You don’t meet chief economists every day, which used to be a source of comfort to me. The first I met was an elderly, dapper American gentleman sporting a bowtie.
We met perhaps 15 years ago and he gave me a piece of his mind. Any notions that corporate governance should embrace non-financial factors, he insisted, were both dangerously European and also illegal in the world’s greatest capitalist economy.
But times change — and with them chief economists.
This was confirmed for me when I met Paul Donovan recently. He is global economist for UBS Investment Bank. And his view could not be more different. Although educated at a time when mathematical modeling was dominant, he joked that he “didn’t inhale” — and when he did breathe in some of the prevailing orthodoxy, he “didn’t enjoy it.”
By contrast, he said, the pendulum is swinging back from “sound-bite economics” to political economy, focusing on the interplay between economics, law and politics. And the evidence suggests that global politics are shifting, driven by climate change and what he calls the developing “environmental credit crunch.”
The tipping point will be when “the general population is both affected — and know that they are being affected.”
Poor people are often flagged as most likely to be affected by climate change, but Donovan concluded that the environment has moved from being a “luxury good” to being increasingly “embedded” in developed world politics.
One reason is that the environmental credit crunch and issues linked to climate change are increasingly visible to the middle classes — “whether they live in a democracy or not.”
Some resulting pressures will cascade into “scapegoat politics,” he warned, although UBS does not identify specific political groups in its research.
Many people vote for Trumps (USA), Goves (U.K.), Le Pens (France) or even Putins (Russia) because, it seems to me, they hope that an old world order can somehow be restored. Politicians launch vendettas against Mexicans, Muslims, the EU or the environmental movement, insisting that once such factors are removed the old greatness can be restored.
But deeper currents are shaping economic and political realities.
In January, UBS launched a study of the impact of climate change on the world’s middle class, currently estimated to number around 1 billion people. The middle class is “fundamental to social stability and economic growth” and has real clout. They hold more assets than lower-income groups and are more likely to take defensive action against any threat to their relative economic and social status.
More problematically still, most of these people live in cities — whose health is crucial both to national economies and to the growth of many global companies. The world’s larger global cities are where nearly 25 percent of the global population lives, and they generate about half of global GDP.
And the location of many of these cities on coastlines means that they are exposed to climate risks, including storm damage and flooding.
The UBS research covers 215 cities across 15 countries, at various stages of economic development. Some of the trends suggest a growing risk of vicious cycles. In China, for example, each urban household owns at least one air conditioner, with middle- and upper-class households aspiring to own one unit per room.
These systems drive up electricity demand and strain local power grids during sustained heat waves — and also can boost the very greenhouse gas emissions causing the problem in the first place.
Meanwhile, a 10-year analysis of 15 European cities estimated that every 1.8 degrees Fahrenheit temperature increase above each city’s average summer temperature results in a 2 percent increase in mortality in northern cities and a 3 percent increase in southern cities.
“By 2050,” UBS projected, “the average American is likely to experience 27 to 50 days over 35 degrees Celsius (95 degrees Fahrenheit) each year. This is a concern for an increasingly aging population that suffers from diabetes, asthma and obesity-related disease. Infrastructure will also be stressed: planes cannot take off, rail lines buckle and asphalt melts.”
And we shouldn’t expect the world’s insurers to pick up the whole tab. UBS found that the middle class in most cities in its sample “is not well insured at all.”
Munich Re, the reinsurer, has estimated that one-third of weather-related losses are uninsured. That picture is much worse in less developed countries and regions.
But Donovan and UBS are not simply focusing on the downsides of all this. In a brief from their chief investment office, also published in January, we are advised that the historic “hurdles for sustainability-minded investors are giving way to a broad array of opportunities.”
Within the investment community, UBS reported, “sustainability is emerging as a lasting trend with the potential to profoundly influence the way portfolios are managed.”
This second study looked at three investment strategies: exclusion (screening out problem stocks); integration (with environmental, social and governance factors built into the economic and financial analysis); and impact investing (with the focus on making a measurable positive Environmental, Social and Governmental (ESG) impact).
The evidence suggests that sustainable investment strategies perform neither better nor worse than conventional strategies — and the balance of advantage can be improved by developing a diversified portfolio of cyclical, defensive and counter-cyclical themes.
Key opportunity areas flagged include energy efficiency, emerging market healthcare, security and safety, water scarcity, clean air and carbon reduction, mass transit rail, oncology and retirement planning.
Long ago, Napoleon noted that his armies marched on their stomachs — and UBS concluded that the same is true of the global middle class. Food availability, pricing and quality are potentially huge concerns.
So as climate change disrupts the world’s food chains, expect the global middle class to exert its political muscle.