How investors, and everybody, should think about climate changeAugust 15, 2021
It’s a great paradox that the two biggest stories of our time are invisible.
COVID for one. You can’t see it. And that’s what makes it difficult to convince, say, 700,000 bikers at the Sturgis Motorcycle Rally in South Dakota this week that they should socially distance, wear masks and get vaccinated. Of course, you do see COVID when the hospital fills up, or your uncle dies.
Climate change is the other one. Like COVID, it’s been hard to get doubters to believe. Evidence was dismissed as "a little heat wave" or "ice melts, so what?"
Alarmingly, it’s now impossible to deny climate change. How else to explain horrific fires all over the world.(And more fires.) Crazy flooding in Germany and China. Unprecedented heatwaves. (July was the hottest month ever recorded.) Massive ice sheet shrinkage. Summer fire seasons out West that have become apocalyptic. Fact: Seven out of 10 of California’s largest wildfires occurred within the past decade. And of course, there’s a shortage of firefighters. Too much demand, not enough supply. (The job pays around $45,000 a year.)
In Maine, where I am currently, smoke from the fires out West and Canada filled the skies recently. I’ve been coming up here for 59 years, and I’ve only seen that once before. Last summer.
This week, the United Nations released a devastating report — technically from the Intergovernmental Panel on Climate Change, or IPCC, a body of scientists convened by the U.N. The report is a tome. The whole enchilada is 3,949 pages, with a 42-page summary.
But here’s the gist of it. (The New York Times has a handy recap:)
-Human influence has unequivocally warmed the planet.
-Climate science is getting better and more precise.
-We are locked into 30 years of worsening climate impacts no matter what the world does.
-Climate changes are happening rapidly.
-There is still a window in which humans can alter the climate path.
The response to the report has been mostly constructive from politicians and business leaders around the globe. There are those though, who see the U.N. as anathema, and pooh-pooh anything emanating from that body. To those people, I simply say this: Forget the U.N. Don’t believe a word in that report. Instead, just follow the money. And when you do that, you will see that money flows validate everything in that report.
I look at the U.N. report as a citizen of the world and as a human being with a family. But I also come to it as a financial person. And right now I see a mad, global rush by businesses, large and small, to adapt, to reconfigure and to invest in ways and means that speak to climate change. Just from one glance at headlines this week: Exxon is selling shale gas properties, the Biden administration is pushing electric planes, and energy companies are capping methane leaks to grow business. And on and on.
You’d have to be blind not to see this.
Risk of falling behind
Yahoo Finance’s Akiko Fujita asked one of the lead authors of the U.N. report, Kim Cobb, a Georgia Tech professor, about what role business can play to fight climate change.
“I think they have a huge role to play,” Cobb says. “We need to be looking at aggressive action across every level of society. Federal action is absolutely required, but we need to have action at every institutional level to help us move this forward. Not the least because some of the most important advances that may yet come in helping us to accelerate action will come from public-private partnerships as well as companies that are helping their communities, their employees, their workforce and their stakeholders and shareholders understand what the risks are that we face with ongoing climate change and articulate why it's important to their bottom line that we reduce the coming risks of climate change as well."
“So for all of these reasons, critically important motivators,” Cobb continues, “I hope for the private sector to continue to up the ante and raise their ambitions to be a part of this transition and make it as fast as possible.”
Companies that don’t make this transition risk falling behind or having their business models usurped. Consider the $5.8 trillion global insurance industry and the upheaval that climate change is creating there. In fact, let’s just look quickly at one piece of it, the U.S. homeowners business. Bottom line: Rates are going up because of climate change. Until recently, this was just a problem primarily facing properties on the Florida coast. Not anymore.
Here’s what Ben Madick, CEO of Matic, a digital insurance marketplace with home and auto carriers, had to say: “Three years ago, we didn't worry about California. It was one of our best markets. We would have tons of customers and a lot of [insurance] options. [Now] there's less and less options available because of climate change, because of the fires, because of the drought.”
Madick says more areas have been designated flood zones around the country because of climate change. Rates in Texas are climbing. Ditto for California, up on average by 20% over the past several years. And then there’s Madick’s personal experience in San Diego.
“I live four houses away from a sort of nature preserve. It's a pretty small one, but there's trees there,” he says. “Two insurance carriers said, ‘We don't want to insure your house. We already have too many houses near that same preserve.’ And then the third one who said, ‘We'll stay there, but it's going to be at three times the price.’ So my home [insurance] went up by 200%.”
You could take your chances and "self-insure" (love that euphemism), but probably not if you have a mortgage, which typically requires some kind of coverage.
And of course this to-the-moon insurance premium growth is inflationary, a significant second order effect of climate change. Same goes for the effect of extreme weather on food prices and supply chains. To economists, climate change is a type of friction, aka, cost — a cost we increasingly will bear.
Speaking of economists, a number of other important climate change studies came out recently, and they would have garnered more attention had they not been overshadowed by the mega U.N. report.
