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Climate Volatility: A Predictable Increase in Forward Economic Volatility that can be Hedged.

Climate Volatility: A Predictable Increase in Forward Economic Volatility that can be Hedged.

Climate Volatility represents a predictable increase in forward economic volatility that can be hedged. We have a short window to act by pivoting social systems towards sustainability and implementing the Climate Volatility Hedge.

Climate Volatility is driven primarily by scarcity and high waste streams, in particular of greenhouse gas emissions of carbon dioxide and methane. (CV Factors). The impact of CV Factors is evident today and a dramatic increase in negative impacts is locked in’. Concentrated and decisive action taken today can avoid the most catastrophic impacts in the future.

A collision of CV Factors with social systems risk factors due to rising inequality in developed markets and a rising middle class in developing markets sets the stage for the increase in forward economic volatility.

It is important to understand that our problems are founded in mathematics and not ideology. So, too, are the solutions.

The Climate Volatility Hedge must be approached three ways:

  1. Infrastructure: Localized indoor agriculture, domestic industry built on renewable (and biodegradable) fibers and renewable energy provides community security, jobs and affordable access at a profit. Sustainable asset ownership acts as a hedge, with predictable bond-like cash flows plus upside optionality. Demand is rising for the production of these assets, and, is inelastic in the case of food and energy.
  2. Liquid Markets: Business models built on extraction of non-renewable natural capital, with long supply chains and high environmental externalities are at risk. Derivatives markets are under pricing this, with many companies in conventional food and energy businesses trading at implied volatility less than the S&P 500. A relative value hedge is the starting point with selective shorting of at-risk industries locked into subprime carbon/scarcity strategies.
  3. Stable Society: Clean food and energy assets, that are in part community owned, is an imperative to social restoration. Our current model incentives the erosion of the labor base without asking the question, “What then?”. We are at a critical point where automation, microchips and private capital investment strategies are eliminating labor capacity faster than society can adapt, re-train and re-tool. Sustainable Infrastructure and localization strategies are a key hedge against societal breakdown.

The concept of volatility is important in that it is a concept well understood by risk managers and investors. Volatility is the standard deviation or amount of predicted change over a given time period vs. some qualified expectation. In sustainability, climate volatility is dictated both by scarcity and high waste streams, and carbon waste in particular.

By predictable, the thesis also points to a mispricing. Although the impact of scarcity and high waste streams are inevitable, with impacts occurring earlier than expected, they are not being priced in by capital markets and investment flows. The predictable effects of climate volatility are not being communicated effectively by governments, businesses or educational institutions. This aberration will create the largest ‘unseen’ bump in forward economic volatility. It also tells us that an arbitrage exists.

Arbitrage conditions allow us to hedge Climate Volatility for a lower cost than we will pay in the future.

New Equilibrium: Understanding the Critical Need

In order to execute the hedge at the scale required, we must raise awareness and come to consensus on the root causes, impediments and solutions to our climate challenges.

One way to raise awareness is to continue to promote data driven arguments supporting the climate volatility thesis.

Data from NASA shows us that we have exited the old equilibrium with climate and are searching for a new one. Graphs from NASA inserted below depict; 1.) Carbon emissions as a % of atmosphere have risen beyond their long-term range,


2.) In the short-term, CO2 emissions has steadily increased,


and 3.) Average Temperatures are rising.


Higher temperatures have predictable results including the melting of polar ice, rising sea levels, storm and drought intensification, extended periods of excessive heat, ocean acidification and more.

The downstream effects of these first order effects are clear and include; crop failures, mass die-off of livestock and ocean life, population displacement through forced migration, social conflict due to food and water scarcity and more.

In the simplest sense, we point to the science of Climate Volatility as the relative displacement of water and heat between soil, air and ocean and the impact of this displacement on forms of life. To understand the interaction of heat-trapping gases, like Carbon, and cooling gases like Oxygen, click HERE.

Many of the economic and social challenges of Climate Volatility are evident today but will increase dramatically in the future.

