New Zealand looking at non-financial capitals, more than GDP

The NZ PM talking about the problems with GDP and suggesting NZ should look at a broader set of indicators and changing the way it should make decisions, including a well-being budget in 2019.

Living standards | New Zealand Treasury

“Our vision is focused on higher living standards for New Zealanders. Achieving this requires growing the country's human, social, natural, and financial/physical capitals which together represent New Zealand's economic capital. Our vision is to be a world-class Treasury working for higher living standards for New Zealanders.”

Me: NZ (along with others) has been looking at a broader framework than GDP for a while now. The NZ PM is now pushing further ahead in asking the Treasury to think about other non-financial capitals such as human, social, natural etc. It’s an intriguing and possibly a positive development. It ties into many recent blogs on intangible capitals, Cowen’s idea of GDP+ and the idea companies have a lot of other capitals to draw upon.

https://treasury.govt.nz/information-and-services/nz-economy/living-standards

https://www.budget.govt.nz/budget/2018/economic-fiscal-outlook/budget-2019-focus-on-wellbeing.htm

Blog on Intangible Capitals here

Blog on GDP+ amongst other Tyler Cowen ideas here: https://www.thendobetter.com/investing/2018/11/21/tyler-cowen-vision-of-free-prosperous-and-responsible-individuals

Significant Major cross-discipline EAT-Lancet Commission paper on Sustainable Food

Major cross-discipline EAT-Lancet Commission on Sustainable Food has published its findings (Jan 2019). I give a summary review. With a fairly broad scientific consensus, the report establishes 3 significant items.

The major items the paper establishes are

• A healthy reference diet

This diet is considered to sustainably feed likely world populations from 2050 and beyond, and give a broadly correct amount of nutrition. The paper evidences that there would like be

• Health benefits from this diet

In rich nations, this would be from better nutrition helping obesity and cardiovascular disease and the second order benefits of this. And in poorer nations, this would be from decreasing malnutrition.

The diet mainly due to a extremely large pivot away from red meat also establishes

• a sustainable agriculture supports this diet

Where the environmental impacts of such a proposed diet are kept within likely carbon budgets and other planetary considerations.

While the report mentions several cultures that eat within the reference diet, in my view, a major weakness is little acknowledgment of the scale of socio-cultural change this diet suggests. To me, a cross-disciplinary socio-anthropologist or cultural philosopher would have made a great addition as a major component of why we eat what we eat is conditioned by social and cultural value.

-The reference diet is high in vegetables and low in red meat, sugar, potatoes and processed foods.

This healthy reference diet largely  consists of:

• vegetables,   fruits, whole   grains, legumes,  nuts, and unsaturated  oils,

• includes  a low to  moderate amount of seafood and poultry,

• includes no or a low quantity of red meat, processed meat, added sugar, refined grains, and starchy vegetables.

Summary values are in table above.

If you look at the carbon impacts of various foods, you can see below that the move to vegetables over red meat is very positive for the environment. This is also because of the second order effects of growing grain to feed beef or other animals, which is environmentally intense both in land use and energy use. (See Fig. 4 below)

Source: Eat-Lancet (2019)

The “Business as usual” modelling shows the huge impact from animals on greenhouse gases.

There are strong second order health effects deriving from this as well - many fewer deaths - although I suspect keeping within the energy intake limit and cutting out added sugar and processed foods would achieved a fair amount of this benefit.  Cutting out processed foods and added sugar and eating about the correct amount of calories is almost universally favoured in all diets (even low carb, high fat diets as fat is high satiety) Still the economic benefits of lower health costs, and a more productive workforce.

In terms of where we need to get to…There is a long way to go (See below). Rich nations eat too much red meat and potatoes. Parts of Africa are too reliant on low nutritional-value cassava (starchy vegetables).

The overall paper is a fascinating read as it takes in the intersectional nature of food and the environment and health and proposes concrete guidance that enables a growing population. As I mentioned earlier, its weakness is in not weighting the cultural change factors in a strong enough way. For instance, many Americans and Europeans know they eat too much to be healthy but there is a learnt cultural attitude and difficulty in enabling change. Still, at least a good road map has been laid out. In terms of behaviours everyone can play a part in, food waste is important no matter what diet or scenario is chosen (grpah below).

