Need some distractions from your day? Scroll down to the bottom of this email. There's a baby jaguar.
But first, let's talk about climate risk. No, I am not talking about "climate change" as the partisan political issue that divides us rather than binds all of us global inhabitants to a common interest to protect our surroundings.
I am talking about the wildfires, hurricanes, and floods we've seen in 2020 (on top of an already-awful global pandemic) make this an important conversation to have.
Think that climate events are not an issue? Well, the market consensus is moving in the other direction.
Insurers, government entities, and large investors are treating changing climate risk as a major systemic risk to financial markets.1
Why? Because many companies and sectors are at risk from the costly heatwaves, wildfires, droughts, floods, and hurricanes that come with a warming planet.2
So, what does climate risk mean for investors?
Investors worry that climate risk could cause the prospects of certain companies to drop dramatically and ricochet throughout the financial system (much like what happened during the 2008 financial crisis).
But, unlike a global issue such as the coronavirus, the effects will play out differently around the country and the world.
Flood- or wildfire-prone areas could experience disruptions in business or find it difficult to insure homes and structures against damage. I live in a fire-prone area and the cost to insure our home will likely continue to rise substantially. Not to mention the non-financial risks of losing our home to fire, as almost happened in the Woolsey Fire in 2018.
Agriculture could be damaged by droughts and heat stress.
Already-warm areas could become too hot for comfortable habitation.
But, if the world goes all-in on sustainability too suddenly, there's also a danger that the “transition risk” caused by new regulations or widespread shifts in energy use could also hurt markets or certain sectors of the economy.3
Well, what's the good news?
There's always hope. Many of the worst effects of climate change, while unpredictable, will play out over years and decades, not weeks and months.
There's time for people, businesses, and governments to adapt. And humans are infinitely adaptable.
And there's hope that the worst-case scenarios about a hotter world might not come to pass.4
I believe that optimism and pessimism can (and often should) co-exist.
I'm optimistic that we will make the changes needed to get on the right path and steer away from the worst effects of climate risks.
I'm pessimistic that we are not sufficiently protecting other, perhaps less adaptable fellow inhabitants of our planet. For example, the rapidly declining populations of the majestic wild mammals.
As your financial professional and guide, I'm also staying on top of the growing body of considerations and research to help my clients chart their own personal path through an increasingly uncertain world.
Here are the distractions I promised.
Deep breath. We can do this.
What do you think? Are you worried about climate risk?
How might it effect you? And what do you think we should do about it?
P.S. Markets have been volatile this month. It's to be expected with so much uncertainty swirling about. I'll reach out if I have anything critical to share.