Investing in a changing climate
Some interesting climate news over the weekend, with US Department of Energy estimating that global CO2 emissions for 2010 increased by a massive 6% over 2009 making it a record year both in the pace of the increase and total emissions. We have also seen a number of studies recently which use statistical analysis to explore links between some weather events and climate change including the 2010 Russian heat wave, increased risk of extreme rainfall in the northern hemisphere and English floods in 2000.
What do these developments mean? For one thing, it shows that while reducing emissions is still very important, the time for adaptation has well and truly arrived. Adaptation has many faces, from building code and council policies which ensure new developments can cope with a different climate, to the expectation and planning for greater volatility in food prices, to updating heath service planning and resourcing needs.
For investors this means:
- assessing the risk to long lived assets (e.g. property and infrastructure) using Commonwealth Scientific and Industrial Research Organisation (CSIRO) and other analytical modelling;
- paying close attention to regulations that seek to respond to these changes (e.g. coastal councils around the country are putting in place retreat or defend policies which could seriously harm your asset’s value);
- revising assumptions in analytical models to include higher probabilities of disasters and disruptions; and
- applying the old rule of diversification to geography for investments where operations can be shut down due to extreme weather.
For example, while not being one of the events linked to climate change in the recent studies, the Queensland floods closed down many open cut coal mines for long periods of time. Investing in a single coal mine in Queensland would have eliminated those earnings for months, but geographically diversifying that risk will have lost money in Queensland but made more money in NSW as coal prices responded to the loss of supply.
This information has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances. The views expressed in this article are the opinions of the author at the time of writing and do not constitute a recommendation to act. Any information referenced in the article is believed to be accurate at the time of compilation and is provided by Perpetual in good faith. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor's capital.