In 2022, as the Federal Reserve was rapidly raising its target interest rate to counter inflation, investors and economists described it as the end of an era. Decades of historically low interest rates juiced returns and materially altered investing.
But a new period has begun. The biggest impact on investing during the coming decades won’t be how high or low rates are, it will be earth’s oceans, according to a new report by Investcorp. “The sweeping transformations wrought by warming and climate change will be the most important and profound investment shift of the next several decades, posing enormous opportunity for well-positioned investments and enormous risk to holdings on the wrong side of climate trends,” James Socas, head of Investcorp Climate Solutions, wrote in the paper out Monday.
Investcorp, the $50 billion alternative investments manager founded in 1982 in the Middle East — that Socas has dubbed a “mini Blackstone, ” a reference to his former employer — has worked with oil-rich nations to pursue energy transitions domestically and invest in climate projects abroad. But other investors will be forced to reckon with the often politicized topic of climate change.
Early this year, Investcorp published 10 climate predictions (some more probable than others) but a report dedicated to oceans was needed.
Oceans cover two-thirds of earth and because water can store more heat than air, and oceans are deep, the sea takes a long time to change temperature. For context: Think about a small lake at the beginning of a summer; it might be bathing-suit weather on the dock but the lake water seems uncharacteristically chilly. The same lake warms over the course of the summer and then cools again in the fall.
The problem with the oceans is that they aren’t cooling like they used to. Oceans have been able to absorb 90 percent of the increased heat associated with emissions from human activity and could be reaching their saturation point. Water temperatures are now regularly hitting new highs. (Sea surface temperature average for July 2024 was the second-highest measured for the month; that record barely missed extending the fifteenth months in a row when average sea surface temperature was the warmest recorded, according to the Copernicus Climate Change Service.) As a result, water warms, expands, and melts sea ice and glacier, adding freshwater to the ocean. With less ice, the water is warming that much faster and creating a grim cycle.
Investcorp stopped short of declaring this new period the end times, but the ocean feedback loop will inevitably be a factor when investing in the coming years (like the lake in the example above, it will take time for the ocean to cool again) — something many stakeholders are underappreciating.
“The increase in global average temperature is a science-based certainty with a very high impact on investments in every asset class. It has more certainty than any macroeconomic forecast, demographic change, political analysis, or earnings projection that investors use for decision-making. Once the carbon budget is exhausted — unless the physics is wrong — temperatures will rise inexorably to the new equilibrium point,” the report says.
Some impacts are already present. For example, storms are intensifying, higher sea levels have worsened storm surges, and insurance companies are choosing to no longer sell policies in affected areas.
However, many more changes are coming, Investcorp predicts. Major industries that were once suitable to a region or country will need to move, such as farming, fishing, and tourism. Some places will also become unlivable, the asset manager says. Those things could be disasters for people and investors. But the necessity for changes will translate into opportunities, too.
“While climate change is receiving more investor attention, and energy transition investments have notably increased, climate is still not given as prominent a seat at the table as it deserves,” Socas wrote.
“As a lower priority, bottom of the agenda item, few firms have modeled what their business or portfolio would or should look like in a world of much higher sustained levels of global warming, the way they might model the implications of sustained higher inflation, political realignment, or the impact of AI. As a result, many investors are significantly underweighting climate change as a near-term, driving factor across the totality of their assets, portfolios, strategies, and returns models.”
