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Climate Change as an Investment Thesis
On Monday, the
UN Intergovernmental Panel on Climate Change
(IPCC), issued a report saying that the planet will reach the crucial threshold of 1.5 degrees Celsius above pre-industrial levels by as early as 2030, precipitating the risk of extreme drought, wildfires, floods and food shortages for hundreds of millions of people. The report, three years in the making, highlights some of the consequences we're already seeing: extreme heatwaves, such as those just experienced across Europe this summer; more frequent or intense droughts, such as the one that nearly ran the taps dry in Cape Town, South Africa, and more frequent severe rainfall events such as hurricanes
Harvey and Florence in the United States. Here in California, this year alone, we've experienced 48 major wildfires that have burned at least 1,000 acres or more.
While officials are warning that i
nternational cooperation is imperative to limit carbon emissions and therefore the impact of global warming, others are taking a more pragmatic approach. This week, Bloomberg Businessweek reporter, Chris Flavelle, writes, "As the US grapples with a second straight year of record hurricanes, floods, and wildfires, a small but growing number of hedge funds, pension plans, and other investors are testing strategies to take advantage of those signs of climate change." So what do these investments look like? According to Flavelle, they include storm and flood protection along the coast, desalination plants in drought-prone regions, new approaches to agriculture, and even land far from the ocean for when rising seas shift the real estate market.
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In a similar vein, the Wall Street Journal ran an article just last week highlighting how the world of business and finance are starting to put a price on climate
change. Their focus was the insurance industry and they noted that big insurers are growing their teams of in-house climatologists, computer scientists
and statisticians to redesign models that will incorporate the effect of the warming earth on hailstorms, hurricanes, flooding
and wildfires. Natural disasters costing over $1 billion in damages has significantly increased over the last 40 years. The industry is now grappling with how to reflect this new reality in their premiums.
Some investors believe rising seas and worsening storms and droughts will create opportunities in health care, insurance, and agriculture. Consider what might happen to food production. As precipitation patterns change and oceans become more acidic, outdoor environments will become less reliable and more intolerant for crops or fish. Demand will increase for technologies that allow indoor agriculture and even aquaculture.
At New Market, we continually survey the landscape of investment opportunities and the idea of climate change as a potential investment thesis is something we too are exploring. In fact, our upcoming Strategic Discussions lunch will feature Wood Turner of Agriculture Capital. He is an expert in regenerative agricultural practices and risk management as it relates to climate change, water management, and the future of food production.
In the Businessweek article, Flavelle quips, "
If electric cars and clean energy aren't enough to prevent rising oceans, then there's money to be made in seawalls, indoor agriculture, and emergency housing."
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Equities experienced increased volatility last week as Treasury yields spiked and equity prices fell. Energy stocks, Financials and Utilities were the best performing sectors helped respectively by a rise in oil prices, a surge in long-term bond yields and a general rotation into defensive sectors. The strength of these three sectors helped value stocks outperform their growth counterparts - a rarity in this bull market.
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> The Yield Curve:
The yield on the benchmark 10-year Treasury note jumped from 3.06% at the end of trading the previous week to 3.25% in intraday trading Friday. That marked its highest level since the summer of 2011. The move appeared to be sparked by an interview with Federal Reserve Chairman Jerome Powell, in which he described the economy as "firing on all cylinders."
> Employment Report:
In a mixed report that keeps expectations for Federal Reserve policy in line, September payroll growth wasn't as strong as expected, but the unemployment rate went down to 3.7%, a 49-year low. Wages are showing steady - but not accelerating - pressure. Average hourly earnings rose an as-expected 0.3% in September for a year-over-year increase of 2.8%.
> Trade Balance:
Whether tariff effects are in play is uncertain. What is certain, at least for third-quarter GDP, is that the deficit in net exports is deepening at a substantial rate. The nation's international trade balance has been in continuous deficit since the 1980s. Yet trade, even in deficit, can still add to GDP provided the deficit is narrowing.
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 Food for Thought
As noted in the Observation article above, the "environment" for investors is changing, drastically. Temperature change, destructive fires, huge storms, lack of sufficient water, fallow farmland and inadequate food supply are real and growing concerns. These fundamental environmental changes are impacting the risk profile of many industries. But, they're also creating unique return opportunities.
Please join us for another though-provoking discussion as we explore these emerging investment opportunities.
Tuesday, October 23, 2018
12:00 - 1:30 pm
The Center Club
650 Town Center Drive
Costa Mesa, CA 92626
Click here to register today.
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New Market Wealth Management offers modern investment solutions backed by extensive research and experience serving the needs of wealthy families. Through our strategic partnership with
Cliffwater LLC
, we have access to institutional-quality research, investment due diligence and asset allocation tools. We believe this level of experience and unique access to in-depth, sophisticated research are essential for success in today's complex world markets.
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