by Harvey Stone
We all know the experience. The plane shakes. Peanuts roll off the tray table. The Captain says: “There’s turbulence ahead.”
WBut what is “turbulence?” One definition says “chaotic changes taking place.” Others use words like “random” and “highly irregular.” No big deal, right? We’ve all flown in turbulence. We’ve invested in turbulent markets. We’ve lived through turbulent times.
The problem is when we see lightning. It doesn’t take a crystal ball to know we’re in for a harrowing ride.
Similarly, it doesn’t take a crystal ball to know we’re in for a harrowing investment ride, as we fly headlong into a period of greater turbulence globally.
What’s the lightning? To cite just a few bolts: greenhouse gasses keep increasing, while polar caps keep shrinking; the record heat wave in Russia, flooding in Australia and droughts in China; and surging food prices that contribute to uprisings in Egypt, Libya and Tunisia. Heck, in just a few-week period, 2 million Texas acres burned; 3 million chickens died in Alabama tornadoes; and we drowned a few million acres of farmland to keep New Orleans from becoming Atlantis’ sister city.
And did I mention the Japanese earthquake/tsunami/nuclear meltdown? Or the fact that scientists use words like “dire” and “irreversible” to describe the five-foot sea level rises that are possible by mid-century? Or the specter of 250 million eco-refugees trying to pour into countries that don’t want them?
The Era of Extreme Turbulence
Never before in human history has:
1) Our world been so inter-connected and so fragile
In 1997, Thailand devalued the baht, and it led to a domino effect where Russia defaulted on loans and US banks nearly went under. (For a more recent example, think “Lehman Brothers.”)
2) Our species lived so close to the edge of our planet’s carrying capacity
The world population is expected to crack 9 billion by 2050. But, unlike the Green Revolution after WWII when there were fewer people, more water and new fertilizers, our ability to supply food is already decreasing due to soil erosion, aquifer depletion, the diversion of cropland and other factors.
3) There have been so many natural disasters creating so much destruction
In 2010, there were 960 natural disasters globally vs. a previous ten-year average of 785.
And, for good measure, the rapidly shifting climate is producing what the military calls a “threat multiplier.”
Given all the above, we’re flying deeper into a century of extreme turbulence. It adds a new touch to the age-old quandary: how do we minimize risk and maximize reward?
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Methods for evaluating risk and reward have evolved along with economies, markets and technologies.
Twenty-five years ago, companies and municipalities were almost solely rated on financial performance. Since then, we have added social and environmental screens. Today, some mutual funds and financial planners consider the impact of climate change on a company’s markets, products and competitive positions.
As we move further into the Era of Extreme Turbulence, there are additional corporate and municipal screens that may be added by Socially and Environmentally Responsible investors, financial planners and mutual fund companies. If implemented, they will require sources of information from insurance companies or third parties who track the likelihood of natural disasters based on climate, carrying capacity and related factors.
Screening for Risk
1. Geography and the likelihood of natural disasters
Awhile back, I told a Munich Re executive about a “Natural Disasters and Business Resilience” service I was developing. He provided me with links to his company’s data. It set me on a path of tracking the direct and indirect impacts of the Australian floods, Japanese earthquake, Texas fires and other natural disasters on businesses and communities.
It also sensitized me to investments that my SRI financial planner has my wife and I invested in.
Example: we are minority partners in several commercial and multi-family real estate ventures. When a property was recently foreclosed, I had a portfolio conversation with the management company President. I asked him if he took the likelihood of natural disasters into consideration when selecting properties.
“No,” he said candidly.
As both an environmental consultant who works with natural disaster impacts and an author who writes about them, it dawned on me that “natural disasters” could be an increasingly important investment screen.
From a recent conversation with an analyst at Calvert, I learned that the use of a “natural disaster” screen is trending. Nevertheless, I expect it will be increasingly important in the next few decades. Why? Because climate models predict more extreme weather events related to a region’s patterns. As an example, I live in New Mexico. The models all predict severe drought and water shortages. What happens to Intel when Albuquerque needs the water for its citizens?
Similarly, imagine a financial planner who wants to add a Tuscaloosa muni bond to a client’s portfolio. In the past, she might have checked the city’s finances and ratings. After the 2008 recession, she might also check the unemployment and foreclosure rates to assess tax revenues. But would she have weighed the threat of more tornadoes and more intense tornadoes? Maybe. Today? Hopefully, “yes.”
