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How Climate Change Will Greatly Impact the Global Economy

Recently, Schroders Economics Group released its Climate Change Survey 2016, which supplemented its report on The Impact of Climate Change on the Global Economy. Schroders sent the survey to 18 investment banks and brokerage firms, and received five responses, all of which stated that global warming presents an “Extremely Significant” or “Significant” threat to the global economy in the current century. Several negative effects are expected, most notably inflationary pressures.

Implications for Everyone:

As a result of global warming, prices of several goods and services are expected to increase. Food and water prices will increase due to reduced output per worker, agricultural production, and healthy water supply.

As oceans continue to rise and low lying areas are submerged, reduced land availability and mass migration will increase the cost of land.

Energy costs will increase as more extreme temperatures increase heating and cooling costs.

Insurance costs are already increasing and will continue to rise. Payouts from extreme weather events such as Hurricane Katrina and Superstorm Sandy have hurt companies’ profits and they are reacting accordingly. For example, in Gulf Coast states, flood insurance costs for customers have risen significantly.

Implications for Investors:

Several academic studies provide various estimates of annual losses in GDP in the current century due to global warming. However, most investment analysts do not account for these losses in their forecasting models. One assumption investment analysts make when estimating a company’s performance is that the company will continue operating and growing into perpetuity. Without accounting for the estimated losses in companies’ growth prospects due to climate change, analysts’ current company valuations may be overestimated.

Companies’ equity stock will decrease due to the added costs to repair damage to property and infrastructure. Consequently, equity investors will suffer losses.

Debt investors will suffer due to increased inflation because the purchasing power of fixed coupon payments is reduced as inflation increases.

Moving Forward…What Can We Do?

Shareholders can use their voting power to encourage the Board of Directors to align managers’ compensation with long-term, climate change mitigating goals.

In order to provide more accurate fundamental data for investors, investment analysts must start incorporating the economic effects of climate change into their forecasting models.

Many economists agree that a government policy incorporating a carbon pricing or carbon credit trading model will reduce carbon emissions. These policies properly reallocate external spillover costs back to the companies (i.e. companies pay for the negative environmental and health effects we as individuals incur).

The Bigger Picture

Because analysts view individual companies as “going concerns” that will exist into perpetuity, they are not alarmed when companies make large capital expenditures now, with the expectation that cash returns will exceed the initial up-front cost. Likewise, the earth is a “going concern” and will exist into perpetuity. Therefore, governments can also make large capital expenditures now and expect to receive cash returns in excess of the initial cost.

Alternatively, the future cost of not investing in climate change mitigation may be much higher than the savings today.

Washington Advocacy Trip: Part 3

Sometimes you have to meet where you have to meet. Representative Beyer of Virginia is one of the new kids on the block. Because of that, his office space is limited. So, when we met with his staff on Wednesday, our meeting room doubled as a storage locker.

Wednesday morning started off with a visit to the White House Conference Center complex, including going thru a secret service checkpoint. The White House had extra security because the Japanese Prime Minister was in town. We met with folks from the Council on Environmental Quality whose focus is on climate, public health and resilience. I found it interesting that the word resilience was used often by members of the administration, both from CEQ and Agriculture.

The EPA’s Clean Power Plan also was big on their agenda. Basically, they’re looking to reduce carbon dioxide emissions to 30% below 2005 levels over the next fifteen years. States are given the choice of how they do it – solar, wind, geothermal, energy efficiency, etc – or a combination. We believe that the plan will be a big job generator as states take action to implement the plan.

