Climate Change and Investment

Climate Change is one of the most compelling themes of our age and is increasingly becoming an area of focus. In this blog we also discuss how this affects the investment community.

Climate change is a global problem with hitherto unprecedented ramifications. The inherent risks are too far reaching for the financial sector to avoid. This will have an impact across the board and will necessitate a deep rethink in terms of investment strategy going forward. However, as far as businesses are currently concerned, it is questionable as to whether they are clearly aware of what the real changes, perils and advantages are going to be.

One of the fundamentals in combating climate change is to keep the global temperature rise to well below 2 degrees – there is now a consensus suggesting that the target should be lower still, at 1.5 degrees – and that the current rate of temperature increase is having measurable effects already.

Examples of this abound. The Independent Committee on Climate Change suggests that some small Pacific islands are now in the process of buying land on larger islands with a view to rehousing their populations. Almost all of Bangladesh – with a population in the region of 190 million – is below sea level and at huge risk as a result, raising the fear of population migration as their homes and livelihoods disappear.

A recent Intergovernmental Panel on Climate Change (IPCC) report stated that “we have a short period of time in which to make the necessary changes” in order to ameliorate the worst effects of climate change, inferring that, if we don’t do something, then nature will make much greater changes for us.

There is also an effect on international political risk. The contribution of Africa to global greenhouse gas emissions is minimal, yet a combination of geographical and economic factors combined with its dependence on climate-sensitive sectors make African countries highly vulnerable to the adverse effects of climate change.  New UN projections on rates of annual population growth, combined with Verisk Maplecrofts’ Climate Change Vulnerability Index (CCVI), suggests that over 95% of the 234 cities considered ‘at extreme risk’ from climate change are in Africa and Asia. The scale of this risk could threaten the capital flows that have streamed into these markets to take advantage of burgeoning economies, emerging consumers and cheap labour, thereby putting the incumbent governments under severe pressure.

The costs to our supply chains will increase, investment patterns will undoubtedly be affected as the systemic risks to the financial system become clearer and firms will have to adapt their business models to the changing demands of investors. Regulatory change will also come into force, dramatically increasing costs.

However, once the facts are assimilated, all is not doom and gloom. Now we have a better idea as to the extent of the problem, the real issue for investors is how do we turn this into an opportunity? The inference is that investing in forward-thinking companies is THE opportunity. Right now, if one invests in fossil fuels, one has to ask what plans those companies have to stay in existence. But ‘renewables’ will almost certainly become one of the fundamental parts of our future, in part because nuclear energy cannot compete in terms of cost.

We are living through a tech-driven data explosion but data uses huge amounts of energy – a serious issue. According to research from Nature, by September last year data centres alone were using an estimated 200 terawatt hours per year, which is more than the energy consumption of some countries, including Iran. However, the information and communications technology (ICT) space as a whole – including mobile phone networks, televisions, personal data devices etc – currently accounts for more than 2% of global emissions, putting ICT on a par with the carbon footprint of the aviation industry’s emissions from fuel. We need to be more sensible about the type and amount of data we use so, as progress is made in this and related fields, energy-efficient data production and storage is another major opportunity.

Even unexpected sectors such as mining are providing options. The switch to electric in the automobile sector is the main driver behind the emergence of opportunities in the mining sector. Aluminium, cobalt, nickel, copper and lithium, as major components used in electric vehicles, have an important role to play yet have particular supply and demand issues and any ‘greener’ approaches to this will likely bear fruit.

In his January 2019 article for Forbes Magazine, Eric Kobayashi-Solomon sums this attitude up: “Think of the fortunes made during the Industrial Revolution – fortunes that exist even to the present day. Think of the fortunes made during the recent China boom. These fortunes will pale in comparison to the fortunes that stand to be made by assuring that our society can remain not only viable, but flourishing into the 22nd Century and beyond.”

Ultimately it’s a question of “seek and ye shall find” but, if both entrepreneurial and institutional funding is applied to the climate change problem, solutions can and will be found that can help safeguard the future for our children and the generations that follow them.