If we stop emitting greenhouse gases tomorrow, there’s approximately one degree Celsius of warming that will still happen because the gases that we emitted decades ago are still in the atmosphere. The adage that old sins cast long shadows wasn’t written about climate change, but it sure could have been.
What that degree — and probably 2 or 3 more, at the rate we’re going — means is that we have a simple choice: We can anticipate and adapt to what that world looks like, or we can pretend it’s not happening or assume that almighty Science will come up with some as-yet-unforeseen Deus Ex Machina to save the day, and then be shocked and impoverished as events unfold. We choose the former — anticipate and adapt. Investors have to be able to see where the puck is going in order to be any good at investing.
A lot of the adaptation business will be about water. The litany of what we can expect as the climate continues to warm almost always includes floods, droughts, severe weather, fires, and sea level rise, and every single one of those has H2O at its heart.
Source: Nik Steinberg, “Assessing Exposure to Climate Risk in US Municipalities.” Four Twenty Seven. May 22, 2018.
Some places will likely have more water; some will probably be drier. Even places where the amount of precipitation doesn’t change could be vulnerable to the impact of climate change on water, because more of the precipitation will be in more intense events, otherwise known as storms. The risk maps from Four Twenty Seven illustrate the geographic distribution of these risks; what might surprise a lot of people who are less acquainted with climate forecasts is the extent of some of these risks. The fact that most of the United States east of the Mississippi River — along with the Pacific Northwest coast — are highly exposed to extreme rainfall is something that any municipality considering a bond issue should take note of, given that rating agencies are increasingly likely to consider vulnerabilities like this as they evaluate muni bonds. Similarly, the water stress map shows much of the West, including almost all of the intermountain region and Southern California, as facing increased water stress.
Sea level rise is another driver of the “too much water” form of climate risk and the need for adaptation. There was a fascinating op-ed in late February about how Miami is preparing for sea level rise, or, as the authors (the mayor of Miami and the former head of the World Bank) put it, the city is “moving aggressively to adapt.” It will need to, as will the entire state of Florida and many other low-lying coastal areas.
These risks aren’t just for municipalities, of course. Pacific Gas & Electric (PG&E) will probably go down in history as the poster child of a climate-related bankruptcy. Look again at the maps of water stress and superimpose California’s state line on that. That state is getting drier. It’s also getting denser: In 1980, there were about 24 million people in the state, and now there are more than 40 million. What that means is that there are now millions more possible sources of ignition: an engine spark from a car, ATV or lawnmower, a tossed cigarette butt, a campfire imperfectly quenched, two powerlines making contact in a high wind. Hotter weather, drier fuel and more sources of ignition make a perfect recipe for increased risk of catastrophic wildfire, and PG&E is living proof.
Not all the risks of sea level rise are encapsulated in real estate. Something else that isn’t very visible in coastal geography is the buried fiber optic cabling that powers the internet. A recent study found that by 2033 — one and a half decades from now — more than 4,000 miles of that buried cable, and more than 1,100 internet traffic hubs, are likely to be surrounded by water, and the most vulnerable cities are New York, Miami and Seattle. The time frame was particularly scary, as one authority noted: “The expectation was that we’d have 50 years to plan for [sea level rise]. We don’t have 50 years.” We have about 15. Think about just New York, and the proportion of financial trading and activity that happens electronically every single day on the NYSE and the NASDAQ. Sea level rise will give new meaning to the term “underwater” in our stock markets.
This is all very scary. The good news is that it’s not the kind of scary that news of a giant comet headed for a collision with Earth brings. This stuff we can prepare for, plan for, adapt to. The point of absorbing scary news is to understand what needs to be done and the timeframe available for doing it. Our future will be about adapting to having too much water, encroaching oceans, and too little water in a lot of places. It is no wonder, then, that credit rating agencies are incorporating climate change into credit ratings and more investors are increasingly integrating climate-related risks and opportunities into portfolios and company engagement.