Or, looking at a few indirect examples of natural disasters on corporations:
- The 2010 Pakistani floods contributed to higher cotton costs, forcing Levi Strauss to impose a double-digit increase in Q1, 2011 products
- The 2010 Icelandic volcanic eruption cost the airlines $200 million a day and crippled the Colombian flower industry’s “Mother’s Day” sales
- Because of the March, 2011, Japanese disaster, Toyota’s Q1 profits dropped 77%; every auto company shut US and European production plants because they couldn’t get parts; two Japanese companies that produce 70% of the printed circuit boards for electronics manufacturers were shut down; and the reality of rolling black-outs, gas shortages and damaged shipping ports will continue to disrupt manufacturers, their global suppliers and the communities that rely on them for jobs and revenue
2. Carrying capacity issues, e.g. fresh water
Evaluating a company or community’s risk to carrying capacity issues will be increasingly critical in future years. After all, Lester Brown tells us that, every day, we have 219,000 more mouths to feed at a time when there is less water and food. And the World Business Council for Sustainable Development indicates that, by 2040, the supply of energy and material resources needed for industrial growth could rise to 170% of the Earth’s bio-capacity.
The most obvious water impact will be on farming communities. Take Boise, Oklahoma, a survivor of the Dust Bowl in the 1930s that could be a ghost town by the 2030s. It sits above the Ogallala Aquifer, which could dry up in a quarter century. When it does, it will destroy communities like Boise and the companies, farms and lives that rely on its water.
In reality, every industry and every community is at the mercy of water supplies. We have substitutes for oil, but not for water. In that regard, a company’s ability to manage, harvest, transport and re-cycle water may serve as a positive indicator for investing in that company.
Screening for Reward
As global turbulence grows, investment opportunities will occur with companies and communities that are resilient and that capitalize on opportunities.
For example: Within days of the Japanese disaster, General Motors (GM) set up three “crisis” rooms where dozens of employees tracked suppliers, diverted parts and mobilized the company for a faster recovery. While there are many other factors, this mobilization will contribute to GM regaining its role as the #1 vehicle manufacturer in the world.
Also within days of the disaster, investors drove up stock prices for Caterpillar, Komatsu and other construction companies that will likely sell heavy-machinery to re-build Japan.
And public earthquake-preparedness companies like Taylor Devices will likely see their business rise as Japan, New Zealand, Haiti and other regions re-build.
MELTING DOWN BOOK
Two months ago, my publisher launched MELTING DOWN – the environmental thriller novel that I wrote for several reasons, e.g.:
- We are all extras in the real-world environmental thriller, where events move fast, the stakes are enormous and the outcome is uncertain
- In 2006, a Pew study showed that 50% of Americans believe the climate is changing and humans have something to do with it. A 2010 follow-up indicated that only 34% believe it. Maybe if I embedded climate science and impacts in-between glaciers being blown up and wild snowmobile chases, I could help to galvanize “climate” as a political issue.
- MELTING DOWN’s plot rests on three real-world fault-lines that will very likely trigger another global disaster: Arctic sea ice is disappearing; the world’s largest untapped oil and gas reserves lie under the Arctic; and the Russians claim the lion’s share of those reserves.
Since I finished the novel, the fault-lines have widened. Russia signed explore-and-drill deals with major oil companies. It is training troops to defend its Arctic claims. And, mind-boggling, it will launch a floating nuclear power plant to run operations in a part of the world that is dark for months, has vicious storms and still has floating ice chunks that could take out the Titanic.
In addition to climate science and impacts, I also used the novel to introduce two other ideas to a wider audience that will be critical to our finding a path out of the coming turbulence.
The first idea is systems thinking. MELTING DOWN’s male protagonist, Tex Cassidy, is a master at connecting global dots; thinking wider; and seeing patterns that reduce the risk of devastating consequences. Similarly, the female protagonist, Zavia Jansen, is a world expert in storm surge barriers who uses her deep understanding of climate and water to help countries protect their coastal areas.
The second idea is the triple bottom line approach. To be developed further in a sequel, there are several examples embedded in the action that highlight on-the-ground approaches to simultaneously solving social, economic and environmental problems.
As world turbulence increases, the ability to think in systems and to implement triple bottom line solutions offer perhaps our best hope of reducing risks, reaping rewards and returning to smoother air.
Article by Harvey Stone, President of Triple Bottom Line Times, a consulting firm and media platform. If you would like to comment on this article or seek further information, he can be reached at harvey.stone@tbltimes.com or call (505) 989 8943.