Impacts of Climate Volatility

We list below a few of the 14+ Climate Volatility impact areas raised by reports from the Intergovernmental Panel on Climate Change (IPCC) along with examples of impacts occurring today:

  • Food Production and Security: Just this year, a major South American Agriculture company, Adecoagro, reported a 30% loss in yield of corn and soy due to excessive heat. Across the globe conventional crops are pushing there temperature maximums with potentially disastrous results.
  • Vulnerable Societies: It is now widely understood that the Syrian conflict was sparked and intensified by a record drought that forced millions of refugees into urban areas after livestock die off and crop failures. Syria may be the extreme but these events are playing out across the world in Africa, China and parts of South America. Most models expect drought conditions in California to persevere for the foreseeable future and to be joined by record drought conditions in the dust bowl region. The northeast US too, has been in drought for much of 2016.
  • Extreme Weather: No storm is normal anymore. We are seeing epic rainfalls that often fall at rates of 1-3 inches per hour. Recent examples include;
    •  Dec 2015: A 1-in-a-1000 year rain floods parts of South Carolina dropping up to 2 feet of rain on places like Charleston in a single day.
    • Mar 2016: Record rainfalls in Louisiana trigger massive flooding with up to 26 inches of rain falling in a four day period.
    • May 2016: almost 9 inches of rain fall in two hours in Austin Texas.
    • July 2016: up to 10 inches of rain pummels parts of the Midwest bringing tornadoes and destruction from flooding.
    • Aug 2016: In Ellicott City, MD, a 1-in-a-1000 year storm drops 6.5 inches of rain in about 3 hours.

A small sample shows 5 1-in-a-1000 year events in an 8-month period. There are many more such events to pull from in that same period. The Volatility estimate is wrong.

  • Human Health: In 2016, an unprecedented heat wave met with intense drought in India to decimate livestock and crops, melt roads and cause human casualties.

Citibank estimates climate change inaction would cost $44 trillion globally by 2040. We think this is conservative – Climate change inaction could make money obsolete

The costs of Climate Volatility will be considerable and even more so if the dialogue remains muted and held back in places. What may be most alarming is collectively we a pursuing a broken food and energy strategy that exacerbates the risk.


We currently have a risky food and energy strategy in that these systems are:

  • Concentrated: Our food and energy comes from large, centralized facilities that focus on intensification (doing one thing at scale). Long supply chains add to social costs and increase risks of systematic breakdown.
    • Energy: Another sniper attack against a major electrical sub-station, similar to the Metcalf Incident, was reported in 2016. The Metcalf incident could have knocked out power to parts of Silicon Valley for a period of months.
    • Food: Drought in places like California, responsible in 2014 for 32% of domestic fresh fruit and vegetable product, causes price spikes and shortages.
  • Productivity Challenged: In the conventional system, costs are rising with less and less output. It’s a classic industrial death spiral that has been distorted by structural impediments in the form of laws, investment structures and culture that favors the conventional model.
  • Carbon Intensive: Conventional Agriculture, Transportation and Electricity are the three main sources of Greenhouse Gas emissions, including CO2 and Methane


  • Embedded with Systematic Risk: One needs to look no farther than the implosion of coal equity and near total closure of capital markets to new development to understand the risks embedded in trillions of dollars of Fossil Fuel market cap. UK bank head Mark Carney and former US Treasury Secretary Hank Paulson have been vocal in their warnings about subprime carbon. In short, there could be up to $28 Trillion of subprime carbon assets, unburnable and held on the books of oil and gas companies today.

Citibank goes one step farther, reporting that the total size of the carbon bubble could be upwards of $100 Trillion.

Our only hope is avoiding catastrophe is making peace with the facts, upping the dialogue and taking immediate and decisive action. Financial Engineering can help.

Financial Engineering A Climate Solution

Trillions of dollars in the investment community are tracking and following indicators known as factors to make trading decision. More than 1/2 of these decisions are fully automated. Factors dictate everything from short-term decision making on through to managing portfolio risk over long horizons. What if the factors understood Climate Volatility?

One way to educate the factors is by using well-understood concepts, like volatility and arbitrage to show the optimal portfolio includes the Climate Volatility hedge.

