Big investors now banking on climate gloom
Investing in climate change used to mean financing the fight against global warming. Morgan Stanley, Goldman Sachs Group Inc., and other firms took stakes in wind farms and tidal-energy projects, and set up carbontrading desks.
Then, as efforts to curb greenhouse-gas emissions faltered, the appeal of clean tech dimmed. Venture capital and private-equity investments fell 34 per cent last year, to $5.8 billion, according to Bloomberg New Energy Finance.
Now the smart money is taking another approach. Working under the assumption that climate change is inevitable, Wall Street firms are investing in businesses that will profit as the planet gets hotter.
The World Bank said in November that the planet is on track to warm by four degrees Celsius by the end of the century, and risks “cataclysmic changes” as a result. Rising seas threaten floods in cities from Mexico to Mozambique; heat waves menace crop yields in India, the U.S. and Australia; and warming oceans may destroy coral reefs, it said.
Betting on the failure of global efforts to contain warming may seem cynical, but it’s increasingly logical. Fifteen years after the Kyoto Protocol to rein in greenhouse gas emissions in industrialized countries was reached, the world is still without a comprehensive pact binding all emitters to deal with the issue.
Since 1990, the benchmark for Kyoto’s emissions targets, global carbon dioxide output from fossil fuels has increased by 49 per cent to 31.2 gigatons, according to International Energy Agency data.
About 70 per cent of the new emissions through 2010 came from China, the U.S. and India, the three biggest polluters. None of them are bound by Kyoto, a treaty the U.S. never ratified because it didn’t set targets for developing nations.
Investor strategies include buying water-treatment companies, brokering deals for Australian farmland, and backing a startup that has engineered a mosquito to fight dengue, a disease that’s spreading as the mercury climbs.
Derivatives that help companies hedge against abnormal weather and natural catastrophes are also drawing increased interest from some big players. In January, KKR & Co. bought a 25-per-cent stake in Nephila Capital Ltd., an $8-billion Bermuda hedge fund that trades in weather derivatives. The firm is named after a spider that, according to local folklore, can predict hurricanes.
“Climate risk is something people are paying more and more attention to,” said Barney Schauble, managing partner at Nephila Advisors, the firm’s U.S. arm.
“More volatile weather creates more risk and more appetite to protect against that risk.”
One form of extreme weather — drought — is helping spur business at Water Asset Management LLC. The New York hedge fund, which has about $400 million under management, buys water rights and makes private equity and stock-market investments in water-treatment companies.