Bill McKibben’s “Do the Math” was a 2013 documentary that tracked the U.S. environmentalist’s tour campaigning against major oil companies, likening his quest to the demonization of Big Tobacco and Apartheid.
The math referred to in the title was an alarming calculation based on the reserves that Big Oil held at the time: five times as much as it was safe to burn, according to the Carbon Tracker Initiative.
Chamath Palihapitiya, the outspoken tech billionaire who has been ubiquitous in 2021, stepped into the environmental, social and governance (ESG) debate with some math of his own. An abrasive Twitter warrior (his pinned tweet refers to “corporatist scumbags”), he warned that billions of dollars in stock-market value could be set to evaporate, and the market doesn’t realize it.
The culprit: the medium-term prospect of international carbon tariffs, which he explains as requiring “every company to have a detailed provenance of the energy used to produce a good or service entering a border… love that iPhone case? Its price will depend on how much coal was burned in China to make it. More coal = more tariff = more cost.”
One of the most basic building blocks of finance that students aspiring to be bankers or fund managers learn is discounted cash flow, or DCF — projecting the amount of money an investment will generate and using that figure to derive the asset’s value today.
Carbon tariffs will “blow up every DCF model of every company in the public markets,” Palihapitiya tweeted. He also highlighted how they could be used: not necessarily as an environmental policy by an enlightened government, but as a tool in a clash between nations.
“The biggest risk/correlation to equity markets over the next decade has nothing to do with interest rates. It will be carbon tariffs and it will blow up every DCF model of every company in the public markets....”
Palihapitiya is outspoken on politics and public policy. His comments show how the climate is ringing alarm bells for financiers who hadn’t previously been engaged with the topic.
And he is a financially interested party: known as the “SPAC king” for how he profited from the boom in blank-check companies, Palihapitiya is planning a $1 billion IPO for a vehicle to invest in climate-change solutions. It’s not unreasonable to assume that as he planned the new entity, he did the math on the demand for technological solutions in a world of carbon tariffs and ESG ratings on companies.
Carbon tariffs are an example of a financial risk that will need to be quantified by the fintech superstars and Big Data crunchers of the future. Investor demand for such sustainability analytics is set to soar.
The investor finished his thought with a cringe emoji.