Put-Call Parity is a well known relationship that has guided the growth and evolution of the derivatives industry. Put-Call Parity describes a relationship between the cash market (today) and the forward market (the future). It’s derivation also includes valuation of individual options (to account for opportunities or risks that exist based on future conditions).

Below we insert a simple idea that Put-Call Parity, arbitrage concepts and other derivatives math can be used, in part, to begin to financially engineer a solution to Climate Volatility. We note the simplification of what’s presented here provides a basis for a discussion in this vein. Future Bright has also designed frameworks for valuation using Real Options and CAPM Extension methods.


The left side of the equation represents the ability to invest in the CV Hedge today and the option that this investment becomes more valuable in the future. The right side represents current valuations for conventional industry, which we are told takes into account all available information. We argue that all available information and, in particular, information on climate risk is not being accounted for. The longer it takes to account for this risk, the more exponential the impact will be. This is known as gap risk.

If you were building a society today to compete globally, would you add more of the left side of the equation or the right? This thought analysis lies squarely in the pathway to paradigm shift. Would you build with clean, resilient assets that provide security and jobs to support society or would you build centralized production dependent on scarce resources and subject to price volatility, that contributes to economic instability and higher health costs? With no embedded interests, you would likely choose the former. It’s less risky.

The Coal industry is a good example where the transfer of assets has become prohibitive, effectively reducing equity value to zero. Other factors, outside of the market for company assets, can affect the valuation in today’s market. A key variable to watch is market demand failure for conventional goods. For example, food produced using pesticides is under increasing global scrutiny from consumers of all types. Whole countries are banning the use of certain pesticides and extending these bans to genetically modified crops (GMO’s). Consumer segments than can, are choosing away in increasing numbers. In fact, access and affordability are key impediments that keep more consumers from pivoting away faster from products they deem harmful to themselves and the planet.

The Climate Volatility Hedge delivers profits today and solves the problem of access and affordability.

The Climate Volatility Hedge

Controlled Environmental Agriculture: With crops failing and livestock dying due to excessive heat, an essential part of the CV hedge consists of a massive effort to build localized controlled environment agriculture. Future Bright estimates this opportunity, which includes Aquaculture, Greenhouse Hydroponics and Vertical Farming, exceeds $1 trillion in infrastructure alone, and is capable of both environmental and social restoration. Controlled Environment Agriculture can produce millions of jobs, provide food security, meet increasing demand for clean, healthy, local and organic product and, maybe most importantly, reduce the water demand of agriculture. Controlled Environment Agriculture uses up to 99% less water than conventional and is profitable at market prices around the world. Controlled Environment Agriculture provides stable cash flows and profitability today with embedded upside due to climate volatility, potential supply chain disruption and food and water shortages. We depict this potential in the graph below.


Renewable Energy: Renewable Energy provides predictable cash flow with upside optionality. When the centralized grid model is disrupted due to storms or attack, renewable energy assets increase in value. When we realize the impact of water intensive energy strategies, long supply lines and high waste streams, renewable energy assets increase in value. The Renewable Energy revolution is already underway, with prices falling below conventional sources across the world and over $1 trillion in investment in the past 3 years, but a greater acceleration is needed. We need a ten-fold investment for both developing and developed markets. The technology is viable, we only need the political and corporate will to build an energy infrastructure that creates a viable path for survival.

Renewable Fibers: Everything made with fossil fuel based polymers and long replacement cycle resources like trees, can be made with hemp, bamboo and other renewable fibers. With afforestation of paramount importance to hedging climate volatility, breaking down structural impediments to renewable fiber farming and domestic manufacturing should be viewed as a tremendous opportunity. Both bamboo and hemp have yearly harvests (vs. decades for trees), sequester more carbon and emit more oxygen than trees.

Waste Reduction: The Consumer Leverage Point is of utmost importance here but so is the response of corporations in delivering viable consumer solutions. There are easy choices like using reusable bags and Klean Kanteens, supporting CSA’s and patronizing businesses committed to waste reduction. Harder it seems, is to get automobile companies to deliver electric vehicles that consumers want, banks to fund community microgrids and sustainable agriculture, investors to do the same, governments to support transition and re-training of fossil fuel workers, education systems to reach consensus and teach preparedness, markets to mobilize and penalize high waste activity in favor of clean and sustainable.