I end on the important summary messages below from the paper:

Unhealthy and unsustainably produced food poses a global risk to people and the planet. More than 820 million people have insufficient food and many more consume an unhealthy diet that contributes to premature death and morbidity. Moreover, global food production is the largest pressure caused by humans on Earth, threatening local ecosystems and the stability of the Earth system.

Current dietary trends, combined with projected population growth to about 10 billion by 2050, will exacerbate risks to people and planet. The global burden of non-communicable diseases is predicted to worsen and the effects of food production on greenhouse-gas emissions, nitrogen and phosphorus pollution, biodiversity loss, and water and land use will reduce the stability of the Earth system.

Transformation to healthy diets from sustainable food systems is necessary to achieve the UN Sustainable Development Goals and the Paris Agreement, and scientific targets for healthy diets and sustainable food production are needed to guide a Great Food Transformation.

Healthy diets have an appropriate caloric intake and consist of a diversity of plant-based foods, low amounts of animal source foods, unsaturated rather than saturated fats, and small amounts of refined grains, highly processed foods, and added sugars.

Transformation to healthy diets by 2050 will require substantial dietary shifts, including a greater than 50% reduction in global consumption of unhealthy foods, such as red meat and sugar, and a greater than 100% increase in consumption of healthy foods, such as nuts, fruits, vegetables, and legumes. However, the changes needed differ greatly by region.

Dietary changes from current diets to healthy diets are likely to substantially benefit human health, averting about 10·8–11·6 million deaths per year, a reduction of 19·0–23·6%.

With food production causing major global environmental risks, sustainable food production needs to operate within the safe operating space for food systems at all scales on Earth. Therefore, sustainable food production for about 10 billion people should use no additional land, safeguard existing biodiversity, reduce consumptive water use and manage water responsibly, substantially reduce nitrogen and phosphorus pollution, produce zero carbon dioxide emissions, and cause no further increase in methane and nitrous oxide emissions.

Transformation to sustainable food production by 2050 will require at least a 75% reduction of yield gaps, global redistribution of nitrogen and phosphorus fertiliser use, recycling of phosphorus, radical improvements in efficiency of fertiliser and water use, rapid implementation of agricultural mitigation options to reduce greenhouse-gas emissions, adoption of land management practices that shift agriculture from a carbon source to sink, and a fundamental shift in production priorities.

The scientific targets for healthy diets from sustainable food systems are intertwined with all UN Sustainable Development Goals. For example, achieving these targets will depend on providing high-quality primary health care that integrates family planning and education on healthy diets. These targets and the Sustainable Development Goals on freshwater, climate, land, oceans, and biodiversity will be achieved through strong commitment to global partnerships and actions.

Achieving healthy diets from sustainable food systems for everyone will require substantial shifts towards healthy dietary patterns, large reductions in food losses and waste, and major improvements in food production practices. This universal goal for all humans is within reach but will require adoption of scientific targets by all sectors to stimulate a range of actions from individuals and organisations working in all sectors and at all scales.

And important strategies identified:

Three lessons can be learned from other examples of societal responses to global changes. First, no single actor or breakthrough is likely to catalyse systems change. Second, science and evidence-gathering are essential for change. Third, a full range of policy levers, from soft to hard, will be needed. ...we outline five specific and implementable strategies, which are supported by a strong evidence base….These strategies are:

(1) Seek international and national commitment to shift towards healthy diets. The scientific targets set by this Commission provide guidance for the necessary shift, which consists of increasing consumption of plant-based foods and substantially reducing consumption of animal source foods. Research has shown that this shift will reduce environmental effects and improve health outcomes. This concerted commitment can be achieved by investment in public health information and sustainability education, and improved coordination between departments of health and environment.

(2) Re-orient agricultural priorities from producing high quantities of food to producing healthy food. Production should focus on a diverse range of nutritious foods from biodiversity-enhancing food production systems rather than increased volume of a few crops, most of which are used for animal production.

