Money Can’t Buy Happiness but it Can Buy Climate Change Solutions
If you’ve missed our last two blog posts (don’t worry, you can still check them out here), we can get you caught up in one phrase: climate change is here and here to stay. But, this article isn’t yet another “the sky is falling” piece. This month we’re looking into how climate change affects the flow of money, and whether and how the flow of money may act as a corrective force on climate change.
American Jobs Plan
President Biden, holding onto sufficient bipartisan support, is hoping to pass one of the largest infrastructure bills ever proposed to target greenhouse gas emissions. The $2 trillion American Jobs Plan proposes more investment in fixing highways and bridges, updating our water infrastructure systems, and retrofitting old buildings. It’s also planning to provide more funding for electric vehicles including adding millions of charging ports across the country.
If passed, this extensive plan will take huge strides towards reaching Biden’s goal of net-zero emissions by 2050. His proposed 2022 budget is also making headways in climate mitigation by adding $14 billion in climate spending compared to 2021, including an additional $2 billion going towards clean energy projects.
The American Jobs Plan may bring good luck to investors in “environmental, social and governance” (ESG) funds, which had already been growing. According to this this article from CNBC, ESG funds brought in over $51 billion in new money from investors in 2020. Financial advisors are predicting the plan will lend more support to ESG investment if passed, as certain sectors such as basic materials, utilities and industrials are expected to boom with the creation of jobs the plan is set to bring. New electric-grid technologies, alternative energy solutions, electric transportation, 5G technologies, automation and robotics, machine learning and AI applications may also be targeted investments in the near term.
Beyond ESG, Are Investment Fundamentals Changing?
Investors have been considering the risk of climate change for over a decade (consider, for example, the Institutional Investors Group on Climate Change’s 2010 A Guide on Climate Change for Private Equity Investors). To understand how investors frame climate change concerns, one global investment firm, Russell Investments, has published articles on how climate change can impact investments and why climate change matters for bond investing. Russell Investments focuses on two types of risk, physical (which can affect asset prices) and transition (which emerge due to economic shifts).
Climate change can induce the following physical events which impact investment value:
Droughts destroying agricultural crops
Flooding damaging properties
Hurricanes destroying infrastructure and buildings
Reduced snowfall at ski resorts
Coastal resorts being damaged by sea-level rise
Additionally, transitions to a lower-carbon economy could impact financial performance as follows:
Industries that may have to pay higher carbon emission taxes
Firms that may have to spend to reduce their emissions
Carbon-intensive manufacturers that see consumer demand switching to other environmentally friendly products
While physical and transition risks can impact private companies as well as governments, and Russell Investments adds a metric, resilience, when evaluating public sector bond markets. All three elements combined look as follows:
Because the range of risks isn’t very well understood, investors have not yet fully internalized climate change in their decision making. Some analytics firms – for example, Beyond Ratings – have developed methodologies to quantify climate change risks and to drive investment toward private and public entities who are best positioned to manage transition and physical risks. The end results are to incent and drive investment in businesses and governments positioned for a climate change future.
Hang On, What About Water?
Biden’s proposed American Jobs Plan and 2022 budget and institutional investment opportunities are all heavily focused on the energy industry - reducing greenhouse gas emissions in oil and gas production, investing in electric vehicles and renewable energy projects. However, while some climate change investment risk metrics focus on lower-carbon energy sources, many focus on water infrastructure and our ability to manage droughts, flooding and extreme weather events.
As we are a #DataDriven company, let’s take a look at some numbers in this U.S. Water Alliance paper outlining the Economic Benefits of Investing in Water Infrastructure. Between 2012 and 2018, the rate of water main breaks in the United States has increased by 27%, and we now have a water main breaking at an average rate of every two minutes. There is currently an $81 billion gap between current water infrastructure spending and how much investment is needed. If the same rate of underinvestment continues, the gap will grow to $136 billion by 2039. Continuing to underinvest is projected to lead to a $2.9 trillion decline in GDP and a sevenfold growth in household water costs in the next 20 years. It is important to note that this U.S. Water Alliance report does not “reflect the financial impacts from climate change, though climate change is expected to increase both the cost and the urgency of water infrastructure investments.”
According to the Brookings Institution, the American Rescue Plan provided $350 billion for flexible state and local aid that can include water investments that “produce high-quality infrastructure, avert disruptive and costly delays, and promote efficiency.” While funds from the American Rescue Plan can provide short-term stability, there is still a need for more aggressive infrastructure improvements. The American Jobs Plan includes giving $56 billion for drinking water, wastewater, and storm water improvements, $45 billion to replace lead pipes, and $10 billion to address water contamination. However, there is still a gap in what needs to be done, and that gap does not take into account potential climate change impacts.
Conclusions and Call to Action
As seen by increasing investment in ESG funds and the development of new metrics and analytics, underlying financial market fundamentals are already responding to climate change. The potential benefit of President Biden’s American Jobs Plan is to shorten the market transition timeline and increase employment in businesses better positioned for a climate change future. [The concern, again, is how speed and targeting favorable headlines will impact the achievement of policy goals.]
There is still a need to ensure that water infrastructure gets enough attention in the American Jobs Plan. As an individual, please consider rallying for your boards to communicate your utilities drought / aridification needs to your elected officials for inclusion in the Infrastructure Plan. Lastly, please sign this petition from the Alliance for Water Efficiency to ask Congress to fund water-saving projects, fight drought and climate change.