The Current Climate
Climate change is widely considered to be one of the most important global factors of our time. Heather Connon considers how it could, and is, affecting the markets and investors
Sir Nicholas Stern, the British economist, academic and Government advisor, warned in his Economics of ClimateChange review that global warming could slice as much as a tenth from global economic output within the next century, while around 45,000 British householders witnessed what might be considered a more immediate impact as they lodged claims for almost £3bn of losses from the summer floods that caused chaos in parts of the UK.
Climate change is a major topic and many people think that it is one of the most serious issues affecting the world's future. During the last century, the earth's temperature has risen by 0.6 degrees Celsius, helping to increase sea levels by between 10 and 20 centimetres, while the Arctic ice has thinned by as much as 40 per cent. While Britain suffered under the weight of the summer rain, Australia and parts of the USA were suffering their worst droughts ever. Experts are still debating how much of this is due to climate change, and argue about how best to mitigate its effects, but all of them agree it will have a significant impact on everything from rainfall patterns to the availability of food across the globe.
That means climate change is something that investors also have to be aware of. It is likely to affect virtually all companies in some way, whether this is through paying for the extra cost of complying with the welter of new regulations that are being imposed by governments around the world, or upgrading production facilities to cope with increasingly stringent emissions controls.
There will be some winners too; already, companies are pioneering innovative energy technologies that are much in demand and businesses will be able to reap benefits from adapting their existing activities to help conserve the world's scarce resources.
The summer's heavy flooding in the UK highlighted one of the industries that is most likely to be worst affected - insurance. The cost of repairing houses and compensating businesses for loss of income during the worst floods for 60 years has been put at almost £3bn. Globally, insurers paid out more than $80bn (£39bn) two years ago following three US hurricanes, including the devastating Hurricane Katrina.
The Association of British Insurers (ABI) thinks these costs could rise dramatically: it estimates that, if the worst case predictions of a doubling of carbon dioxide emissions prove correct, the annual costs of flooding in Britain could be 15 times higher by the 2080s. The costs of other kinds of natural disasters would also start to rise; overall, the ABI estimates that the annual cost of the three predominant global storm types - hurricanes, typhoons and European wind storms - could rise by as much as two-thirds to reach $27bn globally by the 2080s.
Paying for these rising losses requires extra capital. The ABI estimates that the industry would need an increase in capital of at least 80 per cent to cover the difference between average and extreme years of weather-related losses across the world. And customers' premiums would have to rise by an average of 60 per cent.
Small wonder, then, that the industry has begun pressing for urgent action to tackle emissions. "These changes are dramatic and will have a profound impact on our lifestyles as well as our economy," comments the ABI. "Business has a responsibility to manage its own climate risks but can only do so when government provides the right framework of legislation, regulation and public spending."
That warning also highlights where the potential winners in all this will come from: combating climate change has become an industry in itself as new companies pioneer modern technologies designed for using energy more efficiently while established companies adapt their own products and systems to achieve the same ends.
Kirsteen Lothian, an investment manager with the Global Team at Baillie Gifford, says that investors are paying close attention to climate change. "There is money to be made and there are opportunities out there," she says. "The real skill, however, is spotting which companies will be successful."
The growing number of companies in the alternative energy sector seem to be the most obvious immediate beneficiaries. A host of companies are seeking to harness solar, wave or wind power, encouraged by government subsidies which are aimed at meeting targets for power generation from renewable sources - the European Union recently agreed on a target of a 20 per cent increase in the use of renewables for fuel by 2020. Danish company Vestas, for example, started making wind turbines less than 30 years ago and it is now the leading wind turbine company with a quarter of the global market; Q-Cells, established in 1999, is even younger but is now the second-largest solar cell manufacturer in the world and accounts for almost half the European market.
Lothian warns that the long-term success of some of these companies does depend on governments maintaining their commitment to combat the impact of climate change. However, with countries across the world setting targets to reduce emissions, the indications suggest that it will remain a growth industry for some time.
But there are many long-established, large companies that are also finding ways to profit from climate change. Take General Electric, the US industrial giant. Along with companies such as Bechtel, it is developing Integrated Gasification Combined Cycle power plants - a process that makes far more efficient use of coal, and has far lower emissions than conventional power plants.
At the other end of the scale is Smith Electric Vehicles, a subsidiary of the British company Tanfield. It has been supplying battery-operated milk floats since 1920 and is extending the technology with the launch of zero-emission vehicles that have already won orders from an array of companies including Royal Mail and Sainsbury's. There are many other companies also looking at fresh ways of making transport more energy efficient: Lexus, from the same stable as Toyota, is leading the field in the production of hybrid vehicles, while Boeing boasts the environmental benefits of its 787 Dreamliner plane which, made of lightweight carbon fibre rather than aluminium, will result in 20 per cent less carbon emissions.
Global warming is also affecting the food we eat in two ways. First, floods, heatwaves and other unusual weather patterns can wreak havoc with crops; our own floods destroyed large parts of the annual harvest of everything from peas to potatoes, while in Serbia, for example, more than 30 per cent of the annual harvest has been affected by extreme heat. At the same time, demand for basic foodstuffs is growing - and not just because an increasingly wealthy population in China, and the other rapidly emerging countries, is able to afford a greater range and quantity of food. Agricultural products, such as sugar, corn and barley, are now being used as fuel for power plants and cars, as well as for sustenance.
Biofuels are becoming big business: the Government and the European Union have set targets that 10 per cent of cars should be using biofuels by 2020, while Associated British Foods recently announced a £200m project to build a biofuels plant near Hull. In the USA, the government is committed to increasing the use of biofuels to reduce its dependence on imported fuels - and it is estimated that more than 30 per cent of the country's maize crop is already used for ethanol production rather than food. This provides an opportunity for companies such as Deere & Co, which supplies half of North America's farm equipment, or Monsanto, one of the leading agricultural companies, which is working on various initiatives - including the development of more strains of drought-tolerant familiar crops.
But a switch to ethanol is not a trouble-free way to shift from high-carbon fuels: there have already been food riots in Mexico as the price of corn rose by 50 per cent in anticipation of the increased demand for ethanol production. There is also concern a total shift to crops such as corn and palm oil, which are suitable for converting into ethanol, will reduce the biodiversity of the countryside and impact on its wildlife.
Not all the companies benefiting from the green revolution are involved in power or transportation, though. Marks & Spencer scored a publicity coup when it announced a 100-point programme, committing itself to a range of environmental targets. These included increasing its energy efficiency by 25 per cent, reducing its packaging by the same amount and using recycled plastic for clothes - the first pair of trousers made from such fabric were launched in the summer. While the initiative won Marks & Spencer a great deal of favourable publicity, it should also save the company money long term. A growing number of companies recognise that climate change provides a business opportunity, as well as a cost: educated investors can use this to their advantage.
Investment markets, including currency exchange rates, can go down as well as up and market conditions can change rapidly. The views that are expressed in this article should not be taken as statements of fact and no reliance should be placed upon these when investment decisions are made.
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