Liquid Markets & Financial Structures: We continue to see innovation in circumventional finance to give consumers the ability to support sustainability with their savings. Major impediments remains with large institutions making slow progress in the creation of investment vehicles and pathways for deployment. Crowd Equity is making progress but a $1M limit is too low to affect real change. Consumers and Investors should demand transparency and move their money to institutions capable of meeting the critical need. It is far easier to raise investment for abstract consumer technology than it is for food security. That’s backwards and must change for our survival.

Moonshot towards Deployment: We need a WWII scale mobilization from society and business to deploy renewable energy, storage and controlled environment solutions. Elon Musk tells us in Leonardo DiCaprio’s excellent documentary, ‘Before the Flood’, it would take 100 Tesla Gigafactory’s to power the world. Tesla can’t do it alone, but the Fortune 500, at the demand of employees, shareholders and a global public call to action, could.

The defining question of of our time is: Will we make the sustainability pivot and hedge climate volatility?

A Time of Action

We live in a time of action. One could view it as the last true time of action. If we continue on the same path and do nothing or even worsen the problem, we lock in the baton pass from human impact to climate chaos. This dark horizon awaits our grand children with many, many challenges in between.

There are many structural impediments to action. World leaders who question science, intuition and global pleas from citizens everywhere. Corporations vying to protect short-term profits and manage legacy books of coal, oil and gas assets. A broken system of healthcare and consumption that can be viewed from a high-level as nothing short of self-cannibalization. Make no mistake, making the sustainability pivot and hedging Climate Volatility will be the most challenging task ever undertaking by humanity, except for one…

The only challenge greater than hedging climate volatility today is living through the consequences if we don’t.

Pivoting towards sustainability and making the hedge involves re-engineering our food and energy systems, re-thinking our systems of education and equity, and creating a global economy around local opportunity with access for consumers and businesses to make good choices. It is the only way to restore environmental and social systems to lasting prosperity. The window is short – action is required today.

But it’s possible. Possible and profitable.

The solutions and technology to build a resilient, inclusive and secure society rest at our finger tips. Across the world, millions are rising up, educating themselves and demanding swift change. They are entrepreneurs, artists, scientists, business people, politicians, activists, mothers, fathers and children.

Yes, in today’s world of ubiquitous information, the children are becoming aware of the problem, the solutions and of our collective inaction. They are asking the question, “Why?” “Why won’t we act?”. Our decisions right now craft our legacy in their knowing eyes. We have the unique ability to answer firmly, ‘We can and we will’, from a perspective of both economics and morality.

Now, more than ever, we need market-based solutions that address climate volatility and strain in social systems.

Future Bright’s Climate Volatility Hedge represents a profitable today and a prosperous tomorrow.


About the Author:

After 13 years in High Frequency Options Trading, I noticed something troubling. The technology we were developing was making labor obsolete. Coupled with a growing awareness of environmental issues and a focus lent from the realities of the financial crisis, I pivoted towards sustainability and formed Future Bright, a think tank, consultant and portfolio of start-ups designed to represent a hedge for Climate Volatility.

In my learning, I’ve tried to apply my understanding of closed loop systems and systematic trading (HFT), which blend behavioral finance with rules based systems and derivatives, which inform us about exponential risks within an oft-thought-of linear system to understand climate challenges.

The more I learned, the more I became convinced of the need for a lifelong commitment to sustainability. You can learn more about Future Bright’s efforts HERE.

This article presents the Future Bright thesis and hedge for Climate Volatility based on 5 years of research, observation and work with practitioners in clean food and energy, investment funds and banks.

Five Thankful Eyes “I’s”

Five Thankful Eyes “I’s”

Here are 5 “I’s” to be thankful for in our global pivot towards sustainability. Let’s keep in mind the goals here; that is, the efficient and restorative use of resources for a healthy, prosperous and profitable future. When we invest in sustainability today, we improve our communities and our environment so that future generations can live together and enjoy the planet as we have. If we invest locally, in food and energy independence, we improve our own security and that of our families.

