Fund managers are struggling as extreme weather scenarios cloud their investing models
Whether you’re looking at asset flows or investor surveys, it’s hard to deny the rising tide of responsible investing. Part of that comes from a growing recognition of the risks faced by companies with poor ESG practices, including regulatory backlash and reputational damage.
Environmental issues, particularly those relating to climate, have also long been a point of focus in ESG-investment circles. While a lot of strategies are concerned about the long-term impact companies and sectors can have on nature, nature is already impacting one sector.
“After historic floods devastated Midwestern agricultural states this spring, some fund managers are evaluating how climate change will affect the long-term value of companies that make or sell products ranging from tractors to fertilizer,” reported Reuters.
According to the news outlet, fund managers say they’re struggling to determine how extreme weather scenarios could affect commodity prices and, consequently, farmers’ spending on equipment or seeds. A November report from the US government found that increased frequency and severity of storms, attributed to climate change, will raise costs in industries including farming and energy production.
The outlook is bleak even now. In Nebraska alone, crop and livestock losses from this year’s floods are approaching US$1 billion — and that’s just based on early estimates. Farmers whose record-high stockpiles of grain were lost to floods also cannot expect compensation from the US Department of Agriculture.
“I just don’t know how to value these companies now,” Christopher Terry, a portfolio manager at Dallas-based Hodges Capital, told Reuters. “It’s harder to invest around a theme when you’re talking multi-decade impacts.”
Assuming more extreme weather comes to the US midwest, it would mean high costs of grains for feed, leading to lower margins for egg producers. Barge companies that ferry commodities down the Mississippi River may also see fewer days of operation due to flooding.
Not every scenario’s a losing one. According to Michael Underhill, chief investment officer at Capital Innovations, some companies can benefit from more volatile commodity prices: certain midstream grain companies gain an edge from hedging their commodity bets effectively, while farming equipment companies can also benefit if extreme weather drives farmers to invest in new machinery.
There’s also the possibility of a surge in fertilizer demand. According to Lucas White, a portfolio manager at GMO, more severe storms could wash away valuable nutrients from the soil, which would prompt farmers to buy more potash and phosphate-based products to compensate.
“Nobody knows what will happen with commodity prices and it’s more or less impossible to predict,” he said. “But farmers spend all this time getting their soil to be very productive and all of a sudden a huge downpour comes and they have to start from scratch again. It’s very difficult to produce agriculture in a world that is increasingly impacted by climate change.”
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