Climate Change And The Impact Of Laudato Si

Climate Change And The Impact Of Laudato Si by Bill O’Grady of Confluence Investment Management

Last week, the Vatican held a meeting of the mayors of some of the world’s largest cities to discuss climate change. This meeting was part of Pope Francis’s efforts to add to the discussion of climate change, which was the subject of a recent encyclical, Laudato Si. In this report, we will begin with our position on climate change, discuss the encyclical and try to measure its potential impact on the direction of climate change policy. As always, we will conclude with market ramifications.

Climate Change

Since we began writing the Weekly Geopolitical Report in 2006, we have mostly avoided discussing the topic of climate change, although we have been monitoring the issue for years. We did examine geoengineering1 a few years ago and have looked at El Niño2 as well. There are a number of reasons why we have been reluctant to take on this topic. First, we are not climate scientists and the science involved is quite complicated; in general, our concern was our inability to accurately evaluate the methods and conclusions. Second, the topic is highly emotional; usually, we are willing to delve into controversial topics, but, without clear scientific or political consensus on the matter, it was unlikely that we could add anything to the discussion. In fact, the lack of global consensus was behind our initial report on geoengineering; if a consensus failed to develop, states and others might be inclined to take matters into their own hands and use geoengineering methods to affect the climate.

If one accepts that climate change is mostly caused by humans burning too many fossil fuels, the problem is figuring out the best way to reduce that consumption. The temptation to “free ride”3 the cuts in consumption is very strong. Every nation can come up with good reasons why it should be spared from reducing consumption while other nations should bear the brunt of the change. There is no supranational body that can consistently enforce international law. Even if a supranational law is agreed on, enforcement, outside of either a hegemon leading the attack or a U.N. body creating an “international force” (for which there will be free riding), is almost impossible. Although treaties may be made, history shows that during recessions or other calamities, environmental rules will often be ignored in pursuit of growth. In addition, climate change probably has a stronger negative impact on future generations than those currently roaming the earth. The temptation is strong to force these costs onto the ultimate powerless (those who haven’t been born yet).

It is our perception that the consensus of both right and left-wing elites is that anthropogenic climate change is real and a major policy issue. Right-wing populists most strongly seem to oppose the concept and left-wing populists appear neutral.

Our position on climate change is similar to other policy issues; although we have opinions, we don’t view them as important to our primary task, which is operating in the financial markets. If policy is going to lean toward reducing greenhouse gases, it is our job to adapt our investing to this reality. In other words, we see our role as accurately determining the evolution of policy trends and investing accordingly. We don’t expect to be able to affect the direction of policy.

From this perspective, the Papal letter adds to evidence that sentiment is shifting toward anthropogenic climate change. However, Pope Francis’s perspective on this issue is fundamentally different than the usual discussions of this topic. And so, it isn’t obvious that his solutions will gain much traction. We would expect supporters of policy change toward reducing the consumption of fossil fuels will try to use the Papal position to support their goals. We suspect they will find a broader reading of the encyclical frustrating in that the goal of the letter isn’t to support a particular political or policy position. Instead, its goal is to change society at its roots. Thus, the encyclical will add to the commentary about climate change but, due to its lack of a clear policy direction, will have a limited impact on steering policy in the near term.

Laudato Si

Like most encyclicals, this one begins with a recap of related comments from other encyclicals and seminal Catholic documents. Unlike many Protestant religions, Catholicism holds that both scripture and tradition are sources of revelation and so it is important to show that previous popes and bishop councils have held similar positions. Of course, relevant scripture is quoted as well.

The key point of this encyclical is that environmental concern is simply one facet of a spiritual whole; disregarding the earth is part of general sin. In other words, the same sin that leads to abuse of the poor, the elderly and the unborn and the disregard for the powerless is also behind the environmental degradation that has led to climate change. However, this sin isn’t simply bad individual behavior; instead, its origin is found in the very organization of modern society.

Catholicism has never accommodated itself to the Enlightenment. The Enlightenment, which strongly influenced nearly