Global Warming : Financial Implications
Posted by Allison on 5 April 2009, 10:59
Undoubtedly climate change is one of the biggest issues that faces the current global economy. It is something that affects everyone, although some experts warn that it will hit the poorest of the poor.
But for those involved in the financial markets, is the picture all gloom and doom? There are two sides to every story and sometimes it is very easy to get carried away with all the negative media attention that is devoted to the issue of global warming or climate change.
Indeed, there is also a tendency to just simply hope that it isn't going to happen. After all how can experts really predict the future? Or can there be some force for good to come out of what is potentially a very bleak future?
Some estimates indicate that within 50 years some of the poorest parts of Bangladesh will simply cease to exist. Where crops were once grown, there will simply be huge swathes of water.
How climate change will affect people in North America and throughout Europe is not yet known. However, one thing feels clear, life will change dramatically for many people and what is more, economies will experience a major impact as natural disasters increase.
Recent events in Burma and China demonstrate the tremendously negative effect that a natural disaster can have. The amount of aid that is involved in trying to feed, re-home and then rebuild areas where there has been a major disaster is always high and may indeed rise.
Many people assert that climates have always changed. Whilst this is true, climate change previously, has been the result of natural changes. In other words, the work of Mother Nature. This time is different, because this is the first time that man has caused the climate to change. In effect this means that we are dealing with something relatively unknown, which makes it just that little bit more frightening.
Europe may well be one of the worst areas to be hit, due to the fact it is warming 40 per cent quicker than the rest of the world. Europe has already seen quite a lot of damage that has been incurred by increased storms and floods.
Obviously it isn't possible to say exactly how much climate change is going to cost on a global basis, but the European Commission estimates in an official paper that the potential cost of global damage could be some 74 trillion Euros, unless urgent action is taken.
Yet there is also a human cost to climate change, since it is estimated that globally climate change may cause somewhere in the region of 160,000 deaths each year. If food and water become increasingly rare in some parts of the world it is likely that this figure may rise dramatically.
One aspect of climate change that more and more people are becoming aware of is the implications in terms of insurance. In 2004, there were a record number of storms, mainly tropical storms, which wreaked a significant amount of damage worldwide. This led to record numbers of insurance claims being submitted, which led to billions of dollars being paid out in insurance. The cost of these claims has to be met by someone and as a result, globally insurance premiums were increased, thus passing on the cost to the consumer.
A report undertaken by a leading economist in the United Kingdom, Sir Nicholas Stern indicated that global warming and climate change could result in the global economy shrinking by as much as 20 % in the next few years. Quite how the global economy would cope if this did become a reality, is quite hard to imagine, since 20 % is a huge figure. Could the global economy actually survive with a 20 % reduction in its size? Will there be huge areas of the world that simply do not have any economy at all? If that is the case, then how will people survive within these areas?
Presumably they will have to relocate and every developed country in the world is aware that mass immigration brings with it significant economic problems, unless the immigrants are all skilled. It is unlikely that skilled workforces will be moving around the world, it is more likely that it will be some of the poorest people and the world, who have lived on the edge of poverty all their lives and now will have to be supported within their host country.
This alone will seriously impact on the economies of the developed world. How will these people be housed? How will their children be educated? How will healthcare be provided for them? If they are unskilled, then how will they cope in terms of employment? Or will they have to be supported?
All these are very uncomfortable questions, however they need to be asked and this issue needs to be thought about now and we need to plan strategically, to be able to cope in the future, rather than immediate reactions after natural disasters have occurred.
Since the penny has started to drop that this issue really is not going to go away and urgently needs to be resolved, financial service providers have now been forced into thinking about what climate change means not just for their business, or their economy, but what it actually means for the world as a whole.
Many financial service providers will now provide businesses of all sizes and types with a risk assessment of how global warming and climate change may impact on their business. However, most of the businesses who are able to take advantage of this kind of risk assessment, are the big players in developed countries such as the United States, Canada, Europe and Australia. Many of the businesses around the world who will be significantly affected in a very direct manner, by global warming, simply do not have the financial resources to be able to have risk assessments undertaken. Even if they did, it is unlikely that they would be able to implement the recommendations, simply due to lack of finance. Yet there are literally millions of businesses worldwide that fall into this category. In effect, they are the least protected and yet the most likely to be affected by this issue.
China and India
The economies that are currently in the ascendancy, namely China and India have long since been charged with the accusation that they have ignored the issue of climate change. Sometimes this accusation seems to be somewhat hypocritical. It has been perfectly acceptable for the United States, Europe, Canada and all the other developed countries, to simply consume natural resources and contribute to the problem in the first place. In the west, there has been a long history of over-consumption and life styles may simply not be sustainable.
Yet when China and India begin to not just produce goods, but also to consume them and to start having aspirations about owning cars and having a range of material possessions, the West starts to point the finger at them and accuse them of not taking the issue of climate change seriously.
Due to the suspicions that China and India both hold with regard to Western civilisations, there is little dialogue happening on the ground, which means that we do not fully know exactly what measures they are taking (if any) to reduce Co2 emissions. We also don't know the true extent of the carbon footprint that both China and India create.
