Investment Impacts of Climate Change

(3BL Media/Justmeans) - We’ve all heard a lot about what we can expect from a changing climate. There will be increased droughts and flooding, food prices will likely rise, as will the level of the ocean. Growing seasons will shift as will the migration patterns of animals. Some species will move into areas where they had not previously been found.

But what about things like our investments? How will the companies that we’ve put our faith in to provide for us in our retirement years, fare in a world that will look very different from the one we live in today.

A recent study by McKinsey&Company traced the cash flows of major public companies under three different climate change scenarios: expert case (aggressive climate reduction), executive case (worst imaginable impact) and business as usual.

Some of the findings are obvious. Demand for oil and gas will certainly fall in the expert scenario. The impact on upstream companies however, will only be from 5-15%, because of the short term nature of the valuations.

Some industries will do well. Building materials, like insulation, or other high efficiency elements will likely see improved demand. These industries could expects to see gains in the 35-80% range, unless the regulations requiring improved efficiency fail to materialize, in which case, 10% declines could happen.

The changing dynamics will certainly stir the pot in the transportation sector, creating winners and losers, though it’s difficult to predict exactly which is which from here. Fuel efficient vehicles, yes, but does that mean electric, fuel cell, diesel, hybrid, biofuels, or something else that we haven’t even heard of yet? Some regulatory interventions could raise costs leading to decline of as much as 65% to those that have fallen out of favor. Most carmakers seem to be hedging their bets these days, proving a diverse range of offerings, making sure that they can play in any of these scenarios.

The electronics industry, on the other hand, should fare pretty well, since product cycles are quick, producers are inherently adaptive and products can easily add “smarts” to improve efficiency.

A bi-partisan commission of economic and political leaders released a report last summer called, “Risky Business,” in which they warned of property damage due to flooding and extensive disruption of our agricultural system.

Tom Steyer, retired founder of Farallon Capital Management, who co-authored the report, said that investors need to "get to a place where the calculation of a value of a company includes how they are handling this problem."

An earlier report by PriceWaterhouse Coopers (PwC), said that uncertainty, which is not a friend to any business, would likely be the biggest impact. The report also predicts disruption of services, hunger, civil unrest, large numbers of refugees from low-lying areas, droughts and floods, government action, and the possibility of an open trade route through the Arctic to Asia. All of these can be expected to impact businesses in all kinds of ways.

Given these trends, it’s possible to imagine how they could potentially impact certain industries and companies. But don’t leave out the fact the company leaders are also thinking about this and could be, as perhaps they should be, actively repositioning themselves for the challenges they can be expected as we look down the road.

Just this week, the World Bank came out with a report stating that some climate impacts are now unavoidable, no matter what we do to reduce emissions. Impacts like sea level rise, are already locked in. Even if temperatures stay right where they are, sea level will eventually rise by over seven feet. Further increases will bring drastic results. A two degree Celsius rise is now predicted to cut the soybean crop yield in Brazil by 70% and the wheat yield by 50% by the year 2050. These types of impacts will adversely impact everyone, underscoring the urgent need for action now.

Image credit: forwardstl: Flickr Creative Commons