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Yesterday, I posted part one of the transcript from my Saturday Guardian interview with Jeremy Grantham, the environmental philanthropist and the legendary fund manager. Here's part two ...

Jeremy Grantham on what first led him to engage with environmental issues

It started [in the mid-1990s] with a visit to the Amazon and to Borneo with the kids. And without thinking about it you start talking about the logs along the side of the river and the lack of mature forests in Borneo. We were on family trips and happened to do a couple of tropical forests back to back. I'm sure that played a role, but we didn't treat it as an epiphany.



I picked up none of that [James Hansen's 1988 testimony before Congress on climate change and the 1992 Rio Earth Summit]. No. Absolutely not. I was following along afterwards [once the foundation launched in 1997] asking the big NGOs where was the leverage for the birds flying through Costa Rica and Panama. Let's put our money there. Where were the hotspots?


On why his environmental interests moved beyond habitat conservation

I was a moderate environmentalist 10-15 years ago. But then I started to get embroiled in resources and that [the rise in price of] oil was the first paradigm shift that we'd ever come across in an important asset class, and nothing is more important than oil.

I realised that the price of oil had changed forever and is not going back to the old $15 a barrel. There had been a majorly important shift. That led us to asking the question, why only oil? Why not every finite resource? And so we ended up about four years ago saying, "watch out, we seem to be running out of things".


Digging into the phosphate problem, you realised that it can be handled, but only if the great majority of the world is fed via sustainable farming which means nurturing the soil and having it once again full of micro-organisms. If you kill them every year with herbicides and pesticides then you're dealing basically with sand. You've got to restore and renew the ability to grow by re-applying all the nutrients in very big, expensive doses every year.

This is in contrast to well-nurtured soil. There's a 30-year patch in Pennsylvania at the Rodale Institute where they've never put on any phosphorous at all and they are getting productivity equal to regular farming up the road. We arrived at all this just by looking at the numbers and the more I did the more I became concerned that we were already deep into a food crisis.

Arab Spring countries were already getting throttled a bit by rising price of energy and food. They don't spend 8-10% of their budget on these, they spend 40%. So when that starts to double on you, you can see how quickly why people take to the streets.

And that's where we are. The rich countries are really not that concerned and their casual behaviour is only serving to push up the price which is not that big a deal to them, certainly not the movers and shakers who make all the money. But it's a terrible deal for the poor half of the world and a disaster for the poorest 10% or so. That's the world we're in and it could lead to country after country being destabilised.

It has forced me to go back and read all the classics. On my iPad I think I have 40 or so books now. I recommend a book by a scholar who summarises all these works back to Gibbon's "Decline and Fall of the Roman Empire." It's called" Immoderate Greatness: Why Civilisations Fail" by William Ophuls.

And then there's perhaps my favourite book of a more detailed type which is called "Dirt: The Erosion of Civilisation" [by David R Montgomery]. That's a really good read. Then there's "Collapse" by Jared Diamond, which seems to have done quite well and is reasonable.

A lot of details are queried by the experts in the field, but I thought it was fine. Then there are books on peak oil and shortages of raw materials. Books on the whole package of long-term growth on a finite planet, going back to the Limits to Growth and a book by one of the co-authors that looks at the next 40 years. That's called "2052" [by Jorgen Randers]. And so on and so forth.

On the strengths and weaknesses of capitalism


Unfortunately, today, they are the issues that are absolutely central to our long-term wellbeing and even survival. It doesn't think long-term very well because of high discount rate structure.

If you're a typical corporation anything lying out 30 years literally doesn't matter. Or, as I like to say: QED, your grandchildren have no value. And they usually act as if that was true, even though I'm sure they are actually very kind to their grandchildren.

My favourite story is about the contract between the farmer and the devil. The devil says, "sign this contract and I'll triple your farm's profits". But there are 25 footnotes, as there always is with the devil. Footnote 22 says that 1% of your soil will be eroded each year, which is actually horrifyingly close to the real average over the past 50 years.




But not as shocking as the pathetic waste of space over the last 50 years given to "rational expectations", which allows a whole generation of bankers and central bankers to believe that the market is efficient. None of it applies to the real world, or to messy human beings, many of whom are a little crooked when they have to be. It's been a disaster and a complete waste of time.

It has been remarked before that modern economics is belief in a perpetual motion machine. Capital and labour, but no mention of energy. Without energy the whole thing grinds to a halt and the whole theory is demonstrated to be totally false. I'm late in the game at recognising this.