Until this dialogue becomes a real and meaningful one, both sides are likely to simply shrug their shoulders and point the finger at one another. This is hardly a constructive way forward and does little to address the real issues.
Yet so much of the discussion on climate change, global warming, and cutting Co2 emissions is all intensely negative, there is very often nothing but messages of gloom and doom. Admittedly, this is potentially a very serious situation. Some experts think that the best-case scenario is that we can adapt to living in an environment that is heating up very fast. Others predict that within 100 years life may be so different, that we almost would not recognise how we live today.
But it is possible, perhaps only just possible, that some good things can actually come from global change and even global warming, not as a direct result maybe, but as spin offs.
All businesses should be able to operate more efficiently because they may well be forced to reduce how much fuel and natural resources they use. Instead of thinking about profit in a vacuum, they will be forced to think about how they can reduce overheads in order to pay their bills for fuel and yet still make a profit. This may well present challenges to businesses, but it will be a reality in the next few years. But it will mean that they run at a level that has very low overheads and therefore there will be more room for profit.
There maybe some winners in the business of coping with climate change. For example some well-established water providers in Spain may actually see financial benefits from climate change, because the lack of water available, will provide them with an increased market. Other countries, particularly in hot countries will also have an increased need for water, so this market is likely to expand or new ways of conserving water will be found.
The use of hybrid or electric cars is due to double in the next few years, so people producing these cars will also win. There may even be new ways of fuelling cars that can be developed, with different types of fuel. Humans constantly adapt and change, so why should this situation be any different?
Although air travel may get more expensive, there will still be other ways of travelling and train/shipping companies etc all look well set up to adapt to taking increased numbers of travelers. So they too may see a sharp rise in profits.
Biofuels are now becoming of interest and those involved in making biofuel are seeing much more profits than they used to. They are also being expanded. Now there is increasing use of alternative crops to create biofuel. These could include some kinds of waste or even animal waste, who knows, but there are opportunities for both investment and profit and so these may well be come 'hotpicks' in terms of funding opportunities.
Producers of solar heating panels, wind generators and various other forms of alternative technology and equipment are likely to see a substantial rise in their profits, as are people producing any 'green' type of products.
Banks have adapted well to sustainability issues and are now looking at ways to sustain some parts of the world that have always needed aid, so there may also be opportunities for other financial sectors to do this. Since it can all be done electronically, there is no reason to fly out and meet face to face, so it is a sustainable way of doing business.
So instead of simply sitting back and either entering denial about the whole issue of global warming, or shrieking that it is far too late to turn the clock back, perhaps humans should be devoting more time and effort into making sure that there are new ways of doing things and new products around that will help to sustain the planet, whilst still driving forward economic growth.
Positive Challenges for Financial Markets
The positive challenges for those involved in financial markets are obviously the undertaking of risk assessments to companies who want to see what their level of risk will be in terms of climate change. But there are more opportunities than this. There is the possibility of new markets in the Third World and assisting them to meet the challenges of the changes that may happen.
Although there is a lot of poverty in Third World countries there is also much that can be offered to these people in terms of financial planning, saving opportunities, financing micro finance projects, or even green things, like funding a dam so that a village does not flood. That way the people can continue to live there, but the financial institution gets the long- term capital back from what should be now, a more sustainable community. These deals may not be multi million dollar deals, but if they eventually lead to governments in the Third World coming on board, then who knows, they may lead to considerable sums of money being made.
Advice can be provided to all types of businesses and organizations about ways in which they can bank, trade and do business in ways that are sustainable. Currently going green is very much in favour and people who are equipped with the skills to be able to offer specialised knowledge on the very complex issue of sustainable business, may in fact find that they are cornering a niche market.
Innovation has always been a driving force within the financial markets and there is no reason why this innovation cannot be challenged towards making sure that there are new business opportunities to be gained from advising and guiding businesses.
Many countries and therefore potentially millions of businesses risk being affected by global warming to some degree and yet because there is so much speculation associated with it, it is hard to know what will happen and what is simply conjecture.
Thus the financial sector can assist with long term financial planning, to ensure that as much as possible, businesses are ready to adapt to the changes that may come around. This can be done in conjunction with the risk assessments, or as an adjunct.
In effect the financial markets have been thrown an opportunity. In the economic stagnation that has resulted from the credit crunch that has hit the US and the whole of Europe, there is now some light at the end of the tunnel. Financial experts need to identify new ways of practising, developing and even potentially funding new ways in which the challenge of global warming and climate change can be met.
The issues of global warming and climate change are no longer the preserve of tree hugging environmentalists: these are mainstream issues and as such the financial market needs to be right at the front of the drive to turn the potentially negative aspects of climate change, into a very positive business experience.
Yes, there may well be some uncomfortable aspects to some of the issues that currently face the planet, particularly if people have to use their cars and travel less. But innovation may well help to ensure that more and more businesses are equipped to deal with the situation in a way that will ensure that everyone copes and adapts to the changes.
The next few years will therefore be interesting for anyone working in financial markets or planning: just how interesting we have yet to see!