A major new global financial report finds that investors who remain ignorant of or deny climate science will be big money losers compared to those who are climate-savvy.
The Mercer Research report, “Investing in a Time of Climate Change,” details the prospects — and the pitfalls — of various climate scenarios. For the report, “Mercer collaborated with 16 investment partners, collectively responsible for more than US$1.5 trillion, to produce the report,” including Germany’s Ministry for Economic Cooperation and Development and “the private sector arm of the World Bank Group.”
A Bloomberg column by investment guru Barry Ritholtz summed up the report: “In the real world, climate-change deniers are and will be giant money losers.”
The report has several key findings. Clearly, “climate change will give rise to investment winners and losers.” Some industries, like coal, will likely see average annual returns over the next decade “eroding between 26% and 138%,” depending on how aggressively the world attempts to fight climate change. Other industries, like renewables, could see average annual returns increase by up to 97 percent over the 10-year period — if the world does seriously move toward a 2°C pathway coming out of the Paris climate talks this December.
The report identifies three phases investors may go through — “Climate-Unaware Future Takers,” “Climate-Aware Future Takers,” and finally “Climate-Aware Future Makers”:
A key goal of the report is to get investors to “progress along these phases to the extent they can.” Significantly, if investors make it to the final phase — the “future makers” — they “feel compelled by the magnitude of the longer-term risk of climate change to seek to influence which scenario comes to pass.”
Some investors might become “future makers” because they feel compelled as human beings to try to minimize the potential harm to billions of other people. But the study makes clear you don’t have to be altruistic to desire a 2°C future. Strictly from an investment perspective, the sustainable path is much better than the catastrophic one:
“A 2°C scenario does not have negative return implications for long-term diversified investors at a total portfolio level over the period modelled (to 2050), and is expected to better protect long-term returns beyond this timeframe,” the report states.
Mercer finds that “A 2°C scenario could see return benefits for emerging market equities, infrastructure, real estate, timber and agriculture” whereas “4°C scenario could negatively impact emerging market equities, real estate, timber and agriculture.” In other words, Dust-Bowlification is bad for business.
For those out there who think that somehow the market has already priced-in climate risk, Helga Birgden, Mercer’s Global Responsible Investment Business Leader, explains: “We recognize that markets do not always price in change; they are notoriously poor at anticipating incremental structural change and long-term downside risk until it is upon us.”
Or you can just look at the rapidly rising prices for coastal property in Miami, especially luxury condos, to see that markets seem far more predisposed towards bubbles than towards climate reality. And who will be the biggest losers? As John Van Leer, a University of Miami oceanographer, explained in 2013, it is going to get harder and harder to insure and sell coastal homes.
“If buyers can’t insure it, they can’t get a mortgage on it,” he told National Geographic. “And if they can’t get a mortgage, you can only sell to cash buyers. What I’m looking for is a climate-change denier with a lot of money.”
And that was precisely the point investment guru Barry Ritholtz made in his Bloomberg column about the Mercer report.
“I expect those who suffer from cognitive dissonance over whether global warming is real will soon be greeted by a brutal Darwinian result in the markets,” he writes.”I don’t make many forecasts but here is one: It is only a matter of time before the deniers exist only in think tanks funded by the fossil energy industry and oddball conspiracy groups.”
Let’s hope that is sooner rather than later, for all our sakes.