One of my new heroes is an economist called Kenneth Boulding who, at 22, got a paper into Keynes's journal. At the age of about 50 he realised that economics was not taking its job seriously, that it was not interested in utility, in real serious improvement in the world, but that it was increasingly interested in new, elegant mathematical theories designed to get career advancement, over usefulness.

He said the only people who believe you can have compound growth in a finite world are either mad men or economists. He also said: "Mathematics has brought rigor to economics. Unfortunately, it also brought mortis."

On whether there's any conflict in him (via GMO and/or his foundation) investing in oil and gas companies

The first point is that each fund we have at GMO — maybe 80 or so — is run by its own team. I don't think that money management can easily have too many rules coming down from the top.

Our first responsibility is to make money for our clients. I'm happy to write them letters trying to persuade them to do this, that and the other, but if they choose not to, that is their choice, not ours.


The solitary factor that might appear to be an exception is that we are getting close to the decision [at GMO] not to carry coal stocks and anything that has a material amount of tar sands. We have a resource fund which, of course, has stuff in the ground. It owns oil and gas companies, but it does not own coal companies or tar sands enterprises.


And I don't think that if you put billions of dollars into a new tar sands project that you will see a decent return on it. It will be underpriced by solar, wind and other alternatives which are moving at considerable speed.

And point two is they will slap a carbon tax on coal and tar sands which increasingly countries here and there will do — and, eventually, the U.S. in the hopefully not-too-distant future — and that will be a death blow.



The real damage to the environment is the massive reserves of coal and tar sands, and elaborate, high-cost secondary/tertiary recovery of oil and gas. That's where the battle will be fought out and, frankly, that's going to turn out to be 60%-70% of the potential damage to the planet and we, with a bit of luck, can adjust to a world that uses up its conventional oil and gas if we behave well and drag that period out into the distant future.

A lot of it will be used as chemical feedstock which is a higher and better use than using those precious resources as a fuel. Fracking enters the grey area. It's not old-fashioned natural gas that desires to burst to the top under its own free will. You have to torture it out of solid rock and that takes extra energy and extra pollution, and so on. That's why it is a grey-area fuel and that runs some risk of eventually becoming too high cost …


This is not the money that we give out as grants each year. This is the principle behind it. So it's good to have some influence on both ends. [At GMO] we don't aim to have more than 10-15% in farms and forestry. The funds we run for clients are, to a certain degree, neutral on ethical issues. If there is a demand from the client — which I hope there will be — to have more green and sustainable funds, I hope GMO will do it one day.

But in the meantime, with my foundation, I am the client, so it is entirely my right to set our own ethical standards. For the record, for the foundation I also approve the purchase of oil companies. I just won't buy coal and tar sands, for the reasons I've given. I reserve the right at a later date to say that one or two oil companies are simply too badly behaved. I haven't done that yet, partly because I don't have the required information.

It also involves different interpretations of effectiveness and propaganda. I have an honest disagreement with Bill McKibben. Our foundation helps fund his efforts and I have great admiration for him. But I have argued with him that there's probably more juice to be had by going to the campuses and getting the students to stamp their feet that the college endowment should get rid of all their coal and tar sands investments because they can do that.

For the record, we need oil. If we took oil away tomorrow, civilisation ends. We all starve. It's a little impractical and idealistic [to abandon oil immediately], perhaps.


We've got five times the amount of carbon reserves to cook our goose. The question is what can we get away with and what sends the biggest signal. My thinking is that, if we could get dozens and dozens of colleges and foundations to sign up to getting rid of coal and tar sands, we're attacking something that is doable at the portfolio level — the college is not going to feel that is a tremendous encumbrance for them to optimise their return — but it represents 60-70% of the whole climate problem.

By my reckoning, it's a very focused and efficient strategy. And when everything has been disposed of and there's a groupthink on the issue it's a very powerful statement to send rattling round the world.

Coal and tar sands are not even 1% of a typical portfolio. Oil and gas, as one of the biggest industries out there, is huge, but coal and tar sands is negligible. Far better to nail that and send a very powerful signal.

And why wouldn't the colleges sign up because it's very good business. I love the idea when you have an environmental argument backed by a good economic argument. I would like to concentrate my efforts in those areas. I understand the principle entirely of not interfering [with a fund manager's decision-making], but I wouldn't dream of doing that unless I believed the pay-off was very large and the penalty for doing nothing was very high.

I think there is a wonderful case for a prestigious, leading university to have their endowment officially to take into account the long-term effect on the environment - not blanket forbidding this, that and the other, but just taken into account in a sensible way.


