During my fellowship in public policy with YLAC, I chose to work on the policy landscape around ‘Climate change and renewables’, with zero understanding of climate change. Was so lame, to the extent I attributed global ‘warming’ only to hot summers in Chennai with little knowledge of what caused the colder winters in December. All I had in my mind while choosing the topic — it is global and sounded ‘cool’.

At the end of every discussion with my cohorts, uncovering some data points, we were like “S**t, this is crazy and scary”. While the coronavirus has made us realize how vulnerable human life is, the threat of climate change — a much larger existential crisis — seems underwhelming to us.

The reason could be on two counts — economic interest of the nation and cognitive bias at an individual level.

Who Should Bell the Cat?

At a global level, essentially, the question is — who should lead the pack. Should it be the rich developed nations, which has contributed enough to the greenhouse gas (GHG) in the past, in the name of industrialization during their growth phase. Or should the emerging economies, like ours, stop GHG emissions, potentially not becoming a future developed nation at all?

To complicate the matter further, amongst nations, who should cut emissions and by how much. You see, as a nation, Philippines wouldn’t really care much of a draught in Africa. Simply because, we cannot attribute such extreme weather events to one country’s insensitive emission norms.

How far is long-term

At a more individual level, we suffer from the cognitive bias of overestimating the impact of X in the short-term and underestimate the effect of Y in the long-term.

Think of our physical and mental health — we all know how important it is to work out/meditate and stay fit, yet we don’t. The focus on accumulating wealth in the short term makes us slog forgetting the longer-term impact on the w(h)ealth. There is the logical fallacy in this approach — in the peak of our earning potential (earnings per day), every day lost in 40s and 50s due to health limitations will make us poorer at retirement than your present day lost earnings.

While business leaders, CEOs and investors chase infinite growth in the short run, there is an economic cost attached. Some research suggests, if the risk of climate change is factored in, the present valuation of listed entities would be down by 10%. Also, the impact could be felt far higher holding the so-called value stocks than the high PE growth stocks, given the industries that pollute more are traditional low PE sectors — transport, construction, utilities, mining, and oil and gas.

Thankfully, to hedge this risk, investors have already started allocating more capital to green bonds and ESG funds, which in turn invest in companies that are conscious of sustainability. The flow into ESG funds in 2020 is 2x of that in 2019.

Bottom line

Climate change is real. Like the market and interest rate risk, the climate change risk could potentially dent our retirement portfolio without you noticing it.

Knowing this, you ask if I have stopped riding my petrol bike, printing papers in my office or consume meat. Clearly, no. But I’m no more ignorant of the effect this could do to the mankind. Least, I carry a bit of guilt, which I hope would help me think more eco-friendly.

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Nishanth Sekar

Big-picture Thinker | Finance & Valuation Professional | Passionate Investor | Public Policy Enthusiast | Policy in Action Fellow