Emerging markets: Climate change and future performance

3rd November 2011

Once among the world's fastest-growing economies, Thailand has lagged behind much of the rest of Asia over the past decade, posting solid but far from astounding growth while other emerging economies such as China have surged ahead.

Thailand averaged 5.1% annual growth from 2000 until the global financial crisis, compared with 7.8% for emerging economies in East Asia as a whole.

A series of problems have hit Thailand's underperformance, including political instability – but also natural disasters, including a giant tsunami in 2004.

Today it faces the worst floods in 50 years, with a wide range of companies affected. Sony, for one, warned it would suffer a Y90bn ($1.2bn) net loss this year, and flooding can be partly to blamed for cutting part supplies, reports the Financial Times (paywall).

Companies considering investment in Thailand or already based there will no doubt have to review situation after the water levels are down and the damage is repaired.

Disaster wake-up calls

As investors, we get used to stock market jitters as a result of ongoing financial crisis, but massive natural disasters like that in Thailand are not necessarily such a consideration – and as humans, we are of course unable to assess their probability. We are not constantly reminded of the risk of floods, earthquakes and tsunamis, so it gets underplayed as a factor in future investment decisions.

Yet what about the impact of climate change on the emerging markets that are tipped for investment success? After all, it is there that Mother Nature has struck her worst blows in recent years – consider the devastating flooding in India and Brazil this year, for instance. Earlier this year more than two million people have been affected by floods in India as torrential rains lashed India, in Orissa, Uttar Pradesh and Bihar states.

Unchecked environmental destruction will halt – or even reverse – the huge improvements seen in the living conditions of the world's poorest people in recent decades, reports the Guardian

The  2011 Human Development report, from the United Nations Development Programme (UNDP), concludes that problems such as worsening droughts in sub-Saharan Africa and rising sea levels that could engulf countries like Bangladesh, could send food prices soaring by up to 50% and reverse efforts to provide access to clean water, sanitation and energy to billions of people. The development of the emerging world could be suddenly halted in the face of ongoing natural disasters.

The poorest countries are disproportionately at risk from climate-change-driven disasters such as flooding and storms, says the Guardian, as well as air and water pollution.

Testing planetary boundaries

Our planet has limitations. Both common sense and economics tells us that when something is valuable, such as freshwater, and it is relatively free, it is used without thought. It also assumes that when something is exhausted (or too expensive), it is expected that a substitute will be found. 

The Stern Review on the Economics of Climate Change established that the environment and the economy are linked in a looped, rather than linear, relationship. When you breach critical planetary-system boundaries (such as those from the Stockholm Resilience Centre) you also crack the dimensions of our economy. The feedback loop is this – problems such as climate change have an impact on the success of the economy, and therefore investment. If you'd given little thought to soaring global temperatures or water shortage, consider the implications of this on society, industries and GDP.

Achim Steiner, the German-Brazilian head of the United Nations Environment Programme (UNEP), reports the Guardian, said that the financial crisis had led to leaders taking their eye off the ball with regards to dealing with environmental crises and that this would make it harder to keep within a two degree rise in global temperature. But for the longer-term economy, as well as the health of our planet, this is an essential consideration.

The economics of an earlier age still pervades our thinking. At one stage, when the world's population was tiny compared to today, consumption patterns were relatively limited – but as the number of people on the planet soars, we continue to squeeze our limited resources – that threatens to crack the economy to a greater extent than a financial crisis.

More from Mindful Money:

Environmental crisis: Fear financial gloom? A greater challenge lies ahead

Agriculture: Investment themes and climate change

Global CO2 increase: What should investors do?

New Global Titans: Stock-picking to benefit from emerging market success

To receive our free email newsletter s
ign up here.

Leave a Reply

Your email address will not be published. Required fields are marked *