By Paul Homewood

h/t Patsy Lacey.

Aviva are jumping on the climate bandwagon again!

This is written by Will Ballard, Aviva’s Portfolio Manager:

In 2007, when FIFA announced Brazil would host the 2014 World Cup, President Lula da Silva saw an opportunity. Buoyed by strong commodity prices, international investment flows, an appreciating currency and low inflation, Brazil’s economy was growing at seven per cent annually and showed no sign of slowing down. Lula wanted to use the football tournament to showcase his newly prosperous nation on the international stage.

Brazil spent an estimated $12 billion on its preparations for the World Cup, with around $4 billion lavished on building or refurbishing 12 stadiums. The most egregious expense was perhaps the $300 million that went on the development of the Arena da Amazônia in Manaus, a city nestled in the Amazon rainforest. Three lives were lost in the construction of the 40,000-seat stadium, which hosted only four matches.1

This massive white elephant project was not the only policy mistake Brazil made as the tournament approached. By 2014, the government – now led by Dilma Rousseff – was struggling to balance the books. With the commodity super-cycle at an end, it was no longer able to rely on exports to fund its profligate spending. Making matters worse, President Rousseff faced a corruption investigation. Brazil’s exit from the World Cup that summer, following a humiliating 7-1 defeat to Germany, was symbolic of a sharp reversal in the country’s fortunes.

Throughout these troubles, there was one risk no-one had anticipated – a change in the weather. The early signs of El Niño were originally spotted by fishermen off the coast of South America; a reduction in the upwelling of nutrient-rich cool water in their fishing grounds meant slimmer pickings than usual. This periodic warming in sea-surface temperatures across the Pacific was to have broader climatic implications for global temperatures and rainfall.

The El Niño oscillation occurs every two to seven years, and for Brazil it means hotter, drier periods. When it fell between 2014 and 2016, the impact was unprecedented. The resulting drought caused both water and power shortages, as energy usage spiked due to greater demand for air conditioning. Hydropower stations were unable to operate due to low water levels. At one point, the four reservoirs in the Paraiba system, which supply tap water to Rio De Janeiro, dropped to one per cent of their measured capacity, their lowest-ever level.2

Agriculture accounted for over 70 per cent of water usage in Brazil, so it was no surprise the sector was badly impacted by the drought. In 2014, corn production fell by 26 per cent and sugar cane by 12 per cent. Yields of soy, one of the country’s largest exports, fell 17 per cent.3 The coffee bean crop was similarly hard hit, shrinking by eight per cent in 2014 and a further five per cent in 2015.4

Brazil had been one of the fastest-growing economies in the world; now it was suffering its worst recession since records began. Inflation spiked to over ten per cent, with food inflation peaking at 17 per cent. GDP contracted 5.5 per cent. The currency collapsed. 

Climate risk

The United Nations estimates 3.2 billion people live in agricultural areas that experience water shortages. The UN’s Sustainable Development Goals seek to ensure the availability and sustainable management of freshwater and sanitation for all. Despite this, freshwater resources have declined by 20 per cent per person over the last two decades, while demand is only increasing.7

What both Brazil and Turkey show us are the real-world implications of these trends for middle-income countries. And the situation in these nations is especially concerning given that extreme weather events are becoming more frequent due to climate change.


Climate change is making droughts and floods more destructive during the El Niño cycle


While El Niño and La Niña are natural phenomena, human-driven climate change worsens their effects. According to a recent study published in the Proceedings of the National Academy of Sciences in the US, climate change is making droughts and floods more destructive during the El Niño cycle.8 And yet the worst-affected countries persist with policies that damage the environment. Under its current president, Jair Bolsonaro, Brazil has accelerated deforestation in the Amazon.

Drought and water scarcity were historically seen by investors as issues only poorer countries in East Africa had to deal with. In the era of rampant climate change, this is no longer the case: middle-income economies now look vulnerable too. Recent events in Brazil and Turkey show governments that fritter away money on white elephant projects may lack the resources to react when a crisis hits, risking serious damage to their economies, markets and asset prices. Investors should take note.

https://www.investmentweek.co.uk/opinion/4028451/weather-shifts-white-elephants-climate-risk-moving-goalposts-emerging-market-investors

There may be all sorts of reasons not to invest in Brazil, but climate change is not one, as this clown would have known if he had bothered to check the data.

The value of agricultural output in Brazil has been rising at ever faster rates in recent years. Yes, there was a blip downwards during the El Nino, as has frequently happened in the past. In 2017, output recovered sharply.

As for coffee production, there have regularly been much bigger collapses in the past:

http://www.fao.org/faostat/en/#compare

If this is the best advice Aviva can offer, I would suggest investors go elsewhere.

via NOT A LOT OF PEOPLE KNOW THAT

https://ift.tt/3tgfIJO

April 12, 2021 at 04:33AM