Trends Financial Markets

Maps and other data are now available to help buyers analyze the risks of fires, floods and other disasters when searching for a new house. ClimateCheck empowers property buyers, owners, and brokers by exposing and quantifying the risks related to the climate crisis through it’s proprietary risk assessment and report. These ratings are based on an area’s future risk, and how much that risk will change over time. These have been created by using dozens of internationally accepted, global climate models for the continued release of CO2 into the atmosphere.

Real estate brokerage Redfin – is now publishing climate-risk information for every location listed on its website. Redfin users who want to understand the climate risks for fire, heat, drought and storms over a 30-year period to any area in which they’re searching for a home can now see a ClimateCheck rating from 0-100 associated with the county, city, neighborhood and zip code of the home they’re considering. Currently, this data is available everywhere in the US, for over 94 million homes.

Climate risk is real and will significantly impact business as well as personal investment decisions. While businesses have been aware of these risks for some time, personal decision making is now getting impacted too!

As stock prices and real estate markets undercount climate-change risks, country commitments to net zero are already devaluing assets and impacting financial markets

As more and more countries commit to NetZero financial markets are expected to be impacted in significant ways. For instance, the shift to low carbon intensity implies that assets of high intensity companies will now be valued lower. This means that financial institutions that have invested in these assets will become vulnerable. Similarly, financial institutions that have invested in real estate or infrastructure in areas vulnerable to natural disasters may find it difficult to get a return on their investments.

Climate change is a very long horizon risk. The worst impacts are far in the future and yet they affect behaviour and asset prices today. There is a growing body of evidence showing that stocks, bonds, climate futures, equity options and real estate, incorporate information about climate risk.

According to a paper called, The economics of climate change – information about climate risk is likely to affect not only discount rates but also future cash flows. For example, consider the possible introduction of a carbon tax. Such a tax would plausibly lower the expected cash flows of emission-intensive firms. At the same time, if the timing and magnitude of the tax are unknown, uncertainty could increase discount rates for firms vulnerable to the impact of the tax, with both effects potentially leading to lower asset prices for emission-intensive firms.

However, your investments, even those presumably in the capable hands of professionals, dangerously undervalue climate-change risks. That’s the belief held by “an overwhelming margin” of 861 finance academics, investment advisers, portfolio managers, regulators and policy economists anonymously surveyed by Johannes Stroebel and Jeffrey Wurgler of New York University’s Stern School of Business. Respondents are at least 20 times more likely to believe that climate risk is currently being underestimated by asset markets as opposed to overestimated.

A comprehensive net zero pathway, properly understood, presents a range of investment opportunities within and outside of existing portfolios for all investors and includes valuation of things that till now have been considered externalities. Sustainable investing is therefore likely to involve investing in volatile and dynamic markets with an approach firmly based in natural science, not spreadsheet accounting.

Things we didn’t account for earlier are now being valued in financial terms. Take the case of Mangroves and Whales.

• Mangroves provide a wide range of ecosystem services, including nutrient cycling, soil formation, wood production, fish spawning grounds, ecotourism and carbon. It can be 2 to 5 times cheaper to restore coastal wetlands by growing mangroves than to construct breakwaters. Using total economic valuation methodology, the economic value of mangrove resource is estimated ranging from US $3,624.98 – US $26,734.61per ha per year.
• Whales lead long lives sequestering carbon dioxide in their bodies and are responsible on average for pulling 33 tons of heat-trapping CO2 out of the atmosphere. The estimated economic value of this service to slow climate change is $2 million per individual whale.

The problem is there’s never been an official global accounting of natural capital, not in gross domestic product (GDP), the calculation of goods and services, or any other broad economic measure.  While we account for the price of crops in GDP we don’t value soil quality, bees and climatic conditions. The World Bank predicts global annual losses of $2.7 trillion by 2030 if ecological tipping points are breached without more investment to protect and restore nature. The time to value nature is now!

This is why world leaders in Glasgow at Cop26 have committed to stop deforestation. More than 30 of the world’s biggest financial companies – including Aviva, Schroders and Axa – have already promised to end investment in activities linked to deforestation.

The only country that has ever stopped and reversed deforestation has been Costa Rica. This has been achieved because of a government-led initiative that pays local communities to help protect the natural ecosystem. Costa Rica’s success was driven by economics. A ban on deforestation combined with the introduction of PES- which pays farmers to protect watersheds, conserve biodiversity or mitigate carbon dioxide emissions- is the reason for success. This meant that the government actually succeeded in raising the value of nature.

With USD9.391 trillion required across all emerging markets to achieve universal access to electricity by 2030, and an average private-sector participation rate of 45 per cent, the potential opportunity for investors looking to support Affordable and Clean Energy is USD4.226 trillion. The greatest investment opportunities are found in India (USD701.5 billion), Indonesia (USD147.5 billion) and Bangladesh (USD73.9 billion) where their large and growing populations, together with strong projected GDP per capita growth, mean significant investment is required to maintain access to electricity across the populations by 2030.

We can opt for clothes that are made in countries with stricter environmental regulations for manufacturing. We can choose natural and organic fibres that are produced without the use of harmful chemicals. Our choices need to be for more sustainable brands to enable the #NetZeroShift.

