By James Cameron, Non-Executive Chairman, Climate Change Capital
This post is part of a series produced by The Chicago Council on Global Affairs, marking the occasion of its fifth Global Food Security Symposium 2014 in Washington, DC.
There remains a stubborn lack of understanding about the systemic connection between water, food, energy and the climate – and what this means for the future feeding of the world.
By 2030, a growing global population – particularly of middle class consumers – is expected to require 30% more water, 40% more energy and 50% more food. The challenge of meeting this demand is compounded by climate change risk and the interconnectedness of energy, water and food, for example, the agriculture industry uses 70% of the world’s freshwater.
Investors will have to understand that the assets they hold – whether in land, property, agriculture, energy or infrastructure – will be revalued because of the physical consequences of climate change and the public policy response to it, but also because consumer demand for more efficient and resilient alternatives will increase.
The value of land where it may be too hot to grow crops, or where irrigation schemes have run out of water, or where extensive use of fertilisers has degraded the soil will be lower than it was. McKinsey has estimated that more than one fifth of the world’s arable land is already seriously degraded from pollution, soil nutrient mining and salinisation.
There will be regions where climate change could create better conditions for certain crops, but investors will need to factor in these changes and ask is the infrastructure in place, are the skills there and how peaceful is the migration?
There is a huge tension between the short and the long term in the creation or destruction of value and I think there is one more scarce resource to add to the lengthening list – a lack of long term thinking by companies and their shareholders.
We have to take the idea of ‘stranded assets’ seriously. Land liable to be made infertile by flooding is a stranded asset, which is not reflected, yet, in its price.
The global fossil fuel companies are sitting on billions of dollars of stranded assets; the oil and coal reserves that they own which they may never get to mine. The value of such companies does not reflect the reality.
Recent research by the Carbon Tracker Initiative found that these companies are expected to spend $1.1tn in the next decade in costly deep-water oil exploration, tar sands and Arctic projects. These projects will be lost if policymakers agree to cut greenhouse gas emissions or favour disruptive technologies, thus rendering these assets useless.
Even as the evidence mounts against them, many of the incumbents still refuse to acknowledge the potential risks associated to their portfolios and shareholders.
Gradually, however, some of the financial institutions are changing their investment policies and realising that in the long term, which is the way they have to look at it, the interests of their investors, which is everyone, lie in changing where they put their money. Holding stranded assets will become a massive liability.
These institutions will have a profound effect on where money is invested and could give the new economy – where the accent is on the circular rather than the linear, where trade is not just one way, where waste is seen as a commodity and where renewables are at the forefront of our energy mix – a massive boost.
Fortunately, there is real promise in the resource revolution that is underway, which creates genuine alternatives for investors. Businesses that increase the efficiency of energy inputs, or provide substitutable alternatives, or improve the system for matching supply and demand in the power sector, or increase yields in staple foods, or close loops in use of various wastes, or offer new business models that provide a service not a product attached to outcomes that add value in public goods terms or many - these are the way forward.
Businesses that do these things can not only make a good return for their investors, but they can produce a public good – helping the world deal with climate change and feed itself.