommendations4 for the coming years, which sees reduced volumes of carbon credits being auctioned, with increasing price settings. This underpins the price of NZUs going forward.
We have to replace fossil fuels with something – many researchers point to wood or fibre-based products in a new bio-economy based on exotic trees5. The use of forests and trees is likely to expand markedly from the present day.
At MyFarm, we believe carbon emission reductions are essential but will be difficult to achieve across a wide section of our economy. Carbon offsets such as those generated by forestry will play an essential role in balancing the emissions that prove difficult to reduce.
A nuanced purpose of macro investing is finding investments that have exposure to the macro event and help to manage downside risk.
1. (2022). Scientific Consensus: Earth's Climate Is Warming. NASA Global Climate Change. https:// climate.nasa.gov/scientific-consensus/
2. (8th September 2023). World way off track to meet Paris climate goals, says UN report. Financial Times. https://www.ft.com/content/41a...
3.Smil, V. (2022). How the World Really Works, A Scientist's Guide to Our Past, Present, and Future. Penguin.
4.Daddler, M. (26th July 2023). Surprise decision restores Climate Commission’s legitimacy. Newsroom. https:// www.newsroom.co.nz/sustainable-future/surprise-decision-restores-climate-commissions-legitimacy
5.Parker, W. (30th October 2019). A BIO-ECONOMY FUTURE – New Zealand’s Natural Advantage. Graham Brown & Co Chartered Accountants. https://www.grahambrown.co.nz/...