Environment Under Siege

Victoria Harris of Devon Funds explains the issues we should be thinking about to make sure our investments are protected against climate change.

Climate change is a term that’s sometimes wilfully bashed around – and it’s widely misunderstood.

In simple terms, it’s a long-term change to the temperature of the atmosphere which has been accelerated by human activity. Since the start of the 19th century, we’ve released ever-increasing amounts of greenhouse gases into the earth’s atmosphere by burning petrochemicals and by large-scale agriculture, among other things. These emissions mean more heat is being trapped within the atmosphere, and the rising temperature is affecting the world we live in.

A warming atmosphere has us worried for two reasons.

Firstly, it leads to more extreme and unpredictable weather events. Secondly, it accelerates the melting of glaciers and ice. This leