Climate-driven alpha
Why complacency is unwarranted
Robert Rubin has a new book out called "The Yellow Pad: Making Better Decisions in an Uncertain World." I went to hear him speak yesterday. I was struck by his attention to low-probability but highly-destabilizing scenarios. He said, more than once, that too many people dismiss these outcomes out of hand. He even said that the complacency he sees in his world, a world he characterized as encompassing DC, NYC, and “some Cambridge” people, is “completely unwarranted.”
In response to a question from Andrea Mitchell about making decisions today, given both the irrationality of our current domestic political situation and the irrational players that operate within it, Rubin said that the times we are living through are the worst he's ever seen (or words to that effect).
I got the distinct sense that Rubin has taken at least some of his wealth out of the stock market, even though he gamely asserted that America was a good place to do business, that "we'll come out of this [political craziness] one way or another" because ours is a resilient economy with "tremendous strengths." "I'd do business here," Rubin said. But that business, his comments implied, might not be as safe as those people who ignore unlikely futures seem to believe.
Earlier this summer, I heard a thought-provoking presentation about doing business in our uncertain climate times. Greg Lindsay, Senior Advisor for Climate Alpha, says the company is focused on "corporate climate migration." In his words, "We [Climate Alpha] tell you where to buy." They're grinding through innumerable databases looking for the "resilient geographies of tomorrow" based on climate models plus socioeconomic facts, in hopes of helping firms "capture an ever-growing share of the $300T global property market as it navigates new demographic, economic, and climate realities." Climate Alpha's clients will be able to optimize their real estate portfolios, selling out of increasingly uncomfortable places and "moving early into quality of life havens."
Climate Alpha (its corporate name means "making money on climate") pulls in and analyzes many proprietary datasets (where do people rent vacation homes? where are popular AirBnB destinations?) so that the company can provide "signal detection for first-mover advantage into resilient geographies." They use worst-case climate scenario models to stress-test potential locations—a kind of RCP 11, Lindsay joked. "Like Spinal Tap." (For non-climate readers: the highest emissions scenario is labeled RCP 8.5 by the UN. RCP stands for Representative Concentration Pathway.)
Climate Alpha, it is clear, is not dismissing the possibility that much of the lower half of America will soon be too hot, too dry, or too wet for habitability. Having chewed through all its data, Climate Alpha believes it can quantify the interplay of climate with socioeconomic, demographic, market, and other variables, and thus "identify underpriced opportunities with long term appreciation potential." Climate Alpha has apparently created with risk-adjusted return forecasts for each of America's 40,000 counties, focusing on locations that are likely to be top performers in our increasingly uncomfortable world. The company believes that properties in the top 20 zip codes on their list (their "prime geographies") will go up in value by nearly 50 percent over the next ten years.
Soon, shortages in resources like safe housing, water, food, and energy will become even more visible than they are now, leading to massive upheavals. Knowing this ahead of time creates many opportunities to arbitrage the coming shifts, Lindsay said, as some locations become tomorrow's Zoomtowns.
Where are the places with the lowest overall climate risk, highest air quality, most new housing starts, largest number of non-family households, and highest potential cost-savings from zero-energy homes? These are the targets for Climate Alpha's AI wizardry. Note the mention of "largest number of non-family households.” This is Richard Florida's Creative Class all over again, the search (ahead of time) for a place where highly-educated, white-collar, highly-compensated individuals will be comfortable. Coffeehouses, nice-looking storefronts, and good weather will be expensive, and that's fine.
The company is considering reaping additional revenue from bestowing a trustmark or certification symbol (like the EnergyStar for energy efficiency) on particular developments that meet Climate Alpha's resilience criteria. Who's going to have self-sufficient utilities, with water desalination at the ready, solar micro-grids running, and "last-mile living" already in place (meaning you're already inside the last mile and don't have to worry about going anywhere else)? Climate Alpha will know all this, and the certification will help developers upsell their planned projects.
Climate Alpha can help its clients beat the crowds:
As population dynamics change in response to climate, new real estate investment opportunities are likely to present themselves, particularly in the locations that are best able to manage climate shocks. These locations will likely be characterized by infrastructure, healthy public budgets, and quality healthcare systems. Savvy real estate investors and partners should take note of current and future migration patterns in order to capitalize on new investment opportunities.
Dr. Linda Shi, an adaptation expert at Cornell, said the other day on Doug Parsons's America Adapts podcast that this Climate Alpha presentation was "completely delinked from other conversations" about equity, community engagement, and social justice. She's right. Displacement? Involuntary migration? These issues are not Climate Alpha's priorities. They are in business to do business. The company sees that there is a substantial risk that large portions of the US will soon become unliveable, and they're keeping their clients apprised of useful information that will help them translate this disruption into investment returns. Ahead of time.
As Bob Rubin understands, we're living through a time of tremendous acceleration and uncertainty in markets and money flows as well as weather. Polarization and sorting are racing ahead in our country, with extreme factions on each side listening only to validating thoughts. Wealth inequality in the US is staggering. Our strange era is getting rapidly stranger.
It's a mistake to descend to name-calling on any of these fronts, though. Companies will do what distant investors (and powerful index funds and private equity firms) demand. Banks will be entrepreneurial if they are allowed to be. Individual investors will do what existing structures let them do, as we saw in last week's muni bonds overview. Many individuals may become very wealthy along the way. None of this is necessarily malign; it's just what we as a society have established or made possible by the set of structures and incentives we've adopted. (Although, boy, private activity bonds issued to encourage the building of sports stadiums merit a second look. But I digress.)
From my perspective, it's important that governments have the capacity to set in advance structures that will enable people to thrive in concert with the private sector. That's where antitrust enforcement, disclosure requirements, bank regulation, labor market policies, housing and zoning laws, social protection systems, health insurance, high-quality public education, and a host of other basic governmental tools fit in, all designed to keep markets both competitive and moral for everyone. Planned relocation needs to be established as one of these tools, and it will require much greater government involvement in property markets.
It cannot be that only the private sector is enabled to look ahead, face the grave climate risks already causing disruption, and act. It has to be true, it has to be a requirement, that the governments we elect will be capable of acting in the face of uncertainty. That’s why elections matter.