The Bushfires, Davos and the World’s Largest Investment Funds – How the transition from fossil fuels will impact the economy and your property?

Victorians are now in the fourth month of bushfires, while the fires have been raging in New South Wales since last September. The damage has been devastating, with over 18 million hectares burnt. This area is larger than the entire country of Switzerland – a poignant comparison given the Annual World Economic Forum (WEF) was held in the city of Davos in Switzerland in the previous week.

Every year, the world’s ‘elite’ in business, government and academia gather in Davos for this invitation-only summit. They include leaders of the world’s largest corporations, over 100 billionaires, and political and social leaders as diverse and controversial as Greta Thunberg and Donald Trump.

The Australian fires were a talking point.

World Economic Forum – “Environmental concerns” ranked as the #1 issue for the first time in the history of the event!

A survey was conducted of about 800 stakeholders at the WEF prior to the event and the Australian bushfires, as well as of 200 members of Global Shapers, a group described as “a generation of emerging global social entrepreneurs and leaders”.

It is telling that, for the first time in the multi-decade history of the WEF, the survey respondents ranked “environmental concerns” as presenting the greatest risks in terms of the “likelihood to happen” and the “impact they will have over the next decade”.

In its survey, WEF stakeholders ranked failure of climate change mitigation and adaption as the number 1 risk by impact and number 2 by likelihood over the next 10 years.

The Global Shapers showed even more concern, ranking environmental issues as the top risks in both the short and long terms.

The 800 multi-stakeholder networks rated “biodiversity loss” as the second-highest impact issue and third most likely risk for the next decade.

“The current rate of extinction is tens to hundreds of times higher than the average over the past 10 million years – and it is accelerating,” the global risks report stated.

“Biodiversity loss has critical implications for humanity, from the collapse of food and health systems to the disruption of entire supply chains.”

The bushfires in Australia, unfortunately, coincided with the event to provide a real-life illustration of this impact. The Australian bio-diversity loss includes the deaths of one billion animals according to some estimates. A number that really stops you in your tracks.

The evolved view of those attending is not coming from a bunch of greenies to use the colloquial term that many naysayers might spew forth, but from a group that include the worlds super-wealthy and heads of state.

When the winds of changed perspective come from the likes of these global influences, as they have this year, actions tend to follow. If we look in the rear vision mirror, we had a couple of significant pre-cursors in 2019.

In 2019 the world’s largest fund managers began pulling out of thermal coal

The results of this years’ survey were surely influenced by the decisions in late 2019 of the worlds largest fund manager BlackRock, and the worlds largest sovereign wealth fund, the Norway Government Pension fund who decided to pull billions of dollars out of thermal coal and cease investing in this form of energy production into the future.

BlackRock controls $7 trillion in assets,  announced it will end its investment in thermal based coals including any company earning 25 per cent of its revenue from thermal coal.

In a letter addressed to CEOs, entitled “A fundamental reshaping of finance”, Larry Fink, CEO of BlackRock, wrote that “climate change has become a defining factor in companies’ long-term prospects … awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.”

He added: “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.” Investors were increasingly “recognizing that climate risk is investment risk. Indeed, climate change is almost invariably the top issue that clients around the world raise with BlackRock.”

BlackRock was not the first to make this decision.

The world’s largest sovereign investment fund, based in Norway, which controls around $10 trillion in assets, has already dumped $10 billion in stock of all investment in major coal producers in mid-2019.

These recent initiatives represent the beginning of what will become a landslide over the coming decade as investment funds continue to take money out of companies that make money from fossil fuels. Most will not do this from the goodness of their heart. Their actions often will be driven by the belief that these companies will not be as profitable going forward.

For the uninitiated, huge investment funds purchase significant chunks of shares in companies. This provides them with extra influence on the decisions of the boards and executives who run these companies.

If these investment funds continue to back out of companies whose activities produce large amounts of carbon dioxide in the atmosphere, it will impact share prices and change the direction of investment. Ultimately, this will flow through to changing governments policy. History suggests changes in commercial imperatives, predicates government policy adjustments.

Australia will feel the fossil fuel heat in the coming years!

The devastating bushfires continue to rage in Australia, the ‘lucky’ country that holds the world record for the longest period without a recession. As a nation that relies heavily on industries linked to the production of fossil fuels, we perhaps serve as an example of the juxtaposition for the changing and challenging times ahead.

The convergence of the bushfires, climate change, big investment companies moving their money away from fossil fuels, energy issues and politics will remain an ongoing story in Australia for the years and decades ahead.

The bushfires have raised the stakes in Australia (and around the world) because of the direct visceral effect on daily life for more than half the Australian population, through the destruction caused by the fires and the residual smoke sitting above the nation’s two largest cities, Sydney and Melbourne, and the nation’s capital Canberra.

Major weather events were always going to be the likely driver to precipitate significant action from the governments, corporations and the public at large.

The Australian government will face increasing trade pressure over the years from nations who are leading the way with their transition to renewable energy, given our reliance on thermal coal and fossil fuels.

The vast majority of Australians now believe the climate science, and understand that second-guessing the common consensus of most experts is hubris or stupidity, and not worth the bet of being wrong.

Most hope that the government will take the necessary action to transition away from our reliance on fossil fuels while minimising disruption to jobs, our economy and standard of living.

Clearly, the significant economic risk lies on this journey for most nations, not just Australia. A zero carbon future will not be easy to achieve. There will be bumps along the way, economies and asset classes such as the property will be impacted in unknown ways. Unfortunately, it appears as though the price of inaction is much worse.

On a macro and long-term view, this transition is probably the biggest risk to our property markets. The timeframe and success of this journey are still quite blurry as we look through the window of the future, but it might be coming into view faster than many of us think.

Through this lens, it is not unforeseeable that new data metrics such as higher energy ratings for residential properties and other environmentally connected factors may begin to play a part in determining the quality of an investment property. We shall keep our eyes peeled as this inevitable story unfolds and how it impacts your property investments.

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