A little later in the day, we met with Undersecretary of Agriculture, Robert Bonnie. He reiterated to us that the President is personally very engaged on climate change and energy solutions. He said that the Forest Services sometimes spends as much as 50% of it’s budget on fire fighting – a direct result of a warming climate. From the agriculture perspective, Undersecretary Bonnie is focused on:

  • Resilience
  • Rural development banks
  • Market-based approaches to climate problems
  • Working in social impact investing on agriculture and natural resources
  • Energy efficiency loan program
  • Quantifying greenhouse gas emissions from agricultural practices across the country
  • Providing solutions for emissions offsets.
A plaque on Representative Morgan Griffith's wall

A plaque on Representative Morgan Griffith’s wall

We rounded out our advocacy trip by heading back to the Hill and visiting with five House of Representatives offices. We met with staff from both sides of the aisle again, and were greeted with interest and good questions.

General Seip was our expert on military research and use of renewable energy. I enjoyed working with him, because he’s been at the front lines of our energy supply. When he was overseeing the air war in Iraq, his charges had to protect the convoys supplying oil to the ground troops. He said lots of soldiers were lost delivering and protecting the oil. He strongly advocated for continued research into advanced biofuels and other renewable energy technologies by the military as a matter of national security and to avoid putting more soldiers in harms way.

We wrapped up our visit with a tour of the Capitol and the viewing galleries of both the House and Senate.

Overall, it was outstanding trip. I learned much about advocating for causes, engaging with lawmakers and the overall governmental process in Washington. Given the opportunity, I would gladly head back.

Washington Advocacy Trip: Part 1

I arrived in Washington DC last week to join 20 other business leaders as part of E2 (Environmental Entrepreneurs) advocacy week. This was a very dynamic and accomplished group and I was honored to be a part it.

They broke us up into teams and again, I was amazed at the quality of individuals they had assembled. My team included:

  • Marc Boom, the E2 Director of Advocacy
  • Mark Bauhaus, a technology veteran from silicon valley, and partner at JustBusiness
  • Ethan Garber, CEO of IdleAir
  • Norm Seip, USAF Lieutenant General (Ret), national security consultant
Our team in the Russell Senate Office Building

Our team in the Russell Senate Office Building

We had multiple objectives for our meetings:

  • Demonstrate to legislators and the administration the importance of marrying economic and environmental interests.
  • Establish relationships with legislators on both sides of the aisle.
  • Discuss our policy agenda which include
    • The importance of incentives and renewable energy tax credits
    • Clean energy financing opportunities
    • Climate Change legislation and rules
    • The EPA Clean Power Plan
    • A Transportation Bill that is sustainable both financially and environmentally
    • Continued support for the military’s research into renewable energy

A couple of very busy days awaited of us after our briefing on Monday night. Part 2 will go over our first day of advocacy…

What if it’s all a hoax?

This is one of my favorite cartoons from Joel Pett. He offers a great question, what if it’s all a hoax?

Personally, I do not believe it’s a hoax because the data supports scientists’ claims of man-made climate change. So, I guess it’s not that I “believe,” it’s that the hypothesis has been validated by the vast majority of scientists (around 97%.)

Admiral David Titley expresses the same sentiment in an article I read this morning, “People ask me if I ‘got religion,’” Titley said. “No, I don’t ‘believe in climate change – I’m convinced by the evidence.” Read the article

But to go back to the original cartoon, what if it’s a hoax? Some claim that proactively addressing the issue will ruin the economy, but the World Bank has shown those claims to be untrue and even said that tackling climate change would grow the global economy. Read the article

Furthermore, studies continue to show significant clean energy jobs growth. Our friends at E2 are keeping on top of this. More information

So again, what if it’s a hoax and all of these scientists are wrong? Well, unless you’re the CEO of a fossil-fuel company whose very existence (not to mention multi-million dollar compensation package) is in jeopardy, there’s really not much to complain about:

       Energy independence

       Preserve rainforests

       Sustainability

       Green jobs

       Livable cities

       Renewables

       Clean water & air

       Healthy children

       Etc, etc

So let’s focus on the positives, nurture the opportunities and make the world a better place – together.

Peter Krull is President and Founder of Krull & Company, an Asheville, NC-based socially and environmentally responsible investment management firm. For more information, visit www.investwithyourvalues.com