There’s been tremendous momentum for the clean energy revolution in 2015. The clean food movement is gathering steam and knowledge of the economic benefits of localization are growing.  Here’s 5 “I’s” we can be thankful for:

Innovation: Even with research budgets flagging in many areas of the world, the private and public sector continue to innovate with new technology to solve the resource problem. As global recognition grows that the resource problem is one of math and not ideology, we can hope that momentum should increase. Here are a few notable 2015 innovation trends you can discuss around your community:

  • Microturbines: In February 2015, two private companies LucidPipe, the manufacturer, and Harbourton Alternative, the investor, teamed up with the City of Portland, OR to install a 200kw microturbine system in the city’s water pipes.While not disrupting the functioning of the pipes, the microturbines use the energy of the flow to create electricity. For the gearheads: the 200kw system expects to generate 1,100 MWh’s of electricity per year, enough for 150 homes, which implies a ~63% capacity factor for the technology (equivalent to some natural gas plants). The $2M in energy sales over the 20 year PPA life implies a kWh price of around $0.10. Microturbines and other technologies that capture wasted energy are going to be big business. Here’s another such innovation just waiting to be unlocked.
  • HumanPower: Here’s your future business. With proven technology, you retrofit the flywheel in rowing machines, treadmills and elliptical bikes to capture the wasted energy created when someone works out. The energy charges a battery, which the gym uses in conjunction with a smart meter when electricity rates are high. Bring in a specialty finance company, also you, to finance the savings and share your portion with investors. On to your global roll out but you won’t be the only one promoting financial and technological innovation to save resources – the big fish are getting involved too…
  • Bill Gates is expected to announce a multi-billion dollar clean technology innovation fund at the start of this year’s climate summit (COP21)  in Paris. Announced in the NYT this week, the fund will fuel needed innovation in new clean technologies that streamline and improve efficiency in energy systems. Kudos to Bill and other well resourced folks for doing what needs doing and while innovation is necessary, what we need more than ever is the all-in implementation of proven technology…

Implementation: There’s a whole slew of investor ready technologies just waiting for implementation in our energy systems. Three in particular, whose prices have fallen between 60-90% in a few short years are Solar PV, Wind and LED lighting. These technologies enable clean power generation and the implementation of energy efficiency retrofits at a profit for investors.

While investment growth has been brisk, with over a trillion dollars financing clean energy projects in the last few years globally, we’re still missing the mark for wide scale adoption for a few main reasons.

First, politicians have yet to get on board, come to consensus and steer the ship towards a clean energy solutions. The evidence they need, jobs, a reduction in pollution and a boost to the domestic economy is readily apparent and documented. Hopefully, COP21, continued activism from voters and transparency on funding sources can help us re-establish the right course and construct of our political systems. We need guidance at the local level, in zoning laws, at the national level, in right sizing a 5-to-1 subsidy advantage in favor of incumbent industries, and at the global level in the form of cooperation.

Second, Financial institutions are dragging their feet. While there have been a number of newsworthy commitments by banks to invest in clean energy and many of them have funded portfolios of projects, we’ve yet to see the wide scale pivot to build pathways to dedicated investment. 401K and other employ plans should all have a placeholder to participate in investments in clean energy across the capital stack that rival credit alternatives. Progress is being made at the corporate level but product groups are moving more slowly. You’re hear a lot of talk about investment opportunities in emerging markets, clean energy and water conservation but finding places to put your money is another story all together.

Part of the problem is the financial regulations prohibiting banks from investing balance sheet capital. While prudent in many cases, I view this as a large impediment to galvanizing investment into sustainable infrastructure. The net effect is that product innovation is low and lead times are exorbitantly long. It’s much easier for the banks to process innovate and ignore content all together.

An associated problem is the challenge of capital formation. Beyond the retail, private wealth and institutional landscape, the bulk of capital is tied up in the opaque world of private equity and venture capital. While there are offerings for clean energy and other sustainable investments they are difficult to track much less access for everyday investors and savers.

