The earth’s climate is becoming warmer because of things we (humans) have done. Since the climate, along with the atmosphere and water, forms the infrastructure of our lives, climate change will affect us pervasively. As long-term investors, we also recognize that it will affect investment markets pervasively—in some ways that are obvious, some not so much.
Let’s start with the obvious. Regulation designed to reduce mankind’s greenhouse gas (GHG) emissions will create increasing risks in sectors tied to the burning of fossil fuels: utilities, materials, energy and industrials. Conversely, energy production that doesn’t involve fossil fuel combustion—solar, wind, geothermal—will create opportunities. This includes companies that produce wind turbines and solar panels and other equipment needed to make cleaner energy.
What is not as obvious is that there is a world full of risks and opportunities for investors beyond the energy sector. Two ideas shape our thinking about that world:
At first glance, climate change seems inconsequential. What difference does it make if the globe warms by a small handful of degrees? While we may not notice a 2⁰C rise in the temperature outside on any given day, a 2⁰C increase in the global average temperature is far more impactful. It will bring greater frequency of severe weather like heat waves, droughts, floods, and storms. It will raise sea levels. It will expand the range of diseases and pests formerly confined to the tropics.
So, what are the investment considerations outside of the energy sector?
For real estate companies with properties in vulnerable locations, like low-lying coastal regions, sea-level rise will result in increasing risk—and flood insurance will cost more, if it is available at all. For companies with real estate assets in forested regions that are expected to be drier, like parts of the Sierra Nevada and intermountain regions of the U.S., fire insurance is likely to be increasingly costly.
Health care companies need to prepare for expanding incidence of diseases like malaria, dengue fever and West Nile virus, which are carried by mosquitoes whose ranges expand more into temperate regions as the climate warms.
On the opportunity side, a warming climate will open new shipping routes in areas formerly clogged with ice, and it may expand the growing range of some crops. This may create opportunities for maritime shipping companies and those in agriculture and food production.
As society continually seeks to mitigate climate change further, there are opportunities for businesses that produce low-carbon options to replace more carbon-intensive ones (like electric cars), or provide substitute services that involve fewer emissions (like teleconferencing facilities to reduce the need for physical travel).
One of the often-overlooked opportunities is for companies that produce systems and equipment to use water more efficiently, and purify it on site, reducing the need for expensive and energy- intensive pipelines to replenish freshwater. A gallon of water weighs 9 pounds, and it takes a lot of energy to move it around. Reducing the need to move wastewater long distances for treatment, and freshwater for consumption, will reduce the energy-intensity of the water enterprise.
Adaptation to—as opposed to mitigating—climate change creates a different set of risks and opportunities. Greenhouse gases stay in the atmosphere for years—many for decades, a few for centuries, and some even for millennia. There is one degree of additional warming that is locked in as a result of past emissions, and it will take a great deal of effort and investment to limit additional warming to 2⁰C. So we will have to adapt.
What does adaptation risk look like? For an electric utility with power plants on or near low-lying coastal areas, increasing risks from more severe storms and storm surges, as well as sea-level rise, means that investment may be needed to prevent the power system from being knocked out and severely damaged by storms. Consolidated Edison recently spent around $1 billion to adapt New York City’s electric generating system to future Hurricane Sandy events. Anyone with a nuclear power plant near sea level should understand what happened to Fukushima Daiichi and its owner, Tepco. While that disaster resulted from a tsunami, it illustrates the vulnerability of coastal nuclear capacity to rising seas and storm surges.
On the opportunity side of the equation, pharmaceutical companies are expected to develop new therapies for diseases that are expanding into the temperate regions, where many of the richer nations spend considerably more on healthcare than in the tropics.
A decade ago, many in the mainstream investment world talked as though “climate risk” primarily meant mostly regulatory risks for big emitters. Nowadays, more investors are aware that climate will bring both investment risks and opportunities, and in nearly every industry and sector. Where should one look for climate’s investment consequences? Everywhere.