Hi All,
This is a bold statement, but I believe the market is significantly mis-pricing the risks around climate change from several angles (see below). I think it's relatively uncontroversial to suggest that capitalism in general has trouble dealing with negative externalities. My investment hypothesis is that certain industries are in effect taking on increasing, uncompensated, and unacknowledged climate risk every year (e.g. insurance, oil supermajors, coastal real estate holding companies, etc.). At the same time, other industries (e.g. clean technology, water processing / desalination, etc.) have increased upside given the nature of these risks.
- Disruption to Insurance / Re-insurance organizations: Increased risk of catastrophic disasters means that either insurance companies either a) raise premiums or b) limit their coverage. Climate change causes global insurance companies significant issues because it is a correlated risk, i.e. there is an increased chance of flooding in Thailand and hurricanes in the Gulf.
- Coastal Real Estate: I'm not suggesting that cities will be underwater in the near term, but long before that situation occurs vast stretches of high value, coastal properties will be ineligible for insurance and may suffer a massive decrease in value (how many people can / will self-insure a high risk million dollar property?).
- Government Bonds: Governments will be forced to spend heavily to either a) mitigate climate change through infrastructure projects and/or b) compensate or assume financial liabilities to avoid financial panic and protect vested interests. We are seeing early signs of this in the fight over federal flood zones in the US and reforming the federal flood insurance program. Developed governments will fund these efforts with large new bond issuances, which eventually may cause investors to demand higher yields.
- Oil Supermajors: As climate change costs rise, governments will face political and financial pressure to recoup money from the companies "at fault". This may take the form of carbon taxes, direct penalties, etc. Even if governments fail to take action state / private class action law suits will proliferate as affected individuals attempt to recoup losses. An early sign of this is the lawsuits around the California wildfires and PG&E (although obviously this is a utility).
- Tax Rates: Given high debt levels and current account deficits during an economic "expansion", developed countries are ill-prepared to face a general recession. The debt issue will only compound as governments also face increasing financial pressure from climate change adaption and assumed liabilities. As a consequence, governments will likely raise revenue through overt or de facto tax rate hikes. Political pressure will force governments to consider taxing corporations and ultra high net worth individuals first.
To hedge this risk I am investing 20% of my portfolio in renewable MLPs, clean technology ETFs, and private infrastructure companies. Although historically these asset classes have lagged broader market benchmarks, I believe we will start to see political pressure to invest dramatically in these areas, e.g. the Green New Deal. More importantly I think governments will attempt to finance large scale climate adaption projects via public-private partnerships due to budget constraints.
Note: my timeline for investments is 10-20 years. I do not foresee significant climate impacts in the next several years, although there are a number of climate non-linearities that we simply don't know / cannot model (e.g. melting permafrost releasing significant amounts of methane into the atmosphere leading to a dire feedback cycle).
Thoughts?
Submitted April 01, 2019 at 06:06PM by cooleddy89 https://ift.tt/2I5R0Ht
