Market Comment August 2021 - The Wurst of Change
The report on climate change of the United Nations was released earlier in August against the background of more destruction relating to climate change in Greece and Turkey. Since then, the complexities and little-known interrelationships of climate and weather patterns have taken a backseat to events unfolding in Afghanistan. Still, this summer has seen a significant increase in both human and economic cost arising from climate change. Enough to make you wonder whether you will be able to enjoy your glass of Chablis on a warm summer evening in the future. Analysis of the insurance industry has put the costs of weather-related disasters in the first half of this year at USD 40bn. This is often looked to as a cost of climate change and of course this is just a very small part of the overall economic cost. Climate change is adding to economic volatility for example through its impact on economic activity like the recent heat wave hitting the construction sector. It also has an influence on food prices and associated living standards which is an obvious reaction. All of that adds a risk premium into the economy which further undermines economic efficiency. This risk premium is potentially a significant economic problem, and therefore central banks are monitoring climate change when setting monetary policies. This is becoming a source of economic and investment uncertainty that has the potential to add volatility to the global economy and investors should expect policymakers to act or wish to be seen to act to counter both the volatility and the underlying causes of that volatility. This means that there will be substantial policies to tackle climate change which will likely seek to change the cost and rewards on specific forms of economic activities. There will also be gesture policies that play to the social media gallery and will not do very much. Investors need to pay attention to what policies are likely and what the costs of policy failures and omissions will likely be in determining their long-term investments. Scientists’ dire predictions have galvanized decision-makers to tackle the issue or more modestly attempt to solve some aspect of the complex issues one at the time. Money is amply available and is directed at a multitude of promising projects, ventures and initiatives. Many are early-day projects that lack proof-of-concept, or come with hitherto unproven technology, or are not (yet) economically or even ecologically viable or have not been scaled to have a meaningful impact as a solution to climate change. See this link for one of many exciting ventures: Climate change Some initiatives are government-led which generally come as bans on a specific activity or product such as a ban on single-use plastic cutlery, plates and cups in the EU and soon in the UK; others are industry-wide as the sums required dwarf the financial muscle of any major corporation such as building a web of pipelines in the US to store CO2 underground; still others are from individual companies ranging from Volkswagen to stop serving sausages at its headquarters in Wolfsburg as it tries to reduce its CO2 footprint to the more significant such as Maersk’s (the largest shipper on the planet) order of eight ships that can also run on “green” methanol. If you are confused trying to adapt your nest egg to a climate-neutral strategy, you are not alone. The financial industry has responded with a proliferation of fund solutions that aim to support green initiatives. However, the reality is that funds marketed as “climate themed” often hold shares in large polluters including big oil companies, and many are inconsistent with the goals of the Paris agreement despite claiming to be “aligned” with it. Implementing a climate-neutral investment strategy requires an in-depth analysis of each company until we have reliable and standardized investment criteria. Right now, poor quality or availability of data and analytics represent the biggest obstacle to sustainable investing. Change is a foot. The German in me can live without the Wurst but the French in me needs to adapt. In the not-too-distant future, my favourite Chablis will probably no longer come from Burgundy but from Devon instead, as winegrowers are moving north to milder climates.
Switzerland, September 1st, 2021