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Why Investors Are Betting on Climate Change

Sebastian Foot
Oct 23, 2018

Smart Building 5

While electric cars and clean energy are technologies that will contribute to reducing long-term pollution levels, some investors are now taking the view that climate change is here to stay. The recent volatile weather patterns combined with data demonstrating 2017 greenhouse gas emissions reaching record levels has created a new opportunity for a growing number of investors: adaptation. 

Going Long on Adaptation

“There is no way at this point to stop climate change. Pretty much every system is going to have to change,” said James Everette, partner at Ecosystem Integrity Fund in an interview with Bloomberg. While we used to imagine that investing in sand bags was a little comical, building sea walls is now a practical reality. The challenge is they’re expensive. A recent JP Morgan investor note assessed the impacts of climate change, and highlighted that the cost of building a storm surge barrier system to protect New York was $2.7 million per meter. When these projects come to fruition the private sector will play a significant role in their financing. 

While many still see adaptation as an investment theme for the future for a growing number of venture capital firms, traders, and insurers the opportunity is already here. 

Short-Term Hedges Are Expensive

Companies have become increasingly aware that short-term weather volatility creates risks for their business. Agriculture, energy, health, and tourism sectors are now all to some degree having to price in the cost of this uncertainty. For example, US water utilities concerned about unpredictable precipitation levels are now taking out weather risk insurance products to help them manage extreme weather. According to Bloomberg, in 2017 the demand for extreme weather insurance doubled. There are also insurance products that have been launched to help energy companies manage the present risk of wildfires, which are becoming a regular feature of US summers. And while insurance helps a large utility to mitigate some weather risk it is not a cover all. In the long-term, these businesses will have to redefine their own medium-term investment plans to adapt. 

Some food manufacturers are skipping insurance altogether. Seeing the effect that changing weather patterns are having on agriculture, they have begun implementing new risk management strategies to diversify the number of producers they work with and the regions they source from.  

Going Long on Adaptation

“I think we are 40 years into a 100-year transition to a clean finance economy. The momentum is going in our favor and we are succeeding,” said Michael Eckhart, Managing Director and Global Head of Finance and Sustainability at Citibank in an interview

While the low carbon economy continues to build momentum, investment in adaptation measures is relatively new. As a result, the investor type active in the space is applying risk capital in order to seek high and perhaps speculative returns. But as the field matures and we begin to connect the dots between evolving weather patterns and their impact on the global economy, the opportunities to invest in adaptation will become visceral. 

Pension funds have the most challenging job of all. They will need to ensure that their long-term liabilities (e.g., pension payments) can continue to be met under increasingly volatile market conditions, which are likely to be compounded by more severe weather patterns. Equally, they are also uniquely placed to support investment into adaptation: their patient capital will be needed to enable the long-term investments we will have to make, like the storm surge barrier for New York.