It might be that only 10-20% of the graduating population of the top students are interested in the long-term wellbeing of the planet, but it's a measurable number and it's getting bigger and it's enough to be commercially interesting.

If you are losing 20% of the brightest students because you have an undesirable image then you had better start to change it. This is one of the soft underbellies of the capitalist system and it's one way that they are impacted by, let's call it, good behaviour and sustainability in the broadest sense. It would also apply to students applying for college.

On good, long-term investments

My view of food leads me to believe that a spectacular investment is in farm land and in forestry. Or, if you prefer it, land. They don't make any more of it, as they say.


I think farm land is a terrific investment area. But that doesn't mean that some mid-western land isn't ahead of itself because of recent grain prices. It's a very inefficient asset class and every farm is different, but you can hunt around the edge, and outside America, and you can find a decent return in an equity market that is becoming, in the US at least, rather overpriced.

If you were to buy a farm, and I would be urging any buyer to think in terms of the sustainability of the farming technique, but here again our farming portfolio is relatively green but it's not by any means limiting itself to sustainable or organic farming.


On where he plans to take his foundation next

We've recently become very aware of the fact that as our knowledge base accumulates so rapidly, our learning curve is so steep, that the point of maximum sensitivity is shifting so we are quite grateful that we can't commit all our resources on one project.




They don't really exist, by the way. The three people on the planet who do exist might write in and protest, but it's insignificant, a rounding error compared to the training in "Big Ag". One could have quite an effect, such is the small base.

Research into organic farming - there's been fairly minimal research into the intermediate crops that you can put on between the cash crops. They flower two weeks too late, or early, to be convenient.







On genetically modified food

I can tell you where I stand today [on GM crops] and I will have to tell you again next year. That's part of the reason why we want to do these trials to find out exactly what you can do in terms of sustainability and simultaneously ask the question of what are the compromises.


On whether organic food can "feed the world"


On "austerity", debt and monetary policy











On the human species' chances of overcoming its environmental challenges

Whether we have the nous to pull it off is an interesting question, but I think the odds are we will scrape through. Not that we deserve to. [Laughs]. It's a 50/50 shot that declining fertility rates and alternative energy will save our bacon.

But nature and development don't run on a puritan basis of just punishment. It's often sheer luck. It's sheer luck we found hydrocarbons. It's sheer bad luck that carbon dioxide has a greenhouse effect. It's sheer bad luck that the oil industry has incredible vested power and is prepared to use it to delay the speed of our reaction. …

It isn't that we can't do it, it's that the Anglo-Saxon countries — where, by the way, there is a vast concentration of oil companies — are rather intractable on this issue and they've managed to find a little army of non-scientific, persuasive "loony lords", as I call them, to argue the case, either because they like being wined and dined by the enemy, or because they're naturally contrarian and like the publicity, or that they are genuine idiots. Who knows? I'm always puzzled by the modus of these people.

What we forget at the end of all this is Pascal's Wager. What is the penalty for acting as if this was really serious? You spend some money and end up with wonderfully cheap alternative energy? Big deal. Or you continue acting as if it's trivial and keep listening to the loony lords and doing nothing and having it cripple the planet as we know it?

If the potential threat is big enough — like insuring your house, it's a necessary payment even though you don't expect the house the burn down — any sensible person who understands Pascal's Wager will agree to that. It's simply asymmetrical.

The downside risk of this getting out of control is massive. The penalty for spending more money than you should have done because as it turns out, for scientific reasons, we have completed messed up and it's not as bad as we thought, are very modest in cost by comparison.

That's the killer argument for any rational person, but, as we know, this is not about rationality. It's about our unwillingness to process unpleasant information. And the unwillingness of vested interests to stop funding this damn stuff.

On the Manhattan Project

The Manhattan Project was brilliant and is the highpoint of our achievements as a species. Anyone who says government can't do this, or can't do that, I say a pox on you, have a look at the Manhattan Project. They did remarkable things. They were outside the box.


Civilisations have fallen for the lack of something like that. For once, we came up with the right response, but you can't count on that being our natural reflex as a species. If it was, we would have analysed the problem of climate change and energy, and decided it was a bigger threat than Hitler.

But we didn't get a Pearl Harbour or invasion of Poland. We're not programmed to respond to vague, problematical — you can't put a precise number on it — and the long term. That is not our strength. We're much better when the tiger attacks and the bombs drop. [Superstorm] Sandy was probably the closest thing we've had [in the US] to a Pearl Harbour moment in terms of moving public opinion of whether climate change is real.

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