Monday, 30 September 2019

Policy bets

I'm a big fan of betting, but rules that stop players and coaches from betting make sense. You don't want somebody to throw the game to make sure that their bet goes the way they'd hoped.

Bernard Hickey's morning roundup includes the following bit of news:
Prepare for policy shock - The UN-supported Principles for Responsible Investment group, which has nearly 500 fund managers looking after nearly US$90 trillion in assets, warned last week that financial markets had not priced-in the likely near-term policy response to climate change. It issued a report on a new project called ‘The Inevitable Policy Response,’ which sees a political and financial tipping point by 2025 that forces dramatic political action. That would include “bans on coal, and on internal combustion engines; an increase in nuclear capacity and bioenergy crops; greater effort on energy efficiency and re/afforestation; wider use of carbon pricing and increasing the supply of low-cost capital to green economy projects.”

“Government action to tackle climate change has so far been highly insufficient to achieve the commitments made under the Paris Agreement, and the market’s default assumption appears to be that no further climate-related policies are coming in the near-term. Yet as the realities of climate change become increasingly apparent, it is inevitable that governments will be forced to act more decisively than they have so far,” the report’s authors PRI, Vivid Economics and Energy Transition Advisors write.

“The question for investors now is not if governments will act, but when they will do so, what policies they will use and where the impact will be felt. The IPR project forecasts a response by 2025 that will be forceful, abrupt, and disorderly because of the delay.”
And this is all fair enough. Lots of investment decisions depend on assessments of policy risk. The big funds will have all kinds of folks watching over those policy risks to try to make sure they're appropriately positioned.

I'd bet substantially against bans on internal combustion engines, but I'd bet in favour of wider use of carbon pricing - if the government hadn't banned iPredict. I'd count the increase in nuclear capacity as wishful thinking - I wish it would happen, but there are a lot of layers of stupid to cut through to get there. And I expect that private-sector funds who've signed up to the Principles will take the report's predictions with a bit of scepticism.

But here's the part that worries me:
The NZ Super Fund is a founding signatory and the project is due to start publishing detailed modeling from late September on the effects of this shift on the macro-economy and asset values.
If the sovereign wealth funds start making plays predicated on their assessment that governments will ban internal combustion engines by 2025 (etc), and if governments do not want their sovereign wealth funds to realise substantial losses, does that start affecting policy. 

Do we want rugby referees betting on the game they're officiating?

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