From the November 2013 issue of Investment Advisor • Subscribe!

Climate Change Is Today’s Problem

Now is the time for investors to position themselves for the implications of climate change

People often warn about what climate change will mean for our future, but it is no longer about our future. The impacts are being felt now.

Take, for example, Newtok, an Eskimo village in western Alaska. Climate-linked erosion is causing the village to flood as permafrost melts and sea levels rise. A study by the Army Corps of Engineers found that the highest point in the village will be below water level by 2017. Residents are already making plans to move and have been dubbed “America’s first climate refugees.”

The evidence is not just anecdotal. A study from the University of Adelaide shows rainfall extremes are already increasing around the world and that rainfall intensity will increase by between 5.9% and 7.7% for each degree of warming.

The USA’s National Oceanic and Atmospheric Administration has shown that over the last six decades, the increase in heat and humidity has cut the amount of work that people can do in the worst heat by 10%. If one takes the more extreme 6 degrees Celsius warming projection, it would become impossible to work during the hottest months in many parts of the world. Heat stress in New York would exceed that of present-day Bahrain, while in Bahrain the heat and humidity could cause hyperthermia.

Winning Minds Still A Battle

A poll conducted by the Pew Research Center last October showed that while the majority of Americans accept the climate is changing, only 42% believe that human activity is the main driver. This is vastly at odds with academia. A survey of more than 4,000 academic papers published over 20 years showed that over 97% agreed that climate change is anthropogenic. Copenhagen climate change talks in 2009 resulted in a pledge to limit global warming to 2 C, but time is running out to achieve this. Indeed, Lord Stern, chair of the Grantham Research Institute on Climate Change and the Environment, recently declared that technical progress at addressing climate change has come faster than anticipated, but the lack of global political will has become the biggest hurdle.

How Big Is the Challenge?

The effects of a 2 C rise in temperature from 2009 levels are considered broadly manageable. However, a rise of 4 C or more will be overwhelming. In order to stop any further rises in the amounts of carbon dioxide in the atmosphere, we would have to reduce our burning of fossil fuel in the region of 60% immediately. Even if this were possible, it would be an economic disaster.

To achieve the 2 C target, every person would have to limit their carbon dioxide creation to two tons a year. To put this in perspective, two tons is equivalent to each of the following:

  • The annual carbon dioxide emissions of a medium-sized passenger car

  • Heating a single-family home with four people

  • A return flight from Frankfurt to Los Angeles

  • The production of goods worth approximately €4,000 ($5,488.40)

In other words, with today’s energy supply, our two ton limit is exhausted with basic actions. The challenge ahead is steep.

Opportunities for Investors

Long-term policy goals to cut greenhouse gas emissions require nothing less than an industrial revolution to engineer a low-carbon economy. While the path to a low-carbon economy is predictable, it is not well-understood by equity markets.

Companies that offer products that will reduce the amount of energy consumed are already benefiting from the pressure to reduce emissions. Companies that manufacture low- and medium-voltage industrial equipment are benefiting, for example, as is the LED lighting market.

Other important areas include natural gas (which creates 50% lower carbon dioxide emissions than other fossil fuels), clean energy and sustainable transport.

From Mitigation to Adaptation

With international progress on global emission reductions falling so woefully short, it is increasingly accepted that the opportunity to limit warming to 2 C is rapidly disappearing. We therefore expect planning for adaptation to climate change to be a growing theme in the next two to three years, for both governments and companies.

Agriculture is an area that could be affected by the adaptation theme. More disruptive weather patterns and water shortages will hurt the supply of crops worldwide. The need to increase crop yields will thus be greater, increasing demand for companies whose products significantly enhance farmer productivity.

More generally, the preparedness and resilience of individual businesses will become an important component of profitability and equity valuation in the future. Resilience is hard to value in a financial model, yet it clearly has value. Companies with the best understanding of the implications of climate change on their business will become synonymous with quality.

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