25 Sep 2024

New report highlights climate as driver of investment environment over next several decades

Investcorp today published a new paper “The Other Sea Change,” authored by Head of Climate Solutions James Socas, that makes the case for climate change being the most important and profound investment shift of the next several decades, posing enormous opportunity for well positioned companies and the potential for enormous risk to holdings on the wrong side of warming and weather trends.

Although global average temperatures have been setting new records, and weather anomalies are evident around the world, the memo argues that many investors continue to view climate issues as a long way off versus important near-term factors.

In a respectful nod to Howard Marks and his own recent “Sea Change” thesis, the paper argues that it is climate more than any other factor that is the sea change – a sweeping alteration of the investment environment – calling for significant capital reallocation.

The memo lays out the critical data – the carbon budget and annual global emissions – that show that crossing of the 1.5°C warming limit is a virtual certainty in the near term. The numbers strongly imply that warming of 2.0°C or more is likely. However, the memo notes:

• Our research indicates that few firms have modelled what their business or portfolio would or should look like in a world of much higher sustained levels of global warming, the way they might model the implications of sustained higher inflation, political realignment, or the impact of AI.

• The increase in global average temperature is a science-based certainty with a very high impact on investments in every asset class. It has more certainty than most macroeconomic forecasts, demographic changes, political analyses, or earnings projections that investors use for decision-making.

• The high degree of certainty implied by the climate data calls for a significant capital reallocation. Legacy investments will need to be evaluated, repositioned or sold based on the risks of physical property loss, demand destruction, or stranded assets. We believe that new climate-aligned investments and “adaptation” spending will enjoy accelerating tailwinds from market demand and what will be highly supportive government policies.

To download “The Other Sea Change,” click here.

Some examples of what we believe the shift may include:

From	To
Carbon emissions are an “externality” – not a factor in economic decisions	Emissions are priced into all products and services, raising the costs on emissions-intensive products
Tenants and owners prize location-based, trophy commercial properties	Tenants and owners require LEED-certified, energy efficient buildings
Peacetime footing – governments encourage change through incentives and persuasion	Wartime footing – governments force change as stopping warming becomes a national priority
Water is abundant, available and cheap	Water is scarce, rationed, and costly
Invest in economically resilient assets – well positioned for the ups and downs of the business cycle	Invest in climate resilient assets – well positioned for extreme weather, heat and drought
Stores of value are gold, diamonds, art	Stores of value are arable land, water rights
Insurers underwrite based on standard, back-tested actuarial models – pricing is predictable	Insurers struggle to underwrite climate risk as historic data no longer accurate predictor – prices rise sharply
Most valuable real estate = beachfront properties	Least valuable (and un-insurable) real estate = beachfront properties
Timberland valued for wood value	Timberland valued for carbon credit value
Most important macro statistics are monthly jobs report, inflation, GDP growth	Global average temperature, atmospheric CO2, and emissions growth are added to the list
Retire in the south – Florida, Spain	Retire in the north – Vermont, Canada
Investors arbitrage market risks	Investors arbitrage weather risks
Hedge funds hire smart “rocket scientists”	Hedge funds hire smart “climate scientists”
Business travel frequent, as needed	Business travel rare, only as required
Fastest growing cities are in the Sunbelt – Austin, Phoenix, Orlando, Houston	Fastest growing cities are in the Rustbelt – Minneapolis, Buffalo, Detroit