Climate change: investors ignore it at your peril

There are three trends which are set to unfold which will have major impact on the global economy: climate change; water shortages; and changing demographics

By Clare BrookPublished: 1:10PM GMT 13 Jan 2010
In the investment world it is a challenge to predict with accuracy what will happen in the next week, let alone the next decade. But there are three trends which are set to unfold in the coming years which will have such a major impact on the global economy that the investment implications are reasonably easy to foresee.
The first and most potentially calamitous trend is climate change, both in terms of costs of mitigating its effects and also adjusting global energy use to ensure that the effects do not worsen. The second is a global water shortage. The third is demographic shifts, both in terms of population growth, which is partly the cause of the first two issues, and, in the developed world, a rapidly ageing population.

The floods in the Lake District last year were passed off by the Environment Agency as a 'once in every 1000 years weather event'. Unfortunately, once in every 1,000 year events will start to occur with alarming frequency now that the effects of climate change are starting to be felt.
While politicians argued at Copenhagen about how much CO2 to reduce and who makes the first move on an international level, at a national level the shift to more sustainable energy production has already begun in earnest. In the UK, for example, 2.3 million homes are now fuelled by windpower.
The European Union as a whole is predicted to have 199 gigawatts of wind energy by 2020, about enough to fuel 100 million homes. The United States and China are rapidly growing their wind and solar capacity. At the moment only 1pc of urban air in China meets European equivalent standards and the Chinese government is facing civil unrest, so it is unsurprising that they are putting their weight behind the alternative energy industry.
A solar plant was recently commissioned by the Chinese to be built in Inner Mongolia which will be 25 square miles – about the size of Greater London – and will provide two gigawatts of capacity.
What this means in investment terms is that there is a tremendous opportunity to participate in an emerging growth area, not just by investing in wind and solar companies, but in other companies providing solutions to the now pressing problem of climate change: Insulation manufacturers, for example, companies involved in the smart grid, makers of batteries for hybrid and electric vehicles, rail companies.
All these sectors will see tremendous growth over the next decade and yet the share prices are still smarting in the wake of the financial crisis and are far off their 2007 highs.
Less headline grabbing than climate change, but nonetheless a disaster in store for many parts of the world is the increasing scarcity of water.
Already 1.1 billion people in the world do not have access to clean drinking water. As the global population increases and water usage per capita grows, there will be a 40pc shortfall in the water needs of the world in the next 20 years. Again, as with climate change, companies providing solutions to this issue exist and it seems likely that, given the scale of the problem, they will see rapid growth in the coming decade.
The main areas of investment opportunity are threefold: companies controlling demand through water metering and other technologies; companies preventing leaks by shoring up decaying infrastructure (in the US it is estimated that between $30bn and $40bn annually needs to be spent on regenerating water infrastructure); and increasing supply through techniques such as desalination and filtration.
In addition, agriculture and manufacturing will be forced to find methods of production that are less water intensive. As an investment area, water is interesting because it is relatively under explored and so there are still attractive opportunities on reasonable valuations.
Finally, demographics, in particular the rapidly ageing population is a trend which will gather pace in the coming decade. Between now and 2050, the number of people aged over 85 is set to treble in the European Union. People over the age of 85 need on average nine times the amount of health care products and services that someone under 65 needs.
The implications for the health care industry are clear; strong and sustainable growth for companies providing goods and services such as orthopaedic equipment, hearing aids, dental implants, kidney dialysis machines, care homes and hospital equipment.
From an investment point of view, health care is attractive because the growth tends to be steady and counter cyclical so the investor need not suffer the roller coaster ride that other sectors proffer.
So at WHEB Asset Management, we believe that the most reliable way of making money over time is by identifying these long term trends and investing accordingly. One word of warning though: In the 1890s it was predicted that if the rate of traffic continued to increase in London, by the end of the 20th Century, London would be buried under six feet of horse manure.
Then the car came along. Mankind has a wonderful capacity to invent and adapt. But for the moment, we'll be backing climate change solutions, water companies and health care providers. From where we see the future, it looks like the safest bet.
Clare Brook managed funds at Jupiter, NPI, Henderson and Morley (now Aviva). She is the co-founder of WHEB Asset Management, which runs the IM WHEB Sustainability Fund. For details see www.whebam.com