A tipping point on climate change has arrived, but how fast or slow the transition from fossil fuels comes will determine winners and losers.
If you sense something has changed in the aftermath of the latest category five hurricane to hit North America, you’re not alone.
Look at some recent headlines:
- Why are hurricanes like Dorian stalling, and is global warming involved?
- Germany’s finance minister says ‘restart’ with massive climate investments needed to curb emissions
- Benefits of investing in climate adaptation far outweigh costs, commission says
- Global leaders call for urgent action on climate adaptation
- A call to action to the global energy industry: Why the energy mix is not changing nearly as quickly as the world needs it to
- $20 billion fund in Denmark divests from 10 major oil companies, citing ‘poor returns’
- Thinking Ahead Institute cites global temperature change as top extreme risk for investors
One word that stands out in the list of headlines above is adaptation. Preventing climate change and keeping global temperature rise below a certain low threshold seem to be a mantra for the past 15 years, beginning when former Vice President Al Gore debuted An Inconvenient Truth. Now that reaching the most ambitious temperature goals are out of reach unless society makes drastic changes, dealing with a new normal — and all its costly implications — could be the new reality.
Mercer, in its series of papers, Investing in a Time of Climate Change, notes the significance of the moment in its The Sequel 2019 report, “The implications of climate change are systemic and are already apparent. … Humans have never lived in a world much warmer than today; yet the current trajectory of at least 3⁰C above the preindustrial average by 2100 could put us beyond the realm of human experience sometime in the next 30 years. Investors need to consider both climate-related mitigation and adaptation in an active way to develop climate resilience in their portfolios. Financial regulators, particularly for pension funds, are increasingly reinforcing this message by formalizing the expectation that investors should consider the materiality of climate-related risks and manage them accordingly, consistent with their fiduciary duties.”
Colorado-based Rocky Mountain Institute, meanwhile, reports the implications of two narratives society can use to make the transition to a low carbon society — gradual or rapid.
“The question of the timing of the energy transition is a critical one: either the tipping point is right before our eyes in the decade to come, or it is far into the future, beyond the planning horizon of most companies. If stakeholders, whether they are governments setting policy or businesses making investment decisions, assume a gradual transition while the trajectory is actually a rapid one, they will end up making the wrong decisions.”
The costs of the wrong decisions, the Rocky Mountain Institute continues, will be uneconomic investments and stranded high-carbon assets as well as humanity missing an early opportunity to make a sustainable world and limit the risk of catastrophic climate change.
One way to think of how a rapid transition could occur is the example of how the tech industry disrupted music or retail — fast.
It its report, the Rocky Mountain Institute reviews a recent study by the World Economic Forum, The Speed of the Energy Transition, which notes a rapid transition would mean, “renewables like wind and solar quickly start to supplant fossil fuels as their supply increases at an exponential rate, following the familiar S-curve growth pattern of new technologies like personal computers and mobile phones. It means that renewables supply all the net growth in global electricity demand, displacing oil, gas and coal — with demand for fossil fuels peaking in the 2020s — and thus seriously disrupting the traditional businesses of the energy sector incumbents.”
For all the flashing signals our climate and weather are sending, it still seems we are slow to get the memo, but that is probably more a function of not knowing how to react to those messages. Investment manager BlackRock has crunched the numbers on how climate change will affect investors’ portfolios and found most are severely underestimating the timing and the risks.
“The implications for investment portfolios — stemming from a rising frequency and intensity of such events — have been notoriously hard for investors to grasp,” BlackRock notes in Getting physical: Scenario analysis for assessing climate-related risks. “Why? First, the effects of slower-moving physical changes such as rising sea levels can seem distant. This causes investors to discount pressing climate-related risks already lurking in portfolios. Second, the risks are hard to model. New climate patterns mean long-dated historical data are a poor guide to the future. Investors using models overly reliant on the past are missing the big picture. Third, the risks have been hard to pinpoint.”
For infrastructure investors, the transition to alternative energy will pose big risks and opportunities. Writing in the September issue of Institutional Investing in Infrastructure, BlackRock authors David Giordano, Rory O’Connor and Freek Spoorenberg, note, “During the past few decades, or ‘phase one’ of the renewables revolution, rapid advancements in technology have driven a steady decline in prices and the cost of generation, making these technologies competitive with traditional generation sources. Phase one is largely complete. The second phase of the renewables revolution is about bringing the energy source to scale. … electricity isn’t just growing greener; it is also meeting a growing share of final energy demand. Installing additional generation will be part of the process of scaling renewable energy, but so will the addition and improvement of grid infrastructure.”
Understanding how climate change will impact the physical environment and investment portfolios and then correctly adapting to those changes is not an easy task, of course, but the silver lining is that humanity has faced difficult challenges before and overcome them by focusing on shared responsibilities, shared beliefs and shared prosperity.
Michael Stipe, lead singer of R.E.M., the 1990s indie-rock band from Athens, Ga., near Atlanta, may have captured our moment best: “It’s the end of the world as we know it, and I feel fine.”
Thankfully, the end of one world is on the horizon, and if we don’t feel fine about it, we should at least feel hopeful.
