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Wednesday, December 13, 2006

Wall Street Worries About Global Warming

Technorati tags: ; ; ' ; ; 's starting to realize that 's going to be real expensive

Too bad my blog isn't more influential. I've been ahead of the curve on this 'global warming is bad for business' thing. It'll cost a lot more to deal with the consequences than the cause, it'll cut into the bottom line in a lot of industries, and things like crop failure and decreased fishing will play as much hell with markets as it will with people's lives.

Now, it looks like Wall Street's catching up to me. Two points I've made are beginning to gain ground among the captains of industry and the investor class; global warming's going to be real expensive to ignore (Global Warming is About Money, OK?) and there's a real risk that the industries most responsible for climate change will have it come back and bite them in the ass later (Will Big Oil Suffer the Same Fate as Big Tobacco?).

Reuters Alertnet:

CHICAGO, Dec 13 (Reuters) - The topic of the conference was climate change and the rhetoric was sobering, haunted by scientific projections of a roasted world for our children and a looming environmental disaster of Biblical proportions.

But this was no talk shop of environmental activists. It was a meeting of Wall Street investors, insurance executives, state treasurers and pension fund managers, who between them manage about $3.7 trillion in assets.

"The insurance industry has historically taken on social issues. I know of no social issue that is bigger than this one," said Tim Wagner, director of insurance for the state of Nebraska.

The consensus of Wagner and others addressing the conference of the Investor Network on Climate Risk (INCR) was that institutional investors are still too near-sighted to factor climate change into their investment decisions.

While there will be costs to the U.S. economy from climate change, the problem for Wall Street is that those costs are unknown and in the future. Many drew a parallel to the asbestos and tobacco industries, which were hit by lawsuits after the fact.

"The value proposition is one the Street isn't really recognizing," said William Page, a portfolio manager at State Street Global Advisors.

Let me tell you, it's hard being a unknown visionary...

The vice president of global investment research at Goldman, Sachs & Co., Michael Moran, makes a 12-step recovery analogy; "The first step to recovery is acknowledging you have a problem." A point I've made more than once is that the short term thinking of investors is unsuitable to dealing with long term problems. It's not costing them now and it won't cost them next quarter, so what's the problem? Wall Street has always had a 'we'll cross that bridge when we come to it' mentality.

But this isn't true of the insurance industry. They have to take a longer view of risk and they have examples of the costs of climate change. Alertnet again:

For insurance companies, climate risks are already center stage following Hurricane Katrina, which caused about $125 billion in damage in 2005, with $45 billion covered by private insurers.

Nebraska's Wagner estimated that Hurricane Andrew, which damaged or destroyed 125,000 homes from Florida to Louisiana in 1992, would cause $150 billion in damage if it hit Miami today -- one-third of the U.S. property and casualty insurance industry's capital base of about $450 billion.

"Insurance availability will be an issue. Insurance affordability will be an issue," said Wagner, who heads the National Association of Insurance Commissioners' task force on climate change.

Some $2 trillion in real estate was at risk from future storms in coastal communities of Florida alone, he said.

"The increasing scientific consensus is that this represents a trend beyond natural variability and a likely increase for the future," said Gary Guzy of Marsh USA, a unit of insurance broker Marsh & McLennan Cos. <MMC.N>.

Other industries see future risk as well. While interests like agriculture and insurance come immediately to mind, less obvious industries see future risks.

The world's biggest mining companies, including BHP Billiton and Rio Tinto, are among the six biggest listed Australian companies at most risk from global warming.

By contrast, those firms with the most to gain from climate change include Investa Property, Origin Energy and metals recycler Sims Group.

That's the conclusion of Citigroup researchers, who released a report yesterday examining the risks and opportunities global warming poses for the ASX 100.

The problem for the mining industries will be the increased difficulties posed by higher water tables and equipment exposed to the elements. If mining will be affected by global warming, what other industries will be and how many of them are preparing for it?

The first wave of climate change activists were environmentalists and lefties. The next wave will be guys in blue suits and red ties in corporate board rooms.