Commercial Implications of Climate Change

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According to the Intergovernmental Panel on Climate Change established by the U.N., each of the last three decades has been successively warmer than any other on record. Climate change models predict increased warming will have the direct effect of rising sea levels and an increase in the frequency and strength of extreme weather events. Climate change threatens societies’ access to clean air, safe drinking water, sufficient food supply and secure shelter. These factors, in turn, result in indirect challenges to existing consumption patterns and public policies. In a world where goods and capital markets are highly integrated, firms depend on international markets to buy their inputs, sell their outputs and raise investment. In this interconnected world, climate change will be an increasingly important factor. In February 2014, Wikistrat ran a two-week brainstorming drill exploring the commercial implications of climate change. More than 50 analysts collaboratively explored which industries are most vulnerable to climate change – and which industries stand to gain from it. A selection of the insights are presented here:

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VULNERABLE INDUSTRIES Sea levels and weather: reorganization of global production chains Today the top 500 multinational firms are responsible for 70 percent of world trade. Rising sea levels threaten operations in the world’s major commercial ports including Shanghai, Singapore, Dubai and Hong Kong. Recurring extreme weather events along major shipping routes will cause disruptions and halted delivery of intermediate inputs and final goods to consumers. Multinational firms will need to reorganize production chains, reconsider shipping frequency and shipping distances and coordinate manufacturing along new less weather-dependent shipping routes. Multinational retailers like Amazon and Asos will need to stock more inventory and spread it over more geographical locations. Consumers demand clean energy As climate change becomes more visible to consumers, they will increasingly prefer companies who promote clean energy and energy-saving technology. The growing and environmentally-aware middle class will be willing to pay a premium on clean energy usage in the household and in production of their consumer goods. This may result in diminished profit flows to and (investment flight from) capital-intensive industries, such as the automobile industry and the extraction and refining of fossil fuels. Even if the emission of greenhouse gasses is an issue in extraction of uranium, nuclear energy produces hardly any greenhouse gas. Nuclear energy requires significant capital investments, but with changing consumer preferences it is likely to become more attractive relative to major CO2 culprits like coal. Recent research suggests hybrid nuclear plants that combine nuclear energy production (which has a steady capacity and cannot easily be ramped up or down) with another energy production source, such as a hydrogen production plant or a shale-oil recovery operation, can improve the efficiency of energy production operations. Energy storage capacity is limited today, but increasing consumer demand for energy-saving technology is likely to lead to growing public and private interest in energy storage innovation. For example, on March 3, 2014, American firm Green Charge Networks received a $10 million private loan commitment to offer their energy storage products to consumers with no upfront costs. Energy companies will need to take all of this into account when expanding their operations. Agriculture: innovate to compete In India (the world’s second largest producer of rice and wheat measured in millions of tons) most agricultural production is located in drought-prone areas, with some in areas with a high frequency of floods and cyclones. Recurring disruptive weather events threaten food supply and hurt often already-vulnerable producers by causing volatile agricultural prices to swing even more drastically. In terms of export revenue, climate change has a major impact on some countries and regions: Citrus production in Brazil and wine production in southern Europe will be hit hard as production must move to new (more temperate) locations. Decreased food production will push governments to abandon strict regulation on genetically modified seeds. To maintain and gain market share, innovation of new seeds that can stand droughts and fluctuating humidity/rainfall will be even more crucial than today. Profits for a successful innovator would be substantial, creating strong incentives for international industrial espionage in agriculture. Protecting intellectual property in agriculture via trade secrets or IPR regulation will be increasingly important – and likely a topic of renewed heated international debate of patent infringement in poor countries. Agricultural firms may find themselves having to invest more in corporate social responsibility (CSR) and engage in public-private partnership to ensure poorer countries’ access to new agricultural innovations. Methodological innovations such as vertical farming and advanced irrigation techniques will also become increasingly important for agricultural firms. High transportation costs due to extreme weather events along with consumer preferences shifting towards less environmentally harmful goods will increase demand for locally produced agricultural goods.

