“When something extreme happens as a result of climate change, we’re the ones who have to pick up the tab,” says Lloyd’s chairman, Peter Levene. Accordingly, the insurance company has warned in a recent report that unless it and its competitors start making better use of climate-change predictions, the whole industry could collapse.
To make sure it doesn’t, Lloyd’s has undergone a remarkable transformation. Whereas its past forecasts gave far more weight to history than science, now that emphasis has reversed, and Lloyd’s relies heavily on experts’ warnings of rising sea levels, increased rainfall and temperature jumps. Insurance companies won’t give out exact figures, but analysts agree such research now represents a “significant” proportion of the approximately $500 million they devote each year to R&D. Thanks to the new data, Lloyd’s underwriters are now girding themselves for the next megastorm off Florida’s coast, which they predict could cost more than $100 billion. And the company’s chairman warns that clients that don’t show due diligence in protecting their interests from a hotter world may soon have difficulty getting covered at all. Still, Levene is sanguine about the future: “the human race invented air conditioning and central heating,” he says, “We will adapt to these new conditions.”
Global warming is changing the earth and forcing businesses to evolve like never before. Inevitably, some firms will die out as a result of harsh physical and regulatory shifts, but others will prosper. The British government’s semi-apocalyptic Stern Review, published late last year, predicted that by the end of this century, continued global warming could slash global GDP by as much as 20 percent. But governments and business are already adapting. “I’ve been struck all my life as a professional economist by how ingenious people are [at] making money” and solving new challenges, says John Llewellyn, head economic-policy adviser at Lehman Brothers. There’s no reason that should change now. Sure, there will be losers: dirty oil companies, car firms bent on SUVs, and clothing companies that specialize in warm wool. But there will also be winners: companies that desalinate water and develop drought-fighting technology, hybrid car makers, and creators of building materials that stand up to extreme weather.
It’s no surprise that the ever creative financial-services industry has already discovered new ways to turn a profit. After Katrina, smart hedge-fund managers realized that the likelihood of another equally devastating hurricane season soon was tiny (around 1 in 80), but that insurance companies could double or triple their coastal premiums. So within one year of the storm, hedge funds had helped raise $23 billion of new capital for reinsurance companies. Thus far, their bets have paid off. After a calm 2006, many reinsurers, such as Partner Re, have banked record profits. Katrina has also laid the foundation for entirely new markets. Last month, the Chicago Mercantile Exchange launched the world’s first major hurricane-futures exchange, which allows insurance companies to bet on big storms’ happening in order to secure lump payoffs in the event they do and to hedge themselves against the risk.
Others businesses are exploring Arctic opportunities, including fast shipping through new ice-free routes and easier access to resource wealth. As temperatures shift, so does land usage. Prime farmland is shifting north, into once barren areas of Siberia, northern Canada and Alaska. Already, some Alaskan farmers are growing new cash crops, including dwarf wheat, beets and parsnips. Famous French vineyards are wondering when they might need to relocate to cooler England to keep their grapes healthy. And prescient diamond miners in Canada’s Yukon are experimenting with helicopter lifts to transport their equipment as the thick ice roads disappear.
The firms that will profit most will likely be those that manage to create products specifically geared to a warming world. Toyota’s hybrid cars have put them in the driver’s seat of the automotive industry. Airline companies are forsaking the Airbus 380 (a kind of SUV of the skies) in favor of Boeing’s energy-efficient Dreamliner. British supermarket giant Tesco is spending $1 billion in the next five years on things like wind-powered stores and labels tracking how far food has traveled, in an attempt to appeal to a climate-change-conscious consumer.
Entire industries, such as water treatment, are being bolstered. As southern regions—from the Mediterranean to China—expect water shortages, firms that make freshwater from the sea stand to become this century’s alchemists. France’s Veolia Water, which runs the world’s largest desalination plant, has just won contracts for a €128 million reverse-osmosis plant in southern Spain and €1.6 billion water-treatment plant in China’s Gansu province. The company’s total revenue rose 10 percent last year, to €10 billion. Expert dam producers like Texas-based Hydro Solutions are also getting more contracts to protect cities exposed to rising sea levels and storms.
Big Pharma is making comparable profits. On the theory that as temperatures rise, outbreaks of tropical diseases such as malaria and dengue fever will become more common in some places (though there is no scientific consensus on this), companies such as GlaxoSmithKline and Novartis are spending billions to develop vaccines for such ailments. GSK is expanding its vaccine business from 6 percent this year to 14 percent by 2010. Merrill Lynch recently named the vaccine sector one of its top long-term investment picks for 2007. Overall, the vaccine industry generated $10 billion in sales in 2005, and that number is expected to climb to $15 billion by 2010.
Renewable energy would seem to be another obvious winner, but until recently that hasn’t been the case. Now, however, markets are finally becoming convinced of their long-term viability, thanks to new government regulations that tax polluters. The European Union already makes certain dirty industries pay for the carbon they emit, and similar schemes are in the works in Australia, California and the northeastern United States. These initiatives are making renewable energy more attractive. Witness the attention drawn by GE and PowerLight’s glitzy mega-opening of the world’s largest solar plant in southern Portugal on March 28, which drew praise from Prime Minister Jose Socrates. London-based Westhall Capital estimates that the market for wind and solar power alone will increase from $17 billion today to $85 billion by 2010. According to Goldman Sachs, the sector’s returns outperformed the market as a whole by 10 to 20 percent last year.
Of course, where there is money, there are consultants. Already, climate change has given birth to a host of green McKinseys, as well as countless law firms advising business on environmental issues. This summer, Marsh Insurance, Yale University and the think tank Ceres will host high-level seminars for directors of Fortune 1000 companies on the risks—and opportunities—posed by global warming. Companies ranging from General Motors to Tyson Foods, the world’s largest poultry producer, now employ chief environmental officers. Meanwhile, industry insiders say that green consultants are bagging up to $1,000 an hour at large firms.
Ultimately, corporate adaptation could help save not only business but the world. Paul Saffo, a fellow at Silicon Valley’s Future Institute, says, “What was amazing at Davos this year is that the government people were dispirited and it was the corporate people throwing out ideas.” Just as companies recently managed to stop producing ozone-harming products (as a result of which the ozone layer is reviving) we should expect businesses—with the help of government-imposed caps on greenhouse-gas emissions—to help slow man-made climate change through the perfection of alternative energy sources like fuel cells and solar technology. And today’s blue chips should keep global GDP growing even as the ice melts. They may even cure dengue fever in the process. Meanwhile, in the center of Lloyd’s trading floor, the Lutine Bell, which used to be rung when a ship was lost at sea, now sits silent. Today, the warnings are coming from other places, such as scientific forecasts of more hurricanes in the warming Atlantic or tragic heat waves in Europe or India. One thing, however, remains the same: smart businesses are ready to respond to the alarms.
