Climate change as an investment option

Many of us haven't considered climate change as an investment option and just doing businesses in the traditional way as it was going on, but as we are in the midst of pandemic lets first understand that some type of businesses wont come back to life or else wont have a reopening. Yes, people are going to need food, shelter, entertainment, healthcare and transportation facilities but with norms of physical distancing and the lockdown which is some what relaxed now has not left many businesses with cash, almost 50% of the businesses have run out of cash.

Lets take example of a restaurant, if it follows the norms of physical distancing it will be able to serve very less patrons as is used to serve and already falling demand has given it much damage making it difficult to revive properly till the vaccine is found.

 This is the case with almost every retail business wherein the demand has fallen and there has been a change in consumer behaviour towards purchasing things, but in a country like India will it happen the same way as it happened across the globe or it will be a different scenario altogether because as Indians are not taking covid seriously and are returning to the jobs. While many are wearing masks only because there is a penalty on it, such scenarios are happening, only because India has a majority of population with middle income class and lower than that and all of them need money to feed themselves for that day.

Global Oil Demand
The pandemic has shown that oil is not the most important thing and have made it just like any other commodity, while companies are experimenting with work from home culture and accepting it, it would mean that there wont be similar demand for oil consumption as the world is changing according to the times and the governments have realised that investing in climate change is more necessary. So burning oil would definitely mean a permanent reduction in emission of green house gases to a certain level and also easing the way to meet the goals of Paris climate change agreement.

Paris Climate change agreement
The goal is to hold the rise in temperatures to below 2 degrees. This is the main goal of Paris Climate change agreement and economies have realised it. Even countries such as Russia now understands that it must adapt to green energy and make investments in climate change.

Investment in Climate change
If we talk about investment in climate change country such as Russia is facing problem in by not adapting to the changing global scenario. The economy of the world's biggest energy exporter is heading for its deepest slump in 10 years due to the fallout of corona virus so if Russia doesn't adapt, its budget receipts will decline drastically and the growth may be limited to 0.8% per year. The forecasters expect that the recession could accelerate the decline in global fossil fuel demand on which it has been banking on since many decades.

Europe has given out the world's most ambitious climate change package to earmark tens of billions of euros for hydrogen energy. The goal of net zero emissions by 2050 implies of full decarbonisation for the future of the economy and it's residents. Various countries such as France have also provided a fat stimulus of 8 billion Euros for the automobile sector to boost production of electric cars by 1 million cars per year. It is also estimated that in Europe it is going to create 850000 jobs because of investment in green energy.

Here the catch is the cost, most of the hydrogen used as fuel is derived by splitting it from molecule of natural gas but the countries are expecting the cost to reduce drastically because in some countries in the world it is still very costly to use green energy rather than using oil or other fossil fuels to generate power.

Opportunity in India
While I talked about different countries, let me talk about India. India has invested almost $57 billion dollars from 2014-2019 in green energy and have created jobs directly or indirectly. But as we are looking for future we must also look at the infrastructure requirements and challenges that are there. While investments are done to create infrastructure it is the best time now as even if we wish to have electric cars in India, we would be requiring charging stations for it. Now just imagine a situation wherein in cities such as Mumbai, the residents there have to park their vehicles on the road and have to pay for that, this is happened because of improper infrastructure. While we are paying so much for electricity investing in solar/hydrogen/wind farms can reduce the price or if price is not reduced the profits may rise because of investment in green energy and getting the energy at a cheaper price.

I am of the firm belief that for every developing country, investment in infrastructure would boost economic growth and drive demand upwards for consumption. We have seen that even government is pushing for infrastructure projects and from the reports I have read, Mckinsey says that every $10 million investment in green energy would generate 77 jobs  as compared to investment made in fossil fuel which would generate approximately 25 jobs. Also in another report I read showcased that investing in green energy now would generate at-least 400% returns within next 20 years.

I am also of the opinion that we must look at climate change seriously and think of it as an investment for future.

The predicted future and changes

Yes it has been a lot of time that I have posted something and found out that I need to simplify things so started a podcast as many of the readers don't want to read the complexities I write. So as I always do there are multiple things happening in the economy, while many Indians have started to invest in volatile markets I think it is a good sign that first time investors are rising and thus investing their liquidity in markets.

Macroeconomic Views

As i mentioned in my previous blog that there seems to be demand in 2 wheeler as well as 4 wheeler, there seems to be increase in bookings as since the lifting of lock down partially it came in the news that Maruti Suzuki have had bookings of 4000-5000 for hatchback cars in a day and the number is increasing and will definitely increase as more people are preferring to won a vehicle and transport rather than using public transport.

The government has done a tremendous job in giving out the stimulus package but there is water water everywhere and not a single drop to drink currently, many MNCs or big business houses have benefited from this as they took fresh loan at a very low interest rate, this decision of the government also helped in controlling the inflation rate as there was a quite risk of inflation growing amidst the crisis.
Many of us would be thinking how the inflation plays role in such scenario but too much money in the system to spend would ultimately raise the prices as the consumers will be having more money in their pockets and also there is a liquidity trap like situation, the RBI has further reduced the interest rates to 40 basis points leading to downfall in interest rates and cheaper loans.

Reliance also seems to have taken a hit from the demand side shock and is bringing in investors to it's Jio Platforms Ltd. to reduce it's debt. This pandemic situation made consumers as well as investors realize that oil is not everything as we have also seen negative prices wherein the producers were willing to give money to purchase crude oil, but as the demand for oil is rising there seems to be awareness among-st the consumers for climate change and seems that climate change will soon overshadow the pandemic situation and the focus on infrastructure development in a sustainable way rather than what we have been doing till now, just focusing on the cost and means to increase profit margins.

Financial Reforms
I am of the belief that there must be financial reforms as well as administrative reforms within the government, any reform would have to be implemented by the system and execution must be taken care of properly which is not yet seen that much and ease of doing business as well as security is the main concern for the businesses while doing. Though too much liberalisation would also impact negatively as Indians have the habit of over utilisation of what has been given and then complaining also.

ESG (Environment, Sustainability and Governance)
MSMEs must now work and grow considering these three important factors as they are now needed to succeed in the future. Keeping environment in mind many startups have to look for opportunities in these areas as there is a tremendous void available in these segments. Good governance practices and the habit of savings for the time of uncertain crisis as they now have become part and parcel of the business scenario.

Work from Home
While work from home is going to be the new normal in many industries for certain percentage of the employees, it is necessary that we look at developing proper habits and have a routine, thought the productivity is going to decrease it is hence required to take essential and timely breaks as well as do other stuff such as playing board games and some outdoor games also. But even in these times we are maintaining physical distancing but we need to remain social as we were and keep in touch with our connections.

The price of risk and getting ahead in the future

I am getting a sense that I may not be able to write weekly but as COVID crisis is playing with the markets as well as lockdown is getting extended and a stimulus package will be provided wherein almost Rs. 7.79 lakh crores have been provided and the remaining will be provided in the coming time to enhance liquidity. As we all know that we will not be able to live in lockdown as some economic activities are required it is time that I suggest what can be the possible future of investments and strategies wherein one can invest or else work in a new manner but as I always do there are few macroeconomic views I would like to state.

Macroeconomic views

It seems to me that we are a sort of falling into liquidity trap, while countries such as Peru and Chile have lowered their borrowing interest rates to almost zero where the policy rates are ranging from 3.75% to 4.65% as of today.

Policy Repo Rate	: 4.40%
Reverse Repo Rate	: 3.75%
Marginal Standing Facility Rate	: 4.65%
Bank Rate	: 4.65%

Source: RBI

While most might not be understanding liquidity trap, it is when monetary policies fail to attract demand and the interest rates are lowered near to zero wherein it will be useless to keep the money with the banks and there are chances that there will be increased amount of cash liquidity at home and the expenditure is made on cash basis. While this trend was seen because of the covid situation relaxing the lockdown would make the investors make more impulse purchase leading to more expenditure than planned. The government will also be providing and economic stimulus package that was very much needed to revive demand in the economy.

But even though the package is been given I think there will be demand in few sectors but in a niche segment and also I expect almost 20-30% of the firms to shut down post corona virus, the only immediate solution visible is automation. While looking at the current crisis and as many economies have opened up, there have been increase in cases and a 'V' shaped recovery is almost impossible now, the focus of the investors will remain on easing the lock down as well as corporate earnings.

Labour and Supply chain problem

While many of the companies started functioning it is clearly seen that there are problems pertaining to labour, most of the labour have gone to their respective states due to uncertainty, the business owners are expecting that they wont be returning very soon to work and for those companies who have availability of local labour are not getting passes wherein they can work at even half the production capacities and even if they have there is lack of demand. Supply chain is also a big issue now-a-days as transportation problems are being faced to small as well as big enterprises. Why is it so because there are less number of trucks roaming for fulfilling supply chain as the truck drivers have gone. Let me explain this with an example.

Suppose we have around 20 lac trucks during normal condition out of which currently only 60% are functioning which leads to 12 lac trucks, now out of these trucks there is approximately availability of 65% truck drivers and the rest have returned to their native places leading to only 7.8 lac trucks on the road. Thus, this is where there is a tremendous gap to be fulfilled and is only expected to be recovered in the next 7-8 months time after the lockdown gets over.

Demand in some segments

As we all have grown safety standards during the lockdown there seems to be some area which might be affected with and increase in demand.

• Affordable Housing Market: Affordable housing market is an area in which the demand might rise because it is better to own a house in situation like this rather than paying rent and making unnecessary expenditure in which we have no guarantee that we might not be thrown out of the house during tough times. Also the long term expenditure will be less than not owning a house. Also as there have been success in work from home many companies will be making their employees work from home in different cities thus in order to have comfortable working environment, the employees will definitely be seeking for affordable home.
• 2 wheeler: 2 wheeler automobile will be seen with an increase in demand as those of working class will be looking at safety of their own and will have to maintain social distancing, leading to increase in demand for 2 wheeler. I also expect second hand car market to rise as there will be those who might be able to afford at least second hand car and will be looking at comfort.
• Ancillary products: Ancillary products required in manufacturing the above mentioned asset class will also have an indirect increase in demand such as steel, batteries etc.

Strategies of working in future

As I expect many of the firms to shut down but those firms who start innovating will not be finding a hard time. Many of us are thinking of innovation as something big thing just because it is a fancy English word, but it is not the case wherein every business is different and we have been earning hefty amounts from what we always used to do so we have stopped our focus from the process. Business process is one of the main thing which we generally neglect while we are earning more so not giving at least 20% of your time and money on doing R&D in business process would definitely help in lowering the cost and finding new business.

Investing in technology and automation would be the best thing but it would be taking up lot of expenditure, so it is better to have technological collaborations or else capacity allocation agreement with other larger firms and utilize their facility. Many of you would be thinking that why would a firm provide any other business to utilize their production capacity? It is because there will be very less demand and there would be fixed costs associated with the businesses which they need to reduce, firms such as BHEL, called navratna of the Indian government has floated letter wherein they are calling MNCs as well as domestic manufacturers to utilize their production capacities and work. All the company wants is work because it has almost 18000 employees and amazing talent pooled in one company. So can't MSMEs do the same?

Applying 80/20 rule in business, we have seen that small businesses generally do not invest any money in finding out new business opportunities that might be there but are not doing it. While we still do the existing business small business owners can apply 20% of their resources in finding new business opportunities when the business is quiet old, lets say at least 5-7 years and then focus on 80% of the time on expanding the new business and 20% of the time on old because it would now be automated at a certain level.

Hiring professionals for a business when business starts growing is a necessity but small businesses dont do it because of the insecurity that that guy might steal your entire business. It would not happen so but an intelligent employee will certainly find new means of earning and reducing the cost as well as will keep the owner on his/her toes because he/she needs to be updated enough and match the frequency at which the employee is working.

Investing in Future

While I mentioned all the strategies I think might be helpful post the virus situation but when we talk about future I find investing in climate change will generate maximum returns and will also cause disruption. Right now I am talking about those who wish to invest in shares, what many forget is that they are not just stocks available at a certain price but you are also investing in a business. I would suggest that the business should have a simple revenue/business model to operate in which you understand.

For eg: Let's say I think that investing in companies dealing in water treatment and related areas would generate more returns, while we also know the level of pollution has increased treating water will be our priority and sooner or later India might as well have taxes on usage of water, similar to that of US and other countries.

When I invest in water treatment companies products required in them would also be there and a suitable demand for them will be there.

I also think investing in cold chain logistics will be generating good revenue, as we also deal in perishable products our demand for end product such as ready to eat foods have been growing and storing all these foods will definitely require cold chain, not only these but chips and nachos and other FMCG products made out of vegetables will also be requiring cold chain. Similarly to export few items there is necessary requirement to have cold chain infrastructure. Also setting up infrastructure for renewable sources of energy will be having a certainty of demand. While Solar and Wind are very advanced they are also cheaper than using fossil fuels in many countries and they are future in providing and fulfilling the demand of power sector.

