InvestorQ : Nowadays, we are all reading a lot about climate change. How will this climate change impact the economy and the stock markets? Is that really a worry?
Tisha Malhotra made post

Nowadays, we are all reading a lot about climate change. How will this climate change impact the economy and the stock markets? Is that really a worry?

Moii Chavate answered.
4 years ago

Climate change is real and it is not just about activists. It is increasingly going to impact agriculture, industry and the stock markets too. Climate change is no longer about coastal towns submerging, averaging temperatures rising, melting icebergs or scores of species losing their habitats. It is a lot more real and a lot more immediate for each of us. Donald Trump may have criticised the Paris Climate Accord but the world can no longer afford to push this issue under the carpet. Environmentally damaging industries like power, fuel and steel will have to undergo a major paradigm shift in the next few years if they have to continue to be relevant in the years to come. Let us look at how this climate change is going to affect the way India does its business.

What climate change means to agriculture?

If you have found summers getting warmer, winters colder and monsoons getting more erratic, you are seeing the direct impact of climate change. In the last few years, the one factor that has impacted Indian monsoons and hit cropping patterns, is the El Nino effect; a direct outcome of global warming. The World Bank has estimated that the cumulative impact of climate change on Indian agriculture will be a lot more acute from 2020 onwards. It is estimated that Indian agriculture incurs an annual cost of $10 billion due to climate change alone. By 2030, India would need to produce nearly 70 million tonnes more of food grain each year and the productivity of most crops like paddy, wheat, oilseeds, pulses, fruits and vegetables are on a downward trend. From an economic standpoint it will mean greater dependence on imports and a worsening of the trade deficit.

Downstream impact on inflation

Even as the government works towards its target of doubling farm incomes by 2022, climate change is the one big challenge. Food inflation is directly correlated with CPI inflation. There is a clear positive correlation between food inflation and CPI inflation; being the largest item in the CPI basket. A rise in food prices is likely to drive CPI inflation higher and that will put the RBI in a policy dilemma. Higher interest rates would mean weak commercial credit on the one side and an inability to cut repo rates on the other side. Also there are a host of sectors like textiles, food products, FMCG products, and confectioneries which use agri products as their primary inputs. A rise in prices will mean the profitability of these companies will be strained as they find it increasingly hard to pass on such costs to the end customer. This is more so in a competitive market scenario as we see today.

Impact of climate change on the auto sector

This is one sector that could see big changes in the coming years. We already see companies like Maruti Suzuki laying out plans to exit diesel cars altogether. Use of diesel is a major cause of air pollution the world over and the Volkswagen case just underlined that. Tata Motors is already betting big on electric cars as their future course of business and we could see a lot more once the product achieves economic scale. Electric vehicles are environment friendly in many ways. Batteries can last long, the maintenance is quite cheap and it is easier on the environment.

Of course, the challenge of developing economies of scale and creating the necessary manufacturing and service infrastructure still remains but that should follow over time. This is going to be one big sector that will feel the impact of climate change in a big way. The auto companies of the future will have to be the auto companies that are able to adapt to the climate change requirements. That will also impact your investment strategy in a big way.

Bigger impact of climate change could be on power sector

The Indian power generation sector accounts for more than 70% of the coal consumed in India. Not only India still relies predominantly on thermal power (based on coal) but also produces coal of very low calorific value. This means the power sector also ends up importing a large chunk of the coal requirements. Among the emerging economies, India and China are the two biggest contributors to global warming and that means the shift out of coal fired power generation will have to be rapid and substantial.

Ever since the NDA government took charge in 2014, there has been an overt thrust on alternative forms of energy like solar energy. The government has already set a target of 100 GW from solar power and 60 GW through wind power by 2022. Alternate energy was stuck for a long time due to high cost of equipment but that has changed with China bringing down the cost of equipment in a big way.

New themes may emerge in the stock markets

On the positive side, new investments themes may emerge for stock market investors too. Black energy companies involved in sectors like crude oil, refining and thermal power generation may see their P/E ratios gradually trending lower. Green equipment makers and alternate power generators may be the road ahead. Even in automobiles, the future of investment strategy would lie in auto companies that are able to seamlessly adapt to green cars and also scale with profitability. With productivity of agriculture falling due to climate change, investors must seriously look at companies involved in hybrid seeds, genetically modified (GM) seeds, drip irrigation systems etc. it is time for investors to adapt to the new models of investing to be future ready!