If human history is any guide, people won’t stay put once climate change permanently alters agriculture, weather patterns, and infrastructure.
A new study from Wellington Management, which grew out of the asset manager’s work with Woodwell Climate Research Center, explores the effects of climate change that will cause people to leave their home countries and the regions of the world that will become the most likely destinations. The report, which also looks at the impact on countries and regions that will lose or gain population, evaluates how these shifts will affect investments across regions and industries.
Climate risk has emerged in the last few years as one of the top concerns of institutional investors. Many asset managers, including BlackRock, have invested in capabilities to assess the effect of climate change on specific investments such as real estate. Other argue that the effects of rising temperatures are already reflected in stock prices.
Wellington draws its thinking on investments from a central premise that a decline in livability will be the primary driver of migration. But the impact of climate change will, in some cases, only add to existing political and social pressures. More persistent drought conditions, for example, will exacerbate food shortages in some unstable regions. From an economic standpoint, rising temperatures will put pressure on per capita income levels, labor productivity, and health — all of which will strain some companies and sectors, according to the report.
“By amplifying underlying political, economic, or social tensions, climate change can become a threat multiplier — a livability tipping point that helps catalyze an exodus,” wrote the authors of the report, including equity and fixed income portfolio managers and a geopolitical strategist at Wellington.
Even though people will seek a more hospitable environment, the report argues that many will want to explore better conditions within their own countries to remain close to family and social networks. If this proves unworkable, people will then cross borders. Higher income populations will likely have more options within their own countries to mitigate certain risks, while the poor will be the most likely to experience the full weight of climate change, according to the study. Wellington expects most climate migrants to fall somewhere in the middle of the income range.
The report also argues that many people may seek to live in cities, pushing the already strong urbanization trend even further. Rural residents may want to live in cities to get more access to non-agricultural work opportunities as well as education. Some cities may get stretched and overcrowded, and then experience a brain drain as those who can leave, do. Other cities, however, may benefit from a new source of labor and new markets for local businesses as well as new tax bases.
The insurance industry, which has already felt the impact of climate change as events like hurricanes have become more frequent, will need to continue to adapt. Property and casualty companies may have to pay out enormous amounts as storms and other weather events repeatedly hit certain areas of the globe. At the same time, individuals and businesses may not be able to afford crucial insurance to protect property.
Assessing the impact of climate change won’t be a simple algorithm for investors, according to Wellilngton. For example, investors may want to entirely avoid certain countries they believe are at risk. But Wellington argues that the calculus for investment decisions is far more complicated.
“We suggest investors assess regional climate risk within countries,” the authors wrote. “Even countries with low aggregate levels of climate exposure could be home to certain regions with very high risk and could suffer from spillover effects.”
Wellington argues there may be plenty of investment opportunities to help people mitigate the worst of climate change, including in air conditioning, air purification, technologies to help upgrade electrical grids, solutions to deal with water scarcity, and research and development into seeds that are drought resistant.
Real estate, which represents a huge exposure for most institutional investors, may experience a massive reordering, as wealthier residents and businesses relocate from coasts or other at-risk areas. “If a concentration of insurance risks leads to unaffordable or unavailable coverage, residential and commercial real estate pricing, along with mortgage financing and insurance, could take a hit.”