(3) Sustainably intensify food production to increase high-quality output. The current global food system is unsustainable and requires an agricultural revolution that is based on sustainable intensification and driven by sustainability and system innovation. This change would entail reducing yield gaps on cropland, radical improvements in the efficiency of fertiliser and water use, recycling phosphorus, redistributing global use of nitrogen and phosphorus, implementing climate mitigation options, including changes in crop and feed management, and enhancing biodiversity within agricultural systems.

(4) Strong and coordinated governance of land and oceans. Such governance includes implementing a zero-expansion policy of new agricultural land into natural ecosystems and species-rich forests, management policies aimed at restoring and re-foresting degraded land, establishing mechanisms of international land-use governance, and adopting a Half Earth strategy for biodiversity conservation to safeguard resilience and productivity in food production. The world's oceans need to be effectively managed to ensure that fisheries do not negatively affect ecosystems, fish stocks are used responsibly, and global aquaculture production is expanded sustainably given its effect on and linkage to both land and ocean ecosystems.

(5) At least halve food losses and waste, in line with global sustainable development goals. Substantially reducing the amount of food lost and wasted across the food supply chain, from production to consumption, is essential for the global food system to stay within its safe operating space. Technological solutions will need to be applied along the food supply chain and public policies implemented to achieve a 50% reduction in food loss and waste.

Link to paper here in Lancet

https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(18)31788-4/fulltext

And a summary on the EAT site.

https://eatforum.org/eat-lancet-commission/

Blog on living longer through diet:  https://www.thendobetter.com/blog/2018/1/6/how-to-live-longer

AQR Quant paper on ESG

AQR quant paper using MSCI ESG scores and Barra factor model. “Stocks with worst ESG exposures have total and stock-specific volatility that is up to 10-15% higher, and betas up to 3% higher, than stocks with the best ESG exposures. This finding is strong overall, robust to a wide variety of controls, and clear globally as well as in individual regions (US, World ex US, or in emerging markets). We also find that ESG scores may help forecast future changes to risk estimates from a traditional risk model. Controlling for the contemporaneous risk model estimates, we show that poor ESG exposures predict increased future statistical risks. While the effect is modest in magnitude, it is consistent with ESG exposures conveying some information about risk that is not captured by traditional statistical risk models.”

“..we find that deterioration of ESG score from the 75th to the 25th percentile is associated with about a 1% increase in risk.  While this increase might seem small, it may simply reflect the fact that ESG captures risks that are long-run in nature and may not materialize in short to medium term. For example, a firm with poor governance may be more likely to experience a scandal, earnings misstatement, etc., but that does not mean that such an event will necessarily happen over the next few years and consequently be captured in a statistical risk model. Moreover, we are using a state of the art risk model that already reflects much of the information about a given stock’s risk, whether such risk is driven by ESG or any other type of exposure. Thus, it is by no means obvious that ESG information could help improve on this risk model’s forecast, even if it is by a modest amount. Overall, we conclude that investors might be able to utilize ESG information to glean additional insights about the riskiness of their investments…”

Me: (1) The “modest effect” on the future risk estimate might be considered by some to be small enough to dismiss. (2) The use of Barra and MSCI ESG gives an amount of standardisation and ability to replicate the work but is not “consensus ESG”. (3) The constant flow of ESG quant papers is notable. Most recent are neutral to modertately positive. (4) Short run data will be a problem for histroic validification but the forward looking situation tends to chime and never exactly rhyme.

Source from AQR: http://bitly.com/2GwShXT

More thoughts on ESG ratings: https://www.thendobetter.com/investing/2018/9/21/why-esg-ratings-will-never-agree-and-some-of-the-problems-of-ratings

History of Start up failure, Washdoctors

A brief history of Wash Doctors – WashDoctors

History of a London based car wash start up from start to failure in 2 years. “As Founders of a business you need to be stable when things are going wrong, understated when things are going well.”

Me: We’ve used wash doctors. The business had some nice elements to it, some sustainable themes, possible better pay for workers. But the founders examine why the economics don’t work out for very human reasons (complaints, high variability of demand). Fascinating little glimpse into the very considered unfortunate end to a start-up. I hope they try some thing else.

https://medium.com/@washdoctorslondon/a-brief-history-of-wash-doctors-4e02f63ecd62

Social science, Economics, replication study crisis

There’s a crisis in psychological and social sciences that has spread into medical and now economics. It’s notable to me that this crisis isn’t in physical domain sciences which are better measured and tend not to involve the human. Perhaps humans are too messy.