Meltdown: Final showdown and Investment in Future

While it has been quite a break I didn't write because it felt like just reading out the news to all you people, but finally I am glad that there are relaxations provided for the economic revival. While the government is doing a good job the virus situation is likely to be there for 2 years and if the relaxations wouldn't have been provided now then it would have been very difficult for most of the people to survive the crisis.
India as a country gave a stimulus package but any country cannot have a lockdown period for long enough time as they wont be able to provide to everyone. While we have certain problem populations is the major one wherein not all can the citizens will be able to take the benefit from this situation.

Again I would like to give macroeconomic views and some problems which would have been of the lockdown relaxation would not have been provided.

Macroeconomic views
While many are talking about herd immunity I wont be even discussing about it, as I am no expert in that field, but there were few serious issues.

Migrant Labour worker
This is a major problem to most of the companies wherein those workers who were not able to travel to their homes will travel after the lockdown is lifted totally. Companies which focus on localisation would be facing less issue but there might be an increase in wage demand from the local workers because of the unavailability of the migrant workers who are willing to work for less money and for more hours also. The owners now are not able to afford the salaries for eg: even companies like reliance is going for 50% salary cut then it can be seen that MSMEs will definitely looking to reduce their fixed costs and negative cash outflows.

Demand Collapse
While most are expecting the demand to rise like our share markets have risen, it is practically impossible for the consumption to increase in a 'V' shape manner, it is most likely that the consumers will be looking after the survival instinct and will wait for a risk averse situation and then start pouring their money in them.

Liquidity Problems
Though this is always a problem, MSMEs will be most likey to be affected if the banks does not pour liquidity into the system. While government projects play a major role it is the responsibility of the government to pump in cash for the due payments and not delay in payments. There is a certainty that there will be cash flow problems for next 6-7 months pertaining to the situation and I expect at least 10% of the businesses closure due their overheads and not maintaining a proper cash balance.

The food supply chain
This was a problem and will remain a problem in distribution of the food grains, even though the government had the stock of 1 year and for this year the purchases have just started, situation such as hoardings were seen and it is likely that the prices of such ingredients is likely to go up. The migrant labourers who were stranded had difficulty in getting food from ration shops and those whose family is big didn't had proper amount of support.

Stimulus
While all that had been announced was not a government expenditure done looking at the corona virus but just some amount of addition to the expense what the government does every year and maybe releasing the payments on time. While a proper expenditure on revival is expected which will increase the demand and provide liquidity to the MSMEs.

While many might be enjoying the lockdown, there are various decisions by the government looks like harassing the MSMEs such as the employees must be taken by the bus to their workplace. While many companies are already having liquidity problem and inadequate staff this creates another hurdle, in a manner to stop the company from working. There are many people who have lost their single source of income and the millennials are not likely to understand these as many of them dont have responsibility of running their house.

Even government decisions to hault the payment of Dearness Allowance to their employees there was oppose from their employees than how does government expect the private companies to pay their employees for months without earning revenues. Almost 70% of listed companies had earned zero revenue in April and I haven't counted the MSMEs till now.

Investment in future
Post covid era will be totally different wherein there will be disruption in the industry as the whole industry would try to get into automation, many jobs will be lost but even more than the jobs lost there will be more employment for the new opportunities and only for those who keep on upgrading their skillset.

I believe most of the savings must be exhausted but even for those who are left with something must follow simple steps by looking into the future. While horse was replaced by cars because of increase in speed, this time we are focusing on mileage achieved by bringing electric cars by creating a disruption in the existing business. We might not be able to build a car manufacturing business but atleast invest in ancillaries.

For eg: before making cars we will be needing infrastructure to support the cars for long range runs such as charging stations, batteries, solar power parking plots etc. Thus we may invest in companies which will be essential for future such as steel making companies, solar cell making companies.

We would be looking at the companies which are directly or indirectly investing to support green business because that is the future we are looking for, while it is not said by be but I read a report in which people like bill gates said that investment now in climate change would bring in a return of atleast 400% within next 20 years. While many see but totally ignore the fact that climate change in happening and making us change the way we used to do business, than why not look at climate change as an investment opportunity and the better thing is one must not need to have the knowledge of fundamental analysis but just a good viewpoint into the future.