Whether it’s wildfires in California, Texas winter storms, or floods in Australia, the problem with climate change is twofold: not only changes in the physical landscape, but also an inability to prepare an adequate response for worst-case scenarios, even when the best of our science suggests these are highly likely.
A good example of this is in Chinese agriculture. China is among the world’s biggest producers of corn, soybeans, and wheat, but our research shows that many of China’s regions where these crops are grown experience severe water scarcity, with 40% lying in the twentieth percentile for water scarcity risk globally.1 Data from Woodwell suggests that the likelihood of years when yields are down by 10% relative to historical levels will double for all crops by the middle of this century, with wheat showing the highest likelihood, at 65%. The data also indicates that droughts will increase in severity along an east-west axis from Tibet through Chengdu and Hunan in central China, where drought conditions will persist up to 60% of the time from 2021 – 2050 onwards.2 That means the incidence of drought conditions will have increased by around 80 months per decade relative to the 1971 – 2000 reference period used by Woodwell. This will impact both China and neighboring countries reliant on the Mekong River, which originates near Chengdu.
Surprisingly, the research shows an increase in flooding risk as well as water scarcity — in fact, the two phenomena are linked. A warmer atmosphere can hold more water vapor. So, when a storm forms, rain can fall in large quantities, with a drastic effect on any individual location. China is not prepared to manage extreme precipitation events. Roughly 70% of Chinese cities’ stormwater systems cannot properly deal with a one-in-five-year storm event. And we believe that, by mid-century, historical one-in-100-year and one-in-500-year extreme precipitation events will likely occur with at least five times their historical frequency for most of China, especially east of Chengdu and in the northeast region.
China must not only plan for a water-scarce world; it must also plan for flooding in many of its major cities.
What are the opportunities?
China is one example. But we’ve found that increased levels of climate adversity in agriculturally productive areas around the world will require ongoing investments in agriculture technology to boost crop productivity and crop resilience. The same is true for water infrastructure. Climate solutions related to water can be as simple as flow technology or as complex as smart water solutions that enable us to irrigate more intelligently, dispatch water more precisely, and use it more efficiently. We believe that there is a wide opportunity associated with these themes.
We have also found that China faces one of the highest threats of sea-level rises. That’s why it is building what has been dubbed a new Great Wall — flood defenses centered on the coastal regions of China to protect cities like Shanghai. This and similar projects bring with them an increased need for specific construction materials and flood infrastructure technology.
China and India are likely to be the two largest incremental sources of energy demand in future decades. For economies that are attempting to grow quickly, modernize, and raise per-capita income, access to low-cost energy is key. Today, unfortunately, we still see a reliance on energy forms that we do not view as sustainable, including coal and, to some degree, natural gas. Both countries face a conundrum: They must deploy vast amounts of energy while attempting to diversify their energy sources. It’s thus crucial that China, alongside India, is on a path to decarbonization. From an investment standpoint, this plays into the growth of renewable energy sources globally, as well as alternative fuel use and the redesign of energy infrastructure to increase efficiency.
At Wellington, we are able to match our deep knowledge of renewable energy firms with insights from Woodwell’s climate science on whether local conditions favor wind or solar power generation. This can help to inform our analysis of those companies when we engage with them on managing the productivity of their renewable assets. Blending that information with other fundamental research gives us a good sense of what might be the best regulatory outcomes. It also provides a much more complete picture of the risks and rewards of investment and helps us build a mosaic of insights.
Taken as a whole, our research on climate change leads us to believe that many investors are overexposed to the risks stemming from climate change while being underexposed to the accompanying investment opportunities.