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OPPORTUNITIES FOR INDUSTRIES Melting pole ice – an opportunity for logistics companies To meet the transformed demand from multinational firms, shipping and logistics companies will need to diversify their services and explore new shipping routes and/or shipping modes such as air, road and railroad transport. Polar ice melting is expected by many experts to open up Arctic shipping routes connecting the Atlantic with the Pacific Ocean. Exploring Arctic shipping routes will involve large capital investments in new ships (ice-breakers) and reloading facilities. A few large logistics companies will, thus, likely dominate the market for Arctic shipping. Considering the strategic importance of the Arctic coasts for the U.S., Canada, Russia and Norway – and its potential for resource extraction – successful firms can expect government subsidies and support. New and growing consumer demand for drugs for vector-borne diseases Warmer temperatures will push vector-borne diseases, such as dengue fever and malaria, into new locations in Europe and China. The World Health Organization (WHO) estimates that climate change could expose an additional 2 billion people to dengue transmission by the 2080s. A large share of the world’s growing middle class lives in areas affected by this increased risk of vector borne diseases. A higher frequency of droughts and floods has already been linked to malaria outbreaks in Africa, Asia and South America. For the pharmaceutical industry, this means new and growing consumer markets, multiplying profits for decades to come (WHO estimates the global pharmaceutical industry to be worth around 300 billion USD today.) First-mover advantages will be large for those that win the patent races for drugs for these vector-borne diseases. The increased profitability of affordable drugs to the growing global middle class is likely to lead to intensified competition and entry of new firms, in particular from the large Indian pharmaceutical industry – and renew the debate on patent protection and affordability of drugs in poorer markets. Public-private infrastructure procurement generates construction boom Flooding has proven extremely costly for both firms and cities: In 2012, flooding of the Niger delta caused Nigeria to lose as much as 500,000 barrels of oil a day for two months – and in September 2013, floods in Colorado shut down 1,900 oil and gas wells. In November 2013, the State of New York pledged $13 million to erect flood barriers around the Long Island industrial district that was damaged by Superstorm Sandy (and awarded the contract to a Dutch firm). We can also expect rapidly increasing public procurement for strengthening power lines, signal towers, generation stations, road and rail infrastructure and for preparing disaster evacuation. Major private-sector agriculture companies, private health-care providers and senior homes will need to invest in hurricane/disaster preparation services. Power and telecommunications companies – as well as insurance companies – are likely to be increasingly regulated and/or directly involved with governments to protect consumers in disasters. Governments are likely to fund projects to improve the resilience of public infrastructure to a variety of disasters such as earthquakes and floods. R&D investment and innovation in flood barrier technology, resilient materials and building techniques (for example drainage systems and underground hurricane/tornado-proof housing) will determine construction companies’ market share in this rapidly growing global industry. Private security firms in mass relocation and scarce resource protection Scarce resources (potable water, food) will increase tension, resulting in local and regional conflict over access to resources. Protection of public and private desalinization plants, purification plants and water pipelines to prevent theft and/or illicit diversion and ensure orderly distribution is likely to be a growing industry for private security firms around the world.

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With rising sea levels (and lack of arable land and water access), relocation of towns, villages and industrial areas will be more common. Most notably, populations in low-lying areas (such as the Mekong Delta, the Red River Delta and the Ganges-Brahmaputra Delta) will face mass relocation. Even though public authorities will be in charge of implementation and planning, private security contractors are likely to be tasked with overseeing relocations. Regular armies and law enforcement entities are not trained to deal with large-scale humanitarian relocations, and the private security contractors that train their employees for such missions will have an advantage over competitors.

CONCLUSION Climate change directly affects firms’ production conditions by making shipping more costly and precarious. Food security is similarly affected; current fishing waters and agricultural production locations will be rendered unprofitable in the coming years. However, the major commercial implications of climate change will be demand-induced: With rising temperatures, consumers face new and more severe challenges in the form of vector-borne diseases, unclean air and weather-related disasters threatening private homes and infrastructure. Consumers around the world will be willing to pay for products and services that help them deal with these challenges – and they will push their governments to do the same.

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June 2013

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Written by: Dr. Amanda Skuldt & James McGirk in consultation with Dr. Thomas PM Barnett, Wikistratís Chief Analyst Edited by: Steve Keller

There were more than 60 analysts participating.

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