Climate change is one of the most dominant topics in world news, particularly climate emergency. Although the majority seem to be getting on board with measures to try and slow down the rising global temperatures, there are some who are still sceptical, and others who simply just do not care. But why should we care? And how does it affect financial planning?
First of all, whenever we discuss investments as part of financial planning, it’s always with a long-term view. Bearing in mind there is a lag time of around 30-40 years between industrial activity and feeling the resulting global warming effects (today’s climate warming is being driven by emissions in the 80s and 90s, so we haven’t hit anywhere near the maximum level of warming yet!), then for many reading this article the impact of climate change could have a very real effect on the Earth by the time you hit retirement age. The change in global temperature is likely to have a severe impact on the way we live, and the way businesses operate in the future. Let’s have a little run through what the impact could be.
Even a minor increase in ocean temperatures will give rise to more extreme storms including hurricanes and typhoons, as well as the more minor storms that affect the UK rolling in from the oceans onto land. These weather systems will cause catastrophic damage to homes and businesses, and will also have a significant impact on the global economy if they occur with greater frequency. Continual damage to property (personal and commercial) and infrastructure will also have repercussions for the insurance market. Means of production could be also impacted; a large, high-tech factory producing critical components to supply a number of industries being closed for weeks or months, can have wide ranging consequences for businesses that may not even be on the same continent as the area being directly impacted – an effect we have already noticed living through the pandemic.
As well as an increasing number of storms and flooding, certain areas of the world will be facing extreme warm weather events. Prolonged periods of dry weather will inevitably lead to water shortages. Some locations are no strangers to rationing water, such as California – the state home to many tech powerhouses in Silicon Valley. Although the businesses themselves could thrive (particularly with generous amounts of solar energy on hand) the supply of potable water could end up so restricted that it drives people away from the area. A prolonged lack of water supply also affects vegetation; in drought-prone areas, wildfires are also becoming more frequent and severe in magnitude. Again, California is becoming increasingly vulnerable to these extremely damaging events, along with places further afield such as Australia.
All of these climate events will cause major issues for businesses (either directly or through impacts on the workforce) as they lose substantial revenue as a result of any enforced downtime. Insurance companies will have to pay out considerable sums to cover damage, which will have the knock-on effect of increasing future premiums in areas most at risk of climate events. This would have even greater consequences in emerging markets as their insurance infrastructure may not be as well developed, and are thus far less resilient.
Use of fossil fuels is definitely on the downward trend, due in part to current events in Ukraine, but in place of that, there is a huge raft of new technologies, and emergent industries coming to the fore. Engineering and infrastructure companies who construct wind turbines, solar panels (and many other novel renewable energy solutions; some that may ultimately prove to be revolutionary!) will play a leading role in the reliance on fossil fuels. In addition, large engineering companies are responsible for various adaptation measures, particularly projects to limit the impacts of flooding.
Biotechnology is another area with huge potential to reduce greenhouse gases, particularly methane. One of the largest sectors for the direct emission of methane is livestock farming for food production – a natural by-product of their food digestion. An estimate puts the equivalent CO2 emissions from one herd of beef cattle at 300kg per kilogram of protein produced. To put that into perspective, you could drive a modern car 3,000 miles before hitting the same carbon emissions as making 50 quarter pound burgers! Biotech can help with this by developing lab-grown meat, which will produce no methane as a by-product. Additionally, further investment into mycoprotein and meat-alternative manufacturers could also drastically reduce our reliance on farmed livestock. Maybe the veggies are on to something here?
Lastly, another sector with the potential for huge development in the near future is water technology, particularly in sea water desalination (converting seawater into potable water) and the recycling of waste water into potable water. This will alleviate concerns to some extent in areas like California and the United Arab Emirates, with many more areas affected by unsustainable water practices to be added to that list if climate change continues at the current rate. From an investment perspective, the companies behind these technologies could have the potential for huge growth in the medium to long terms as these wealthy, water-pressured areas look for alternative solutions.
How does it fit with ESG?
It kind of doesn’t; not directly at least, as many ESG funds tout environmental ‘this, that and the other’ but many will also invest in companies on the strengths of their social and governance attributes. For example, Shell and ExxonMobil could feature in many ESG-integrated investment funds on the strength of factors like equal pay, board diversification and investment in renewables.
However, it has been proven that businesses who invest in protecting themselves from the risks of climate change and that invest in greener technologies are much more resilient, and thus should prove to be the better long-term investments. Think of it as the person who spends their savings following a house-devastating flood on flood defences, versus the person who spends their money on just re-filling their home with new, designer furniture and luxury carpets – the former will be in a much better place following the next flood, whereas the latter will be back to square one. It takes a forward-looking business with a strong senior leadership team to impart this kind of strategy, instead of a business where the primary goal is dividends for shareholders; a very short-sighted strategy that will fail to pay in the long run.
The delay of approximately 30-40 years between industrial activity and feeling the resulting global warming effects is similar to investing – it’s about looking decades into the future before expecting any results. Investing in these newer technologies may not be a short-term solution, but in the long-term they may help your portfolio as well as in the fight against climate change.