Making Money Out of a Global Crisis

From aiCIO Europe's April issue: Elizabeth Pfeuti looks at capitalizing on climate change, water scarcities, and socio-political evolution.

View this article in digital magazine format.

Once change has started, it is very difficult to stop. If this change is on a global scale, it’s impossible.

But does this mean investors, helpless in the face of geopolitical tides, should sit passively and simply hedge potential risks? No. The best will use their financial might to help solve a crisis—and make a buck or two while doing it.

There are plenty of crises to choose from. Average temperatures are set to increase by around 2°C over the 21st century, according to consulting firm PwC. There is just 50 years’ worth of oil left if we continue to use it at our current rates, but energy consumption—and electricity generation is still the largest user of fossil fuels—is set to rocket 50% by 2030, PwC believes.

More visibly, over the past 20 years, global society has also undergone dramatic change, shifting the population’s demands and needs. Japan has begun closing 400 schools a year, due to its falling birth rates, notes PwC, while sales of adult nappies by the country’s leading sanitary and hygiene firm were higher than those sold for infants in 2013. India and Latin America, which have burgeoning birth rates, are leading the explosion in smartphone sales to cater for their young populations.

Investors have three choices: wring their hands and worry; hedge out potential losses by dropping resource companies and Japanese toy makers in favour of silicon stocks in their portfolios; or seek out opportunities created by these changes.

“Investors have to get on their agenda that what the world is going through presents opportunities to make money,” says James Holley, senior manager at consulting firm KPMG. “There are new technologies and services that are the products of innovation happening all over the world, and rather than policymakers, it is industry and investors who should be the driving force behind them.”

These policymakers—mostly international governments—have many more pressing issues on their minds, and a cynic might argue that few political parties have ever won an election by promising to invest in sustainable energy production, for example, despite the pressing need illustrated above.

Some may feel ill at ease profiting from something as potentially destructive as climate change, but it falls well within many investors’ fiduciary responsibility. “For long-term investors, the alignment is really good,” says Holley. “Investors can often fall victim to short-sightedness and needing an immediate return, so we need to help educate them—and their beneficiaries—about global megatrends that are set to impact our world and our businesses.”

One megatrend is the change in global diets. In 2004, the United Nation’s Food and Agriculture Organization (FAO) predicted that by 2015, developing nations would have increased their yearly intake of meat from 10.2 kilos in 1964 to 31.6 kilos in 2015, marking a 210% surge. The organisation updated this prediction eight years later to say that in 2012, there had already been a 221% increase.

With that in mind, one might think commodities would be a good bet for investors. The S&P GSCI livestock total return index rose 12.37% in the five years to the end of March—not bad, but what about the future? In 2012, the FAO warned this increase was not sustainable in the largest production regions: the US and Europe. The cost of production with relatively little upwards price movement had dealt a killer blow. Instead of demanding higher prices, farmers in developing economies were taking over. We have seen this story before—cheaper labour markets and production systems do not send prices soaring in a sustained fashion.

So how can investors benefit? By looking to what is scarce in this equation. Land? Even back in 2004, mega-farms were booming. In 1964, half of all beef cows in the US were held on lots of fewer than 50 animals. By 1996, nearly 90% of direct cattle feeding was occurring on lots of 1,000 or more, according to the FAO. Feed? Figures are disputed, but it certainly takes more wheat to feed cattle than to bake a loaf of bread. However, animal feed can be made from many things—including food waste from humans—and can be stockpiled, so we need to be cleverer, and longer term, than that.

It can take up to 20,000 litres of water to produce one kilo of meat, according to the UK’s Institution of Mechanical Engineers. This includes the water needed to grow feed, quench thirst, and be used at all external stages by technology and industrial practices. Some 200 million litres of water is used every second in food production. And water is exhaustible.

Just 1% of the world’s total water is available to be used, according to European not-for-profit agency Waterwise. The rest fills our oceans, sits frozen in ice caps, or is otherwise unreachable or unusable. This is one constant in our lives. Throughout the planet’s history, there has only ever been 1% available to be used. In 2001, the global population used 54% of this water, according to Impax Asset Management. By 2025, we will use 70% of it—and the population is still growing.

To cut this Gordian Knot, purification and desalination processes have taken hold in some emerging economies on the front line of water scarcity. Global growth rates for companies involved in filtration, membrane technology, and desalination are around 15% to 20%, with 26% annual growth forecast in China and 15% to 20% in India.

Investing in companies that concentrate on energy efficiency will gather momentum across many sectors. Today’s petrol and diesel engines deliver up to 80 miles per gallon, but this should rise to 100 miles per gallon within 15 years.

When you look far enough into the future, there are plenty of ways to access potential returns—but there is also at least one stumbling block. Much of the innovation that will help solve these crises is happening on a micro level, and it is difficult to access for large investors who themselves are usually resource-constricted.

Some pension funds are building in-house teams to address these issues and the opportunities therein. Dutch pension giant APG and PGGM have made significant strides to implement measures that not only screen out investments that are not environmentally or socially sustainable, but bring in new investments that will take advantage of the world’s new state. The Swiss public pension investor Publica is set to make its €29.5 billion work in the same way, as will the UK’s Railpen.

“The trick is to identify value that can be attained by scaling it up. Investors can then see synergies across their portfolios,” says KPMG’s Holley. “If one area is creating waste, another part can be employed to help clear it up. That many investors can only see the risk potential is one of our largest challenges.”

If investors are serious about looking long term—meaning dry oil wells in 50 years should not be at the end of their time horizon—there is plenty of innovation to explore. Thinking out of the box and being part of the solution can be a profitable business, and one that will start reaping rewards earlier than many might think.

If they and their peers get it right, investors may also still be around to see how it all turns out. 

«