Climate Change: Turning Vulnerability into Opportunity

25 Nov 10 Climate Change: Turning Vulnerability into Opportunity

A recent Investment Confidence Index survey report, released by JP Morgan and ValueNotes, brings out an interesting finding. According to the survey, Indian investors are wary of the climate change and perceive it as a negative indicator for the Indian economy. The findings reveal that nearly 15% retail investors[1] consider climate change as an impediment to India’s economic growth. The impact of climate change on the Indian economy can be far reaching, if widespread efforts for reducing emission levels are not taken immediately.

Climate change and protectionism emerge as new areas of concern

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Source: J.P. Morgan Asset Management – ValueNotes Investment Confidence Index, September 2010

 

Climate change and food security

The survey indicates that 17% retail investors and 21% advisors perceive a good monsoon as a positive indicator for the Indian economy. This implies that investors believe that the economy is on track as long as the monsoon showers are on time.

Positive indicators for the Indian economy

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Source: J.P. Morgan Asset Management – ValueNotes Investment Confidence Index, September 2010

This is not surprising given the fact that the country is largely dependent on the monsoons for its agricultural produce. However, the weather Gods have been playing havoc over the past decade. Frequently occurring cyclones, soaring mercury levels, unseasonal rainfall, dry monsoon spells have affected agricultural yield, thus impacting food security. It is estimated that a 1o C temperature rise can result in a drop in wheat production by 4-5 million tonnes.

High consumption of non-renewable energy is not a good sign

What is also worrying is that India fulfils nearly 60% of its energy requirements from coal, oil and natural gas. Approximately 30% of the energy requirements are met though imports. The oil and gas import bill in FY10 amounted to USD 85.5 bn, and any rise in international oil prices would certainly not be good news for India’s trade deficit. It is estimated that a USD 1 price rise per barrel of crude oil implies a corresponding rise of USD 1.2 bn in India’s annual import bill.

Energy requirements in India are spiralling because of the accelerated growth process. India has immense potential for exploiting renewable energy sources. Gujarat, Maharashtra, Orissa and Tamil Nadu have constant and high speed winds and are well-suited for exploiting wind power. India is the fifth largest producer of wind power and receives over 5000 trillion kWh/year of solar energy, which is much more than the total energy consumption of the country.

Renewables such as solar energy can be used for lighting up villages, which have been reeling under darkness for ages. For instance, Bommalapura village in the Mysore district, did not even have a transmission system, and relied solely on oil and kerosene lamps. However, a Bangalore-based joint venture between Cauvery Kalpataru Grameena Bank (CGKB) and Solar Electric Light Company (SELCO) has provided all 32 houses of the village with solar lamps. This can be replicated across other remote villages, as it does not require setting up of an electricity transmission and distribution infrastructure from scratch.

Opportunities for India Inc.

Awareness among retail investors, will also affect the way corporate India responds to climate change. As per the findings of the survey, though India Inc. is aware of the risk that climate change poses to economic growth and development, but the awareness level is quite low. The findings state that only 2% of corporate India perceives that the Indian economy faces risks from climate change.

Despite the challenges it poses, climate change puts forth lucrative opportunities such as trading of certified emission reduction (CERs) and verified emission reduction (VERs). Trading of CERs has become easier as both MCX and NCDEX have introduced a platform for futures trading in carbon credits. Industries, such as power generation, plantation companies, sugar manufacturing, steel, chemicals, fertilizers and cement, which have a high carbon foot print, can invest in clean development mechanism (CDM) projects to earn carbon credits. These industries can take cue from the Delhi Metro Rail Corporation (DMRC), which is the world’s first rail project to earn carbon credits. The trains use regenerative braking system which reduces electricity consumption by 30%. CDM projects pave way for more foreign investments, employment generation, infrastructure development and lower the  demand for imported energy.  The CDM domain has also started attracting private equity (PE) investments. PE funds, apart from having a share in the project’s profits, also earn by selling carbon credits.

Green technologies are not only beneficial for the large corporates, but can become profit centres for small and medium enterprises as well. Community based small CDM projects pave the path for utilizing and developing alternative energy sources. Such projects provide entrepreneurs with a platform for developing innovative cost effective technologies which can be implemented in remote areas as well.

To conclude, fear about the negative impact of climate change on the growth process can prompt the Indian financial community to be a part of the solution for combating global climate change. The survey, now entering its fifth wave, captured the sentiment related to climate change for the first time. It would be interesting to note how the Indian financial community reacts to climate change in the subsequent surveys. Will it become a greater concern or will factors like inflation, fiscal deficit or currency fluctuations undermine the importance of climate change in India’s growth?


[1] Individual investors who buy and sell securities for their personal account, and not for another company or organization (http://www.investopedia.com/terms/r/retailinvestor.asp)

Mariam Ahmed

Mariam was a senior research analyst at ValueNotes.

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