13/07/2018 The Carbon Bubble & Your Brand Antarctica is reportedly melting three times faster than it was just ten years ago. That's 200 billion tons of ice melting into the oceans every year. Proof enough that average global temperatures are on the rise! All this is the effect of centuries of carbon emissions to the atmosphere in the post-industrial era.) If we do not check our carbon emissions in the next 5 years, we will be inviting a series of natural catastrophes across the globe at great financial risk. And if we take steps to control, there will be a smaller, but significant short-term drop in sales & profits. Either option will precipitate a crash in the valuation of equities, brands & markets across the globe. The Carbon Bubble What will be the effect on your equity, brands & markets? There are 3 possible scenarios: A] If climate change continues beyond a point, it will result in irreversible, catastrophic changes in the environment & huge financial losses. (Snowfalls in deserts, heat waves in high altitudes & a significant rise in sea levels, which may submerge swathes of landmasses.) B] Obviously this is not desirable: it needs to be checked. But this also has its own financial implications, because for global warming to be kept under control, businesses & brand owners must accept significant financial setbacks in the short term. (Of course, this is much less than the catastrophic losses of global warming!) C] In a fragmented world, a more likely scenario is that climate change may only be partially controlled - especially because the short term losses [B] are resulting in financial setbacks which are in between [A] & [B]. Businesses will be tempted by short term benefits of partial or non-compliance. In any case, if the above costs are not adequately factored into existing valuations, it will create an economic "bubble", which will burst causing markets to crash. The Paris Accord of 2015 195 nations had signed an accord in Paris in 2015. Called the Paris Accord, the backbone of this agreement involves a global target of keeping average temperatures from rising more than 2°Celsius by the end of the century*. (The figure today stands at 194, after "big brother" U.S.A. reneged in 2018.) Beyond 2º Celsius, it has been estimated that we risk dramatically higher sea levels, drastic changes in weather patterns, food & water crises, and an overall more hostile nature. The Paris Accord provides a framework for increasing momentum on greenhouse gas reduction, with some oversight and accountability. For example, the US pledge involved 26% to 28% reduction by 2025.(Of course, that was before they walked out in 2018.) Alas, of the 194 countries who remain signatories to the Paris Accord, none seems to be taking it seriously. * The 2º Celsius rise is based on temperatures which prevailed in the pre-industrial revolution age. Here's a list of the immediate effects on businesses - if countries adhere 100% to the Paris Accord. The Risk Chain Thermal electricity producers would have to retire an estimated 20% of their installed capacity. And make new investments to replace these with solar & wind renewable energy facilities. Automobile manufacturers & their ancillary units would have to retire a part of their brands which are based on internal combustion engines. And make new investments to switch to battery operated vehicles. Battery makers need to raise their production as well as technology. Banks who have extended loans to such firms may stand an additional risk if their borrowers do not comply. Fund managers who have invested in such firms may risk erosion in the value of their investments. Oil & gas industries who are feeders to such industries may face a direct loss of revenues. Automobile, Air-conditioning & Refrigeration Brands Brands need to brace for a double impact: 1. A clear loss in production/sales of existing products that do not comply with the Paris Accord. 2. New investments to launch products which comply with the Paris Accord - along with a lead time for each major product line. This double financial impact is bound to adversely the top lines/bottom lines & equity values of brands. Since the financial impact is proportionate to the %age compliance achieved, & may encourage businesses to take decisions for the extreme short term. High Fuel Consuming Brands High fuel consuming industries like steel plants & businesses like Uber will need to factor in new equations for fuel costs. An average %age of biofuel that will need to be replaced with alternates to comply with Paris Accord, will adversely affect operating margins. There may be new investments required to launch captive renewable power plants. And new products/services may need to be designed to comply with Paris Accord. All of which will need some lead time. Insurance Brands Extreme weather events are a direct result of climate change, raising premiums & ultimately making it unaffordable in cases where the predictability is very low. The above effects will be reduced if the adherence to the Paris Accord is 100%. However, these effects are likely to be nullified by severe damages due to weather. Infrastructure & Drastic Changes In Energy Demand The impacts of climate change are particularly pertinent to infrastructure and buildings, given their long life span and their high initial cost, as well as their essential role in the functioning of our societies and economies. Buildings and infrastructure can be vulnerable to climate change because of their design (low resistance to storms) or location (e.g. in flood-prone areas, landslides, avalanches). Indeed they can easily be damaged or rendered unfit for use by any changing climatic condition or extreme weather event: rising of sea level, extreme precipitation, and floods, occurrences of extremely low or high temperatures, heavy snowfalls, strong winds… Climate threats or extreme weather events are projected to increase. Climate change is expected to reduce demand for heating in northern and north-western Europe and to strongly increase energy demand for cooling in southern Europe, which may lead to peaks in electricity supply in the summer. Increases in temperature and droughts may limit the availability of cooling water for thermal power generation in summer (lowering energy supply), whereas simultaneously, demand for air conditioning will increase. Finally, climate change also brings huge uncertainty in weather patterns, negatively impacting production of renewable energy (sun/wind). Carbon Bubble Financial Impact Audit Group There's a clear need to compute the financial effect on top line/bottom line & equity value vis a vis %age of compliance with the Paris Accord. This can be done with an audit of internal data coupled with available external data. We are setting up a panel of experienced & eminent persons to audit of the impact of the Carbon Bubble on brands & their owners. Contact email@example.com for details.