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Windfall: a Book on the Rise of the Climate Investor Class

August 6, 2014

dougfriedenbergWindfall, the booming business of global warming is a recent book written by McKenzie Funk. Most of our readers are in the business of making money one way or the other in the financial markets. For investors, climate change is the gift that will keep on giving to investors all over the world.  The author has managed to put together a composite of  climate investing decisions to help draw a global picture. And in the process he shows just how many moving parts there really are in this story, which occurs against the backdrop of data such as the recent prediction from MIT that suggests a median warming of 5.2°C by the year 2100.  That's about 10°F and that's the median of the computer simulations.

The magnitude of change can be more easily understood if you look back 100 years and mull over what technology was like 100 years ago.  When you consider 100 years of technology change/disruption, virtually every business from hundred years ago, with an ever-accelerating delta the last 20 years, has had to reinvent itself.  Now imagine 100 years of changing coastlines, weather patterns, food production capabilities, water accessibility, port facilities and international logistics.  Along with the (sometimes sudden) revaluation of assets which are either part of the solution or part of the problem.

The melting of the volume of ice on top of the Earth's surface into the oceans is easy to understand. Next time you bathe your kids, watch what happens to the water level in the bathtub when you stick the kid(s) in the tub.  It's really not hard to understand even if you're not a scientist.  Funk goes on to observe that this kind of temperature change could melt the polar ice cap in the summertime, with profound effects on the low-lying lands and island nations, along with derivative effects in the growing regions on land.  He cites the likelihood that parts of the Americas, North and South, turn into a dustbowl. Windfall is divided into three sections:  the melt,  the drought and the deluge.

The Melt

We are seeing the first time the Northwest passage through Canadian territory is becoming open to shipping. Canada, along with other far north countries, are actually winners in the climate change sweepstakes.  In fact many Arctic nations have recognized that global warming may be an advantage to them because it exposes resources they couldn't capitalize on before.  Growing seasons are expanding all over the far north.

The Chapter entitled "Shell Games"  tracks the evolution of Shell Oil's approach to the entire climate change question as it observed how governmental players were reacting.  Funk observed how Shell reacted predictably and in its own corporate interests as it determined that there was an inability on the part of governments to push solutions for the climate problem.

The melt section was completed by brief reviews of developments in surprising places.  An enormous amount of real estate is becoming available in Greenland and a very small local population is now assessing what to do with it.  And then there are innovative Israeli companies developing ways to save the snow-covered Alps so that hedge  fund managers can continue to ski there. A very creative Israeli environmental engineering professor explains that a warmer planet means more evaporation from the sea, but a higher water temperature, retards condensation of the increased humidity when the air temperature is also higher. He cites Cyprus,  Greece, Ivory Coast as countries facing the disappearance of rainfall.

The Drought

In the chapter "Too Big to Burn" we see the influences of natural catastrophes on the insurance marketplace. For instance,  California homeowners can get private insurance in vulnerable areas;  if you have this kind of insurance, you can watch private firefighters protect your house and entertain yourself by observing all the other houses going up in flames. Note that the insurance company is protecting your house, not your property value.

We learn that the Schroeder global climate change fund, for example,  is heavily invested in Munich Re, the world's largest reinsurer. The investor logic is really very simple:  natural catastrophes like hurricanes or similar events can create early losses for insurance companies, true. But then it allows insurers to reprice their coverage at better rates. So insurance companies like climate change;  it creates opportunity for them, sort of like an exciting new game creates a new revenue stream at the casino.  That's why 2005's Hurricane Katrina wasn't a big deal for insurers. Even though they paid out $40 billion they only paid $.72 of every insurance dollar collected for coverage, due to their actuarial experiences from previous devastating hurricanes.  And where they were prevented from raising the rates they just dropped coverage.

Water is another critical subject. A number of top firms have hired water analysts and some are calling water "the petroleum of the next century." Some investors are committing whole funds both to publicly traded water plays and also amassing water rights in places like Australia and the western part of the United States. Their actions are entirely rational in light of the data now available about the effects of global warming on different parts of the world.

In this section. Funk observes as one climate investor negotiates the acquisition of huge tracts of farmland in south Sudan, dealing with tribal bosses to secure his position.  And then he tells about dual poignant tragedy where there's an effort in Senegal to plant enough trees to combat the encroachment of the Sahel and the increase of desertification in Senegal. This clearly futile effort shares the stage with the story of many refugees in Western Africa trying to beg borrow or steal their way into Europe to find some way of making a living.  It's a sad story of dual battles being lost.

The Deluge

The chapter, "The Great Wall of India" serves as a reminder of what happens in the world when climate events change the picture. Many in the United States have been slow to realize the effects of climate change; elsewhere, many countries seem better equipped to understand the science and its implications. Which is why a fence is being built to separate about 150 million people in Bangladesh from about a billion Indians next door.  Dhaka currently has 13 million people but its population is increasing by half million people per year, the highest growth rate on the planet. India, on the other hand, is looking at the likely effects of climate change on Bangladesh and can see that much of Bangladesh will not be inhabitable in the future, even for Bangladeshis who can swim for hours.  They see people from the vulnerable countryside already moving away.  And India knows that displaced Bangladeshi refugees will be headed straight for India.

Funk goes on to discuss reasons why the people of the Netherlands or some of their businesses are not at all disturbed by climate change even though the Netherlands is itself a low-lying country. This is partly because the people of the Netherlands are used to developing solutions for this kind of problem and there are robust businesses there just waiting to sell the world solutions to help everyone else avoid getting wet.  For a price.

One such Dutch company is taking advantage of the increasing wetness of the world by designing and building a floating world to begin taking the place of the one you normally go to the beach in. They have plans for floating and hybrid cities able to accommodate as many as 100,000 people.  Some may see it as a drawback that such a city would be designed for people who can afford it but that's a point to be discussed at a later date.  The low-lying Dutch are also developing excellent ski resorts to attract the Austrians and Swiss whose own mountains are beginning to lose their snow.

It will not surprise you to learn that the Dutch have been called in to design possible solutions to the barrier that is now under discussion in New York City to protect New York City from the ravages of climate change. Hurricane Sandy helped bring the problems of New York to the fiscal attention of the powers that be.

Conclusion

The author observes in his conclusion:  "In an unfair world rational self interest is not always what we wish it would be".

The take away from this book is not necessarily the encouragement to have a view about climate change.  It is rather to understand how forces both well financed and not are responding to the prospect of climate change as rational actors depending on the circumstances.

And while his book does not cover the denialists it's worth noting the climate denialists are rational actors too -- at least those with investment interests to protect. It's quite possible the remainder are simply unwitting pawns relying on faith-based premises which leave them easily manipulated.

Regardless, Windfall  helps  the reader see the planetary climate picture little more effectively.  For the fund manager looking to make megabets on upcoming trends, the book makes a strong argument that climate change is the place to look.

Climate Anecdotals

Henry Paulson Editorial:  The Coming Climate Crash

Web tool to find public companies' climate change disclosure

Climate changes lead to rise in kidney stones

New tool for studying carbon maps and local effects

Battle of the titans:  Koch Brothers, Tom Steyer on climate