The crisis is a replication crisis. Many significant results in social sciences have failed to repeat in subsequent studies and analysis.  Some results that have been replicated have shown a much lower magnitude of result. (See links below)

Some of the replication research is not perfect plus the philosophy of statistics would suggest a portion of any results at the 5% of 1 in 20 level will simply be random.  (See links below)

Some significant social science results that haven’t replicated are:

-the “ego depletion” theory of willpower  (Willpower is like a muscle, the argument goes. When it's tired, we're less focused; we give in to temptation and make shoddy decisions that hurt us later.)

-the “marshmallow test”  (children who can wait for 2 marshmallows in the future vs 1 marshmallow now, do better on certain other metrics)

-The social priming theories

-Power poses

Interestingly, it also seems scientists are good at predicting which tests are most likely to NOT replicate. (https://www.nature.com/articles/s41562-018-0399-z)

A summary here:

“Psychology’s reliability crisis erupted in 2011 with a wave of successive shocks: the publication of a paper purporting to show pre-cognition; a fraud scandal; and a recognition of p-hacking, where researchers exercised too much liberty in how they chose to analyze data to make almost any result look real. Scientist began to wonder whether the publication record was bloated with unreliable findings.

The crisis is far from being limited to psychology; many of the problems plague fields from economics to biomedical research. But psychology has been a sustained and particularly loud voice in the conversation, with projects like the Center for Open Science aiming to understand the scope of the problem and trying to fix it.

In 2015, the Center published its first batch of results from a huge psychology replication project. Out of 100 attempted replications, only around a third were successful. At the time, the replicators were cautious about their conclusions, pointing out that a failed replication couldmean that the original result was an unreliable false positive—but it could also mean that there were unnoticed differences in the experiments or that the failed replication was a false negative.

In fact, the bias toward publishing positive results makes false negatives a significant risk in replications.”  From https://arstechnica.com/science/2018/08/why-do-only-two-thirds-of-famous-social-science-results-replicate-its-complicated/

Interestingly this has spread into economics and the anomaly literature.

...In 2016, government economists Andrew Chang and Phillip Li tried to reproduce the results of 65 econ papers published in good journals. They got the original data, and even contacted the authors for help in following their footsteps. Yet still they only managed to reproduce 49 percent of the published findings…. See  https://www.federalreserve.gov/econresdata/feds/2015/files/2015083pap.pdf

In the anomaly literature it is notable that “value” and “momentum” results mostly (though not all) have replicated but at lower magnitudes. This lower magnitude result seems to be fairly consistent as well.  The paper also make a good point that microcaps seem to skew the results of previous work.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3275496

Most anomalies fail to hold up to currently acceptable standards for empirical finance.

My view:  while there  are complex root causes behind this (eg yes, there is fraud but it doesn’t explain many of the results), I think the overall message is to take results with a certain amount of skepticism and if you think the results seemed far fetched (eg Marshmallow test, possibly) then wait to see a replication study before putting too much weight on it.

A paper suggest the base rate fallacy is part of the explanation:  https://academic.oup.com/bjps/advance-article-abstract/doi/10.1093/bjps/axy051/5071906

Confronting inequality

Jason Furman reviewing  Confronting Inequality: How Societies Can Choose Inclusive Growth “On the substance, the book finds that, on average, inequality results in less sustainable growth and lower growth. Redistribution has no direct adverse impact on growth and by reducing inequality actually helps it. Structural reforms (like deregulation) generally increase growth and inequality. Fiscal austerity hurts both growth and especially inequality, with the authors suggesting that it does not generally pass a cost-benefit test because the benefits of less debt are outweighed by the cost of getting to less debt. Monetary expansion reduces inequality.“

the book presents the IMF authors work it doesn’t argue the other side but makes a case against fiscal austerity...

