Global warming - a hot topic for investors

 , Jan 15, 2007

By Kenny Tang and Ruth Yeoh, Financial Times

The review of the economics of climate change by Sir Nicholas Stern, the former chief economist of the World Bank, has been hailed as the most comprehensive study of the subject ever undertaken. The report's originality is that, while no one can be certain about the trajectory of the growth of carbon emissions and their relationship with global warming, it connects the economics of uncertainty and risk to the global economic impact of climate change.

The key premise is that the benefits of strong early action on climate change outweigh the costs. If we are fortunate, the world might escape with a 5 per cent fall in global GDP and millions of deaths from the economic impact of climate change. If we are not so lucky, there could be a 20 per cent drop in global GDP, mass starvation and hundreds of millions of deaths.

Stern's overall message is clear: richer countries must cut carbon emissions, and cut now. He warns that if no action is taken floods from rising sea levels could displace up to 100m people, while melting glaciers could cause water shortages for one in six of the world's population and droughts could create tens or hundreds of millions of "climate refugees".

According to Anthony Wilkinson, principal at Asian hedge fund Clean Resources Asia: "The defence of vested interests remains stubborn in many countries. The tide needs to turn more quickly for [developing countries in] Asia to avoid seriously constraining future economic growth, growing social instability and mounting health costs".

So, in view of the warnings, who are the likely winners?

The key is water. Water from melting glaciers will initially increase flood risk but thereafter supplies will be severely reduced through the elimination of its original sources, eventually threatening one-sixth of the world's population in China, India and South America.

Higher temperatures will affect water supplies and cause declining crop yields - in Africa, this could potentially leave hundreds of millions without the ability to produce food. At least 200m people may become permanently displaced due to rising sea levels, heavier floods and more intense droughts. There are already areas of stress on water resources in many countries because of rising demand from growing populations and economic activity; climate change exacerbates the situation.

The obvious winners will be those in water. Investors are already starting to realise that water will become an increasingly scarce commodity. An acute water crisis is looming: China, as an example, is set to use up to 89 per cent of its available water resources by 2030. Foreign investment has been trickling into the country's state-dominated water industry, as Beijing plans to shift part of the financial burden to the private sector, and foreign companies can bring in managerial expertise and technology.

The demand for fresh water already exceeds the supply in many areas, a condition that can only worsen as the population expands and industrialisation reaches more countries. This will drive large investments in the water sector, with the UN anticipating infrastructure investments to increase from $75bn (58bn, ?39bn) to $180bn a year by 2025.

The Stern Review reinforces the critical role of water in relation to the potential effects of climate change. The other obvious winners are those in renewable energy and in the capture of carbon and storage. The latter has the potential to significantly reduce emissions from fossil fuel power generation and is likely to prove a critical technology in global carbon reduction strategies, particularly for developing countries with fast-growing economies and rapidly growing fossil fuel consumption.

Some important markets will be created as we struggle to adapt. These are likely to include markets in managing higher temperatures, especially in major cities where there is a need to cope with the magnified "urban heat island" effect; in dealing with vector-born diseases such as malaria, which could become more widespread; in flood defences; in new methods of food production and so on.

It is clear that we can no longer protect ourselves from the risks that climate change brings by ignoring the disasters it wreaks. While the evidence is mounting, it is encouraging to note that millions are invested in tackling climate change through the use of clean energy. Calculations suggest that global expenditure on curbing the effects of climate change could be $1,000bn within five years.

If you are not already shaping and planning your 2007 investment portfolio on the assumption that climate change is at the top of the business, political and regulatory agenda, the Stern Review should change your mind.

Kenny Tang is founder and chief executive of Oxbridge Climate Capital. Ruth Yeoh is finance director of YTL Group. Their book: Cut Carbon, Grow Profits - Business Strategies for Managing Climate Change and Sustainability will be published in February.

Copyright The Financial Times Ltd 2007

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