By: Krzysztof Musialik, senior vice president, Franklin Templeton Emerging Markets Equity
We truly live in a global economy, and climate change—including its causes and potential impacts—has been one of the biggest issues of discussion and debate today. It’s a galvanizing topic, but one that has the potential to create many disruptions around the world, as well as potential opportunities. And emerging markets are front and centre.
The Rise of Emerging Markets
One thing that’s not up for debate is the rapid rate of growth of emerging markets over the past few decades, leading to some impressive transformations. However, this explosion of growth and development in emerging markets has also led to increasing pressures on the environment. China is now regarded as the second-largest economy in the world only behind the United States and is a global leader in a number of areas. In the 40 years since Deng Xiaoping led China’s economic reform to embrace a “socialist market economy,” there has been tremendous growth in wealth in China, moving millions of people out of dire poverty and dramatically improving the quality of life in the country. This, of course, has been positive, but rapid growth and industrialization can come with consequences, particularly in areas such as environmental degradation and climate change.
Of course, China certainly isn’t the only emerging market to experience rapid economic growth and development. Of the top 10 largest economies today, three are in emerging markets, and growth rates in emerging markets overall are expected to outpace those of developed markets this year and beyond.
Market liberalization and globalization have led to tremendous growth in consumption both in emerging and developed markets.
Growth of a Global Consumer Culture
Once largely a developed-market designation, a new middle class has emerged in emerging markets. And these consumers have more discretionary income to spend. Take air travel, for example. In 1978, there were 378 million global airline passengers—today, there are 4 billion.2 In 1978, China saw 1.5 million passengers travel by air, while 2017 saw more than 551 million air passengers. The growth in air travel comes with corresponding consequences—more aircraft results in more fuel usage and more greenhouse gas emissions, which can be detrimental to the environment.
There are many examples of how globalization and increased trade have contributed to a rise in consumption of all types of consumer goods. Clothing is one example. Americans buy five times more clothes today than they did in 1980—and if you live in the United States or Europe and look at the tag on your blouse or shirt, the odds are high its origin isn’t your home country. Of the world’s top 10 producers of textiles and clothing, eight are in emerging markets.3
Textile production requires large amounts of water and creates polluting emissions. With today’s emphasis on “fast fashion” it can also result in a lot of waste.
Emerging markets are supplying many goods and services that power the world. Increased production of goods requires more electricity, and this electricity has been produced mainly by burning fossil fuels. Global coal production increased from 3.3 billion short tons in 1980 to 8.2 billion short tons in 2010.4 While China leads in coal production, the Chinese government has been promoting green-energy policies, including the use of solar. Global use of coal has been declining in recent years, but nonetheless, it remains a substantial source of electricity generation.
The Cost of Growth
While growth and development no doubt benefit many people across the world, often a solution to one problem brings another one. While millions of people have emerged from poverty, our dependence on fossil fuels has arguably led to climate change, which is now generally perceived as one of the biggest risks to the global economy and the world as a whole. Emissions from the use of fossil fuels are generally accepted as a key contributor to climate change.
Climate change brings serious impacts to the investment world, too. We see four types of risk associated with climate change and its influence on investments.
Long-term risks which may impact the competitive position of whole countries or even regions in the global economy. According to the World Bank, climate impacts could push 143 million people across three developing regions to become “climate migrants,” who are forced to leave their homes in search of more viable habitats.5 And, food supplies could also be significantly pressured. Low-lying coastal regions are vulnerable to sea-level rise and the increased occurrence of intense storms. This would impact a country like Bangladesh, for example. Another example would be West Africa, which is dependent on cocoa production. Climate change could make it impossible to grow cocoa in this region in a few years’ time, and it may have to shift towards other crops as a result. “Climate smart” agriculture could prove a necessity for certain crops to survive—and could also represent interesting investment opportunities.
Short-term impact on commodity prices due to adverse weather events. Adverse weather events are becoming more frequent. The scientific community at large generally regards changing ocean-current patterns amid the changing climate as a contributor to these weather changes. For example, coking coal prices soared in 2011 as a result of heavy floods in Australia, which is one of the world’s largest coking coal exporters. The World Economic Forum’s 2019 “Global Risks Report” puts extreme weather conditions and climate change policy failures as the risk with the biggest threat over a 10-year horizon.6 El Niño and La Niña are periodic changes in Pacific Ocean sea surface temperatures that impact weather across the globe, with both positive and negative effects. While not new, they can become more powerful and unpredictable with climate change. El Niño is usually negative for a country like India, as it tends to bring lower-than-average rainfall during the monsoon season, which is critical for Indian agricultural production. Peru also suffers from a negative impact on its fisheries. On the flip side, North America tends to see milder El Niño winters and a country like Argentina in South America could see a boost in soybean production.