The connection between climate change and investment is not new, but in the past few years, global agencies are increasingly linking economic conditions to climate-related shocks
Every whiff of garam hawa wants to be a sweeping heatwave. That sweep turned into a distinct menace this summer, as large parts of the country recorded particularly high temperatures. As meteorologists branded the worst of them as the hottest in a 100 years, investors worried about their probable impact on economic growth, and the turbulence that will inevitably occur in the market.
The connection between climate change and the investment world is neither new nor tenuous. Discourses based on the very palpable connection between the two have gathered steam lately, a trend that will no doubt intensify in the wake of the latest heatwave. Academia and investment professionals alike have agonised over what many say will soon become an irreversible climatic debacle.
Others, like global rating agency, Moody’s, have established a connection with economic trends, especially inflation. The latter, identified as a significant drag on the nation’s growth prospects, has already raised its hydra head. Added to high-impact issues like coal shortages and relatively modest wheat production, the effect of climate change will compound some of the gravest problems that exist in the economy at the moment, and that too, in a scenario, when cost of funds is generally set to ascend, thanks to the apex bank’s current monetary policy on rates. The reference is clearly to the less accommodative stance adopted by the Reserve Bank of India (RBI), reflected in two consecutive repo rate changes.
“Incidences of climate-related shocks”, as the rating agency puts it, will negatively impact the nation’s credit score, further underlining the International Monetary Fund’s (IMF) lower forecast, and highlighting the need for such macros as higher employment, cheaper credit and greater social security. The heatwaves witnessed earlier this quarter are only a modest part of the overall mega trend, though.
While the larger picture, and the biggest consequences, are being discussed threadbare, the situation spells bad news for ordinary investors. For many of them, their holdings across major asset classes are likely to feel its worst impact in the days ahead. Entire portfolios made up of manufacturing, infrastructure and commodity stocks, for instance, could suffer. Supply constraints, rising input costs, and increase in loan servicing costs will all emerge as negatives. For companies that operate within these spaces, the impact on margins will be obvious in the coming quarters. The market will now watch out for the progress of the monsoons. The expected levels of rainfall will help alleviate the situation, at least temporarily. The state of industrial output, too, will be keenly observed. A lag in the same, because of demand and supply issues, will weigh heavily on economic growth. Investors will closely monitor exports as well, although recent developments suggest that Indian exporters have lately clocked a fairly decent performance.
Volatility Ahead
Any further negativity arising out of climate-related issues will lead to greater volatility in the securities markets, in both equity and debt. I must mention in this context that stocks have remained under pressure in recent times; and there is a great deal of uncertainty, as well. Of course, several other sectors not directly related to such issues have suffered, too. Among the worst hit is the rate-sensitive banking and financial services industry (BFSI). Many banking stocks, especially the mid-cap ones, have borne the impact of uncertainty. The debt space, too, has been brutalised to a great extent, a condition attributed to regulatory measures stemming from inflationary pressures. For the record, retail inflation signalled by the Consumer Price Index (CPI) is at an eight-year high. Fuel and food, the two constant worries, have seen serious price escalations.
Investment circles suggest greater vigilance on a number of sensitive sectors. Some sections have marked areas like agriculture, food, fertiliser, seeds, and agro-tech as proxies for the general trend. Others have pointed towards core manufacturing, particularly steel and cement, as well as capital goods and engineering, to highlight their point.
Rapid climate changes, however, are likely to come up as eye-openers for those who wish to invest in alternative, non-conventional, and renewable sources of energy. Yet, the average investor does not have too many choices in key segments like solar and wind. The electric vehicle (EV) space is just about to shape up in India. Listed companies representing these industries are few and far between. The energy sector is dominated by conventional players, including those that heavily burn fossil fuel—change the worst perpetrator of climate damage.
Entire corporate models are expected to be overhauled because of extreme climatic conditions. The impact will be specifically felt in India on the earnings front. In many markets around the world, natural disasters and loss of biodiversity have been identified as change makers. Ergo, Indian policy makers will have a challenging task to perform—curbing the consequences of man-made environmental debacles should be among their top priorities.
Natural resources, such as water bodies and forests, are already under great strain, and pollution is relentless in this country. These will hurt the economy in general; corporate earnings will be decimated, and consumer interests damaged. Chances of revival are not visible immediately, and that is the most terrible realisation for market watchers.
Endless Disruption
Market pundits have already warned investors of the disruptive forces that climate conditions can potentially unleash. Many of them are exhorting participants to work out solution-based strategies, preferably with the help of professional service providers.
The recurring themes for the future will be industries that command lower carbon footprint. Pollutants will be shunned, while portfolios will be assessed on the basis of what has come to be known as “carbon intensity”.
Already, in key pockets elsewhere around the globe, environmental social and governance (ESG) strategies have found a near-permanent place. Entire portfolios are being lined up on the basis of green compulsions, and full stack investment services inclined towards such factors are already inthe works.
Disruptions in the past have thrown up surprises, and many little-known corners of the market have yielded winners. This time, too, for all the endless disruption that is being presaged, it will not be any different.
As green finance catches up with its conventional counterpart, and as the world moves on battery-operated transportation and investors drop traditional industrial-military complexes from their strategies, disruptive tools will act as counterproductive elements. Heatwaves will sweep across drier parts of the world, floods will displace people in riverine areas, and droughts will hurt livelihoods in rainfall-deficient swathes. North India is a living example; it has suffered enormously this year.
We will have to ascertain growth estimates in view of all that has happened. Climate-led disruptions are potentially endless, it seems, and we will have to rework ourselves. As I mentioned at the very outset, every whiff of garam hawa is a potential scorcher, and investors will do well to recognise the scenario as the biggest-ever threat they are likely to face in a long time.
The author is Director, Wishlist Capital