Let’s delve into them. First a Federal Reserve paper, “Growth at Risk From Climate Change,” by economist Michael Kiley
Kiley’s research shows that increases in temperature correlate with lower economic growth and that those negative outcomes are disproportionately high. In other words, it’s not just that higher temperatures will on average reduce GDP growth, which they will, it’s that there will be more frequent and worse economic downturns — making really bad growth outcomes more likely. Or as he writes: “The results indicate substantially larger effects of temperature on downside risks to economic growth than on the central tendency of economic growth.”
Translation: Not good.
It also appears to be the case that hotter countries, such as Nigeria and India, would suffer more, or again disproportionately from higher temperatures, whereas wealthier, cooler nations like the U.S., Japan and countries in Europe are better equipped to mitigate climate change. That means more suffering by the world’s poor. That’s a bad moral outcome and also a costly one for both poor and probably rich nations too.
'The right thing to do'
Interesting that the Fed is considering this, right? In fact other central banks around the world are even more active. The Bank of Japan, in contrast with the Fed, is pushing an active climate change agenda. According to The Wall Street Journal, that includes “no-interest loans to commercial banks to support their lending for projects judged to be environmentally friendly and the purchase of green bonds in foreign currencies.” The EU is taking similar measures. But Fed chief Jay Powell said in June: “We do not seek to be climate policy makers.”
Ah yes, the Fed doesn’t want to be seen picking winners and losers. Well, they are changing their tune a bit when it comes to wealth inequality, which I wrote about recently. Maybe climate change is next.
The other scholarly work I referenced is an NBER (National Bureau of Economic Research) working paper titled “What do you think about climate finance?” by two NYU Stern professors, Johannes Stroebel and Jeffrey Wurgler. The professors surveyed 861 finance academics, professionals, public sector regulators and policy economists about climate finance topics.
They found that those respondents believed definitively that financial markets were underpricing the risk of climate change and that pressure from institutional investors is viewed as the most powerful force for change.
“The least influential force for moving toward a low-carbon economy [was seen to be] voluntary behavior by corporations,” Wurgler told me. “The major emitters are facing short-termist pressures to do nothing or politically fight back. But institutional investors, if we are to believe these results, are pushing them for change.”
Wurgler spoke of three motivators when it comes to these investors. “There's a performance idea, a doing well by doing good idea,” he says. “There's another idea of catering to investors [who care about climate], and there's a third idea that, well, this is just the ethically right thing to do for my children and grandchildren, and if returns suffer a little bit, then so be it. But it's the right thing to do.”
There still is an Attila-the-Hun crowd that takes exception to all this, though not the way it used to. Remember, originally they denied climate change existed. Then they denied it was caused by humans. And now they essentially are saying that, well, maybe it exists and it is due to human behavior but the whole thing is mostly a liberal, government subsidy sham, and the only thing worth doing is a carbon tax and a carbon tax would be impossible to do.
So ergo, the conclusion is to do nothing?
That’s wrongheaded for more reasons than I can count.
It kind of surprises me too, and forgive me if I sound crass, because huge dislocations or problems like climate change always provide for opportunities (again follow the money), which I will get into in a second.
But first a word about carbon taxes from Pavan Sukhdev — the president of WWF International, one of the world's leading environmental advocacy groups, who I interviewed recently. Sukhdev made the excellent point that governments should impose taxes on companies for their pollution, rather than for the goods that the companies produce.
"Frankly, look at what we are doing these days when we tax," he says. “We are always taxing the goods and not enough taxing the bads. This doesn't make sense. We should do it the other way around."
"When we come to resource usage and resource emissions, basically, pollution and especially the use of the atmosphere, it's a limited space," he adds. "We should be taxing that resource use — the resource of the atmosphere — but we don't do resource taxation."
Let's return to the opportunities theme, though. That's something you're going to be hearing about much more, according to Michael Sonnenfeldt, the founder and chairman of Tiger 21, a network for high-net-worth individuals.
"Our members are getting very interested in clean energy,” says Sonnenfeldt. “They're not looking at the stock price today. They know the clean energy transition, especially with this terrible report that's come out this week, [means] we're going to have to end fossil fuels, decarbonize and completely rewire the utilities of the world. That's trillions and trillions of dollars a year over the next decade and they're trying to play that play more than anything that's going on today or tomorrow."
“The biggest areas are in the power sector, number one,” says Sonnenfeldt. "Utilities that are increasing renewables in the private space. A lot of new renewable companies. [Also] electric vehicle companies, not only Tesla, but Lucid is now out and truck companies. You have the ETFs that are in batteries. One estimate says that there's going to be 25 times the demand for batteries than currently exists. That's going to be a long run. You have TAN, the solar ETF.”
And of course there are a slew of other green ETFs, as well. And a million more ways to profit from and invest in this, well, megatrend. The business person in me thinks about it this way: Right now climate change is a huge problem. Thousands of people around the world are trying to turn it into a huge opportunity.
Sounds like a win-win to me.
This article was featured in a Saturday edition of the Morning Brief on August 13, 2021. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Andy Serwer is editor-in-chief of Yahoo Finance. Follow him on Twitter: @serwer
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