Risks are always factored into our investment decisions. Climate change is certainly one easily recognisable at present as forest fires burn out of control, storms erode foreshores and farms run out of water. These concerns are hardly new but recent experiences have turned them from concerns that are beyond the horizon to very real current day considerations. What the future holds for our environment and how we can protect it is reshaping our world politically, economically, commercially and socially on an unprecedented scale.
So, when we are looking at risks to our capital markets, the world’s response to climate change is very topical. Sure, New Zealand has an established carbon market, a Government that’s encouraging Electric Vehicle (EV) adoption and more environmentally friendly energy sources. Worldwide consumer decisions are becoming more driven by better options for the environment too, such as plant-based protein and reduction in non-recyclable plastic usage. As climate change impacts our day to day lives, however, there’s inevitably going to be social and thus political pressure to do more than beyond what we are currently doing.
Whether it’s electric vehicle adoption, the future of media and information, interest rates, the outlook for medical marijuana or plant-based protein, capital markets allow us to invest in our views and be proven right or wrong.
The environment – what will our planet look like and what might change?
Infrastructure – what will need to be built to accommodate those potential changes
Agriculture – New Zealand has a strategic advantage in agriculture. How will that develop in the future?
Through investment in capital markets we are generally expressing our views of what the medium to longer term future may hold
Are you willing to bet on what the future might look like? It may (a) go as expected, (b) be better than expected, or (c) worse than expected. Whichever you predict there are always going to be at least two alternative scenarios. The problem with looking into the future is the further out we need to look, the more unknown the outcomes and the greater the risks we need to consider. When it comes to investing, the same logic applies. The shorter the timeframes being considered, the easier the risks are to predict.
People tend to focus on three-year political cycles given the political landscape in NZ and Australia, and the media’s short term views. Like corporates, investors need to be considering strategies that span not only today, but 10, 20, 30 years into the future.
The problem when considering so many potential outcomes is that with each there are a multitude of uncertainties. What will regulation be in 20 years? Who will the CEOs and leaders be? How will consumers behave? Will technology change? What will interest rates do? The outcomes and risks in some cases are simply beyond our imagination.
Educated and well-founded researched may guide us, then we are applying a healthy amount of subjective risk analysis of that occurring, with a simple relationship: the longer the timeframe we are forecasting, the more risk we are taking and the more potential outcomes that exist. Anecdotal evidence can also be handy, how many users of Xero went onto buy shares in the company after having a positive experience with its software?
Consumers’ needs and wants, which are becoming increasingly sensitive to the needs of the planet, will continue to drive demand and change corporate behaviour. This in turn will effective Government behaviour as it regulates on what is palatable to the electorate. Governments are voting machines with a short-term bias, so changes will lag what is required again, thrusting the burden back on corporates, who will seek to differentiate themselves to their customers and other stakeholders. This will incentivise customer choice and lead to corporate innovation and subsequently competitive advantage. Consumers, governments and companies will respond to climate change and it falls on us as investors to consider climate change in our investment decisions.
This article reflects general views and opinions of Maxim Financial Markets Limited at the time of publication. Nothing within the article should be relied upon as a basis for making any investment decision. Please contact us to seek specific investment advice before making any investment decision. A Financial Advisor disclosure statement is available upon request.