All in all, these are exciting times for the fashion industry. The fashion revolution is well underway, and every day we see new pioneers being born. Before you know it, sustainable fashion will no longer be just a trend but the new normal. Brands that distinguish themselves as ‘responsible’ and ‘sustainable’ will most likely gain the larger share of the millennial consumer’s wallet.

At the same time stakeholders need to actively engineer the conditions for strong ventures to emerge and succeed in order to future-proof a sustainable business model for the fashion industry. This includes addressing a financing opportunity of $20 billion to $30 billion per year until 2030. At the moment though, the funds that are being raised are a mere fraction of what is actually needed given the size and scope of the fashion sector. 2021 is likely to see fashion recovering from the aftermath of the pandemic, but more than ever the focus on a green recovery is likely to be paramount. However, to manage the transition towards a circular and low carbon based business model, vast sums of money are needed. These are now being enabled through sustainable finance.

Spice giant McCormick & Company has partnered with the International Finance Corporation (IFC) and Citi to provide its herbs and spices suppliers with financial incentives linked to improvements in measures of social and environmental sustainability. The program has started with suppliers in Indonesia and Vietnam, and will soon be launched in other countries.

Under the initiative, suppliers can qualify for discounted rates on short-term working capital financing when they meet sustainability standards accepted by McCormick. Those standards include performance on labour conditions, health & safety practices, crop management, environmental impact, farmer resilience and women’s empowerment. The higher the supplier’s performance level in meeting these standards, the more they save.

The unique partnership leverages Citi’s global Supplier Finance platform and is part of IFC’s Global Trade Supplier Finance (GTSF) program – a $500 million multicurrency investment and advisory program established in 2010. GTSF provides short-term financing to small and midsized suppliers in emerging markets selling to large domestic buyers or exporting to international buyers, by discounting invoices once they are approved by the buyer. The financing rates can be linked to sustainability measures to minimize impacts on the environment and promote climate-resilient agriculture practices, while connecting smallholders to global markets.

INVEST vs DIVEST

Money goes where it gets the highest return, the markets function on that premise. Equities and bonds are priced keeping in mind the risk potential. The risk premium for green investing vs others will decide whether an investment needs to be made or not. India needs over USD 400 billion in capital investment which could save over 100 GW of energy and 1.1 billion tonne of greenhouse gasses between 2015 and 2030,

PURPOSE

Corporate disclosures on their own or brand purpose wont reduce emissions unless business models change.

FUNDAMENTAL RESEARCH

51 billion tonnes of CO2 needs to be removed from the atmosphere. It won’t happen without reliable access to clean energy, sustainable aviation fuel, green steel and cement or a substitute material. Companies in fundamental research will move the needle for a NetZero world.
Brand purpose is a statement of intent, corporate disclosures are about what you did in the past year, innovation is about how you are designing the world. In the past few decades we designed products because we could and created campaigns that propagated a genuine or manufactured need. Now we need to design products and innovations because of the existential crisis we find ourselves in.

STEADY + SCALABLE

Changing the way we make things and grow things is not a quick software fix. It requires change at a fundamental level and reliability so that it can be scaled up. The speed of the digital economy may not be replicable when it comes to fundamental research. However digital can certainly speed things up once the fundamentals are clear.
“The digital economy has fooled us in terms of how quickly things can change, because you don’t need the reliability and scale, and therefore the capital and the regulations.” Bill Gates

CARBON PRICE

Why does a Rs 1 plastic pen exist? Why do we have Rs 100 polyester t shirts? – The price of both these products doesn’t account for the polluting impact they will ultimately have. Unless we account for the cost of carbon, we will continue to do business as usual. #climatechange #circulareconomy.

Materiality issues don’t remain static. They are constantly evolving. The concept of double materiality takes this notion one step further: it is not just climate-related impacts on the company that can be material but also impacts of a company on the climate – or any other dimension of sustainability, for that matter (often subsumed under the environmental, social and governance, or ESG, label).

This notion of materiality is already embedded in the EU’s new sustainable finance disclosure regime for financial firms and corporates. In 2021 Siemens updated their materiality assessment focusing on Siemens businesses Smart Infrastructure, Digital Industries as well as Mobility.

How Siemens identified and assessed material and high priority issues:

Outside-in perspective:

Sustainability issues that are associated with opportunities or risks for the course of business, the annual financial statements or the situation of the company (business criticality). The top three material issues that have the greatest impact on Siemens and the generation of long-term value are climate action, sustainable product design and lifecycle management as well as social and environmental standards in the supply chain.

Inside-out perspective:

Sustainability issues on which the company’s business activities, business relationships, and products and services are likely to have either a positive or negative impact (sustainability relevance). The top three material issues where Siemens has the greatest impact on society and environment at large are climate action, social and environmental standards in the supply chain, cyber security and data management, sustainable product design and lifecycle management as well as partner management and collaboration.

Stakeholder perspective:

Sustainability issues that are defined as material by key external stakeholders – such as customers, investors, suppliers, politics and NGOs – and internal stakeholders (stakeholder relevance).