What if Greta is Right?

Teen climate activist Greta Thunberg has developed a high profile over the last year winning Time Magazine’s prestigious Person of the Year award in 2019 and speaking at many conferences, including most recently the World Economic Forum in Davos.

Greta’s message is simple.  The world needs to drastically reduce its emissions of greenhouse gases, principally carbon dioxide, and quickly.  The question is what happens if emissions are not reduced sufficiently and what is the necessary time frame to effect the reduction?  Greta says there is a global “carbon budget” which is the maximum amount of carbon the world can convert to carbon dioxide before the levels of atmospheric carbon dioxide hit a point where they are so high it becomes impossible to contain global warming and the change will be irreversible, unstable and uncontrollable.  Greta believes such a situation will probably lead to extreme weather patterns that it affects human civilisation as we presently know it.  According to figures cited by Greta, at the current rate of carbon dioxide emissions, the point where the “carbon budget” is fully expended is eight and a half years away.

Assuming Greta is right, what are the implications?  It is unlikely the extreme weather patterns she cites will suddenly appear out of nowhere in eight and a half years’ time. It is far more likely the world moves progressively from its current weather patterns to these more extreme ones.  What this will mean in practical terms is the current bush fires in Australia not only become the norm but become more extreme and more severe over the next few years; similarly, with droughts, floods, violent storms and other extreme weather conditions both in Australia and globally.

A logical response to these worsening weather-related incidents will be increased actions by governments.  As we saw with the Australian bush fires, politically having no climate change policy and doing very little as Australia topped the list of the world’s largest carbon polluters on a per capita basis was largely an electoral asset to the Coalition government in the May 2019 elections campaigning on the negative economic impacts of addressing climate change. However, this lack of coherent policy has now turned into a political liability.  Likely action, when and if it is taken, will centre on reducing the use of fossil fuels, which Amicus believes ultimately must be to make polluters pay for the costs of the pollution they are creating and thus provide economic incentives for them to pollute less within a market economy.

Even if Greta is “half right”, the results of increased carbon pollution will most likely be the same but only over a longer time frame.  The populace in each country will demand their governments take action to reduce emissions and the extremity of these actions will be proportional to the severity of the weather-related incidents those countries are experiencing.  The economic and social pain of taking action (e.g. loss of jobs by closing coal mines, transitioning to electric cars and flying less) will be balanced by the economic and social pain of not taking action (e.g. bush fires, floods, droughts, storms and rising sea levels).  Effects are unlikely to be confined within national borders.  Accounting for the costs of pollution will probably affect global trade, with importing countries charging exporting countries for the pollution caused by the manufacture and transport of their imported goods to put them on an even playing field with domestic industries where the domestic government already make these domestic polluters pay.

Amicus believes this will create both investment risks and opportunities.  For conservative Australian investors who generally place monies with banks and other authorised deposit taking institutions, the immediate risks will be limited.  Smaller ADI’s have balance sheets largely dominated by residential mortgages and unless there are large exposures to rural properties in fire or flood affected areas, the risk is confined to the overall economic impacts of a global or domestic recession causing falling house prices and rising unemployment.  This does not seem an immediate threat. 

The major banks will have exposures to fossil fuel industries, but these are likely to be tightly managed and many of these are to integrated companies, such as AGL who are transitioning from fossil fuels to renewables so they may themselves benefit from the transition if they manage their businesses well.  Loan losses, if they occur, can likely be contained.  Last week, the Bank of International Settlements in their “Green Swan” paper suggested there was a risk central banks would need to purchase loans made by commercial banks to coal mines and power stations to avert another financial crisis. Amicus thinks this is unlikely in Australia as the major banks are robust financially and have only moderate exposures. ANZ announced in early January it was shedding about $700 million of its exposure to thermal coal in the next four years, bringing its total exposure down to under $300 million, a figure comparable to those of CBA and NAB.

A third set of ADI’s are those linked to insurance companies (AMP, Suncorp, etc). Again these risks are likely manageable because these companies will themselves re-insure their risks and manage them as part of a wider diversified portfolio.  Further, many weather related risks will simply become “uninsurable” as insurers withdraw from the market so risk will be transferred to the home-owner who is forced to bear the financial risk of choosing to live in a bush fire prone area (or one prone to flooding or storms) rather than investors in the insurance company.

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