Economist Jason Furman makes a much better summary review than me.  

amazon link here 

Germs killed 90% native americans c. 1500 causing re-forestation and mini ice age

Earth system impacts of the European arrival and Great Dying in the Americas after 1492

Germs from Europeans arriving in the Americas from 1492, caused the native American population to die in large epidemics. With the loss of 90% of the human population, much of the agriculture land turned back into forests.

These forests acted as a large carbon capture sink reduced the Earth’s temperature significantly causing a mini ice age / cold spell.

A comprehensive paper drawing on many previous papers in this area. Link here:  https://doi.org/10.1016/j.quascirev.2018.12.004 

The arrival of Europeans in the Americas in 1492 CE marks the onset of disease epidemics resulting in the loss of the majority of indigenous people living in the Americas over the subsequent century (Berlinguer, 1993; Cook, 1998; Crosby, 1972, 1976; Nunn and Qian, 2010). Indigenous land use was widespread before European arrival, particularly in Mexico, Central America, Bolivia and the Andes where terraced fields and irrigated agriculture was practised (e.g. Abrams and Nowacki, 2008; Chepstow-Lusty and Jonsson, 2000; Heckenberger et al., 2003; Hunter and Sluyter, 2015; Whitmore and Turner, 1992), and across Amazonia where diverse pre-Columbian land uses left its traces in the composition of contemporary Amazon forests (Clement et al., 2015; Levis et al., 2017; Maezumi et al., 2018a; Watling et al., 2018). Thus the Great Dying of the Indigenous Peoples of the Americas (Wolf, 1982) after 1492 CE likely led to a reduction in land use. Fields and fallow areas then underwent secondary succession and in many cases increased carbon stocks as they reverted towards similar prior states – with local, regional and potentially global consequences for the Earth System.

The uptake of carbon on the abandoned anthropogenic lands after European contact may have been large enough to impact the atmospheric CO2 record (Dull et al., 2010; Faust et al., 2006; Lewis and Maslin, 2015; Nevle and Bird, 2008; Nevle et al., 2011; Ruddiman, 2005). Furthermore, at the same time high-resolution Antarctic ice-core records of atmospheric CO2 concentration show an anomalously large decline of ∼7–10 ppm (Ahn et al., 2012; MacFarling Meure et al., 2006) beginning in the 1500s with a minimum in the early 1600s (Fig. 1). Isotope analysis shows that the anomaly was driven by an increase in the terrestrial carbon sink (Fig. 1B, Bauska et al., 2015; Francey et al., 1999; Trudinger et al., 1999). Hence, the carbon uptake that is thought to have occurred following the arrival of epidemics in the Americas may have reduced atmospheric CO2 levels and led to a decline in radiative forcing that may then have contributed to the coldest part of the Little Ice Age(Faust et al., 2006; Neukom et al., 2014)

More on climate

Paper on temperature impact on human capital

https://www.thendobetter.com/investing/2019/1/28/long-term-impacts-of-exposure-to-high-temperatures-on-human-capital

Nassim Taleb on climate risk

https://www.thendobetter.com/investing/2017/9/18/nassim-taleb-climate-change-risk

Long-term impacts of exposure to high temperatures on human capital

Long-term impacts of exposure to high temperatures on human capital and economic productivity:

“Weather anomalies have a range of adverse contemporaneous impacts on health and socio-economic outcomes. This paper tests if temperature anomalies around the time of birth can have long-term impacts on individuals' economic productivity. Using unique data sets on historical weather and earnings, place and date of birth of all 1.5 million formal employees in Ecuador, we find that individuals who have experienced in-utero temperatures that are 1 °C above average are less educated and earn about 0.7% less as adults. Results are robust to alternative specifications and falsification tests and suggest that warming may have already caused adverse long-term economic impacts.”

Paper link here

https://doi.org/10.1016/j.jeem.2018.10.001

Ram Fishman, Paul Carrillo, Jason Russ (2018) (Journal of Environmental Economics and Management)

Comment: the falsification test does mean that spurious patterns are a less likley explanation, there could be other causal effects as correlation is not causation, but the finding is provocative.

It chimes with a recent paper by Isen et al. (2017) finds evidence for a simila r association among 30-year individuals in the U.S. born between 1969 and 1977.  (Relationship between season of birth, temperature exposure, and later life wellbeing).