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Family offices now see climate change as the biggest influence on asset allocation

Science fiction writer William Gibson once said: “The future is already here – it’s just not evenly distributed.” The west coast of the US makes the point for individuals fearful of climate risk because it is prone to drought and hence sensitive to extra heat, as remote, or cooler, locations escape attention.

This leaves financial institutions badly exposed.

A failure to take climate risks into account could lead to future litigation by clients, or regulators, against corporations and asset managers. This risk could include multi-family offices responsible for looking after third-party families

Infrastructure manager Whitehelm says California is the shape of things to come: “Climate risk will result in once viable companies becoming stranded assets and it is happening quicker than many anticipate.”

Christopher Hohn, manager of the $30 billion UK-based TCI hedge fund has analysed the problem in considerable depth. He says climate: “will have a material effect on a company’s long-term profitability, sustainability and investor returns.”  He warns global pledges to achieve zero carbon emissions by 2050 will prove too slow.

Family offices keen to hand their legacy to the next generation are increasingly concerned. A June survey of limited partners by private equity firm Coller Capital found that 76% of limited partners saw climate as the biggest influence on asset allocation ahead of healthcare and biotech on 75%. Around 21% of respondents were family offices or endowments. The proportion of family offices concerned by climate risk was 83%.

Drought currently blankets California and the North West US. Reservoirs are running low in the heat after experiencing low levels of snowmelt from the Sierra Nevada. An official from the state’s Natural Resources Agency said the drought was “unprecedented in depth and severity.”

With forests tinder dry, wildfires are spreading with unprecedented speed. One of them has just broken out in a region which has not burned in fifty years, spreading across 1,000 acres before being brought under control. Rattlesnakes, mosquitoes and bears stressed by the heat are seeking refuge in urban areas.

Forecasters expect worse later in the year, amid winds from the hot eastern deserts, where Death Valley has already hit 128 degrees.  The North West is also unseasonably hot and attempts are being made to curb its firework displays on July 4. Nature reserves are being closed off to tourists.

The Whitehelm research goes back to 2018, when the Californian weather started to deteriorate. It outlines the financial pain endured by listed utility companies facing wildfire claims as a result of the terms under which they supplied power to the region.

Claims of $30 billion were lodged with Pacific Gas & Energy, with insurance cover of $800 million. Citizens were able to lodge claims as a result of live transmission wires breaking loose in high winds, and setting fire to brushwood. 

PG&E went bankrupt, then became restructured through a $59 billion package. Its ability to pay dividends was restricted and a wildfire rescue fund secured 24% of its equity. It ended up pleading guilty on 84 counts of manslaughter. 

PG&E has now lost 84% of its 2018 market value. South California Edison, also forced to settle wildfire claims and suffered a 26% loss in its market value. California reserves the right to nationalise both utilities.

Whitehelm concludes: “Climate risk is no longer deemed to be an ideological concept, but a real and present risk to the current and future value of almost all investments.” 

A failure to take climate risks into account could lead to future litigation by clients, or regulators, against corporations and asset managers. 

This risk could include multi-family offices responsible for looking after third-party families. In extremis, this could lead to serious risks in the banking and insurance, as central banks are fully aware.

TCI’s Hohn argues companies face climate risks through regulation, taxation, competitive disadvantage, brand impairment, financing, physical asset impairment and litigation. He is campaigning for greater carbon disclosure, and climate action.

Hohn is one of the world’s most successful hedge fund managers, worth $5.9 billion, according to Forbes. He is so concerned that he has donated money to Extinction Rebellion, the environmental lobby group. 

Asset manager MFS warns existing net-zero targets are soft, and the world is set for average warming of 2.9% by 2100, nearly twice the recommended 1.5%: “These developments could cause unparalleled disruption to life as we know it.”

Silicon Valley entrepreneurs are belatedly responding to the challenge. According to data provider Allied Market Research it is set to grow in size from $9 billion in 2019, past a dip triggered by Covid-19 to $48.4 billion by 2027. 

Around 47% of the respondents to the Coller survey believe money can be made in the sector.

Chris Sacca, worth $1.2 billion, used to work on M&A for Google, whose headquarters could become vulnerable to floods over time, as melting ice caps increase sea levels. He later became a pioneer of the tech VC scene, but he now directs his energy to climate tech fund Lowercarbon Capital

Sir David King, former UK scientific adviser, has gone further, and suggested spraying saltwater into the air to create clouds and reflect sunlight back into space.

 

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