Crunch time? An interview with Jeremy Leggett

If you’re looking for a book to add to your summer reading list, you might like to try Jeremy Leggett’s ‘The Energy of Nations: Risk Blindness and the Road to Renaissance’. It may not sound like a thriller, but its analysis of the energy time-bombs ticking inside most mainstream portfolios could have you turning the page as quick as any murder mystery.

Jeremy Legett and his new book The Energy of Nations: Risk Blindness and the Road to Renaissance[/caption] Worryingly, this is no work of fiction. The author Jeremy Leggett, is a former oil industry consultant turned renewable energy entrepreneur with Solarcentury and chairman of influential financial think tank Carbon Tracker. The book analyses several systemic risks from unburnable fuel, to shale gas, to a mismatch between global oil supply and demand. Any of these, it argues, could have just as big an impact as the 2008 financial crisis. As most investors have at least some exposure to the global energy sector (through index trackers etc.) Barchester took the opportunity to interview Jeremy about his book:

Barchester: If you were advising some of our clients on how to position their portfolios in light of your analysis, what would your advice be?

Jeremy: If I was investing my own money I would want to position my portfolio based on the fact that any one of the shocks that the book describes might happen. These shocks could be catastrophic, causing major indices such as the FTSE100 to fall by 25% or more. So one solution is to stay in equities but to be a patient investor in renewables, diverting investment into those vehicles that will bounce back in a renaissance. But I would also look outside the equity market towards investments in areas such as solar farms or cashflows on electricity savings. The rise of crowd funded energy co-operatives and retail bonds are also encouraging. The likes of Ecotricity and Good Energy have issued these, and although they are not huge they get taken very quickly.

Barchester:  Psychology has a big part to play in your book, can you explain?

Jeremy: Brain scientists tells us that humans have a tendency to be blind to large systemic risks that threaten whole economies and societies. And sometimes if an argument is too compelling then people are driven into denial. This plays into investment risk. If you accept some of the arguments in my book then some of the entities consideredhigh risk by mainstream finance, are actually muchlower risk than those routinely held, and vice versa.

Barchester: What can individuals do to help avoid these crises?

Jeremy: First we need to make sure the story focuses on solutions not problems, what I call the ‘seeing is believing’ effect. Then we need to get the message out, and it’s encouraging to see how the likes of 350.org are igniting student activism around divestment. I gave a talk in Oxford recently and was impressed by a campaign that asked students to pressure their parent’s to invest their pension responsibly. We need more of that sort of thing. And all of us can push our own spheres of influence. As one small example, Solarcentury donates 5% of its profits to a charity that supports the proliferation of solar lighting in Africa. In just three years it’s become Africa’s leading retailer in solar lighting pushing down use of kerosene lighting. It shows what can be done.

Barchester: Tell us about your objections to shale gas?

Jeremy: I think the biggest contradiction is the price of gas. Governments lust after the low price of shale, but that poses an existential problem for large parts of the Earth’s gas industry. In the US the price of gas is driving gas companies to the edge of bankruptcy and companies like Shell are writing off billions. In the UK there’s also the fact that most drilling will be in the heart of the Conservative party’s voter base, so pressing ahead would be electoral suicide.

Barchester: What is the role of policy-makers in avoiding a carbon crunch?

Jeremy: Their role is leadership but there’s a big vacuum. There are positive signs however. In Norway the Labour opposition recently said it would require their Sovereign Wealth Fund - the world’s largest - to divest completely from coal and some unconventional gas holdings. That could send a huge message and it could snowball very quickly. Oil companies could experience a double whammy in 2014. Their rising cost base and increasingly unattractive profitability could lead to both divestment and to shareholders saying, ‘hang on you can’t waste all that money, either give us some back in dividends or come up with a different business case’. When you play in the likes of Saudi Arabia, which now has the single biggest national plan for solar in the world, then you can start to see how the road to renaissance might emerge.

Barchester: Is the future all bleak?

Jeremy: There is tantalizing hope. We have the means to escape the crashes awaiting us, or to soften their blows with what the book terms the ‘road to renaissance’. Some in society are already racing to find this road but it’s not easy. Some of the venture capital firms I’ve worked with are very disappointed that the Cleantech revolution has not matched the experience of the digital revolution. But that’s because the change to digital was relatively uncontested territory; by contrast, energy is heavily contested territory.

With thanks to Barchester client Phil Townsend