While the Impact investment arena is growing at a healthy clip, still more investment and financial innovation is needed to unlock a smooth pathway for capital formation and make these efforts more than just symbolic.

Recent regulatory changes on crowd equity funding and notable investment efforts from the likes of Howard Buffett’s i(x) are bright spots from opposing poles. While crowd equity funding is sure to evolve, the $1M annual limit is likely to limit any truly transformational results from this avenue alone.

Against a backdrop of structural headwinds but with economic tailwinds, the clean energy transformation has performed admirably. In the US, clean power made up 60% of new generation in 2015 and many areas of the globe are crafting plans or have significant investment already underway.


Incubation: Young minds are reading. Today’s generation is coming up well-versed on high waste streams, climate risk and scarcity. Thanks to the internet and some progressive journalism from the majors (9 people own 1600 major news outlets) young people cannot only learn but use there voices to ask their teachers, parents and friends why we aren’t acting more decisively. Circumventional finance platforms like Mosaic, AgFunder and others are a direct result of these shifting winds but there net effect is still small next to the juggernauts of capital controls. Will the old guard shift beyond symbolism and listen to the voice of the new generation? Will politics recognize the majority call to action? One thing remains sure – the good ideas are incubation in the minds of the young and evidenced across the entrepreneurial landscape of the internet economy.

While the young give us hope; old ideas are rooted in the pivot to clean energy and sustainability as well. The insulation comes in the form of savings and security…

Insulation: Energy Efficiency is a creeping up as possibly the best risk-adjusted return option available today. When we lower operating costs, we insulate our business or our family from shocks to the economic system, like lost jobs or customers and general financial cycles. That’s exactly what early investors in energy efficiency are realizing, stability of returns reaching into the double digits for all stakeholders in many cases.

Doubly, both Efficiency and Renewable Energy offer security benefits at the national, state and local level. A distributed renewable grid system is a more difficult target for a terrorist attack, responds better in an environmental disaster and has none of the associated costs of fuel volatility of non-renewables. Energy Independence and thus security through renewables and efficiency should be hailed as the most American thing we can do. The companies that made fortunes on the last regime and fossil fuels should help us pivot (they have the capital), retrain their workers (it’s the right thing to do, again American) and continue to make fortunes. I can live with that and I’m pretty sure our children can but the move must be more than symbolic. It must be unconditional and tectonic not incremental, just like the banks. Then we can thank them for it instead of scratching our heads and wondering why we are liquidating the planet for a few more good decades. This brings us to inspiration – for our problems are many and without hope – it’s hard to be thankful for anything.

Inspiration: We can draw our inspiration from many places. Together, we’ve accomplished many great things and it hasn’t been easy. To all people fighting for a future that is profitable today and prosperous tomorrow, together we gather strength from each success. From the young around us, still rightfully enchanted by our beautiful world, to the artists, poets, journalists, pioneers, politicians, investors and ordinary citizens using their voices and positions to promote sustainability, our ability to sustain ourselves, we can say thanks.

I say thank you.

More people join everyday and slowly the impediments recede, the logic of pushing against becomes harder to defend. Mostly, we might draw our inspiration a beautiful day or a rising sun, which powers all life and can deliver 20,000 times the electricity we are using today.



Water the ultimate everything

Water the ultimate everything

I could accumulate all the quotes and worrying snippets I’ve seen over the past few weeks here about water scarcity, pollution, or misuse. But that would defeat the simple point I want to ring through. One will suffice

“Without water, nothing happens” this was in the Time and said by a farmer referring to the extended dryness in the American farm belt

It could just as easily apply universally to all human activity. Our bodies are, after all, 70% water. In Iowa, the larger piece of arable land in the WORLD, ill-advised and mass farming techniques have polluted the ground water. In Colorado, Oil and Gas companies, with federal dollars padding their pockets, outbid farmers for water rights.

The food and energy problem will come to ahead in our lifetime, and water will be the big issue.

A start would be requiring Agricultural supply and Energy companies to take responsibility for their effect on groundwater. They’ve more than enough economic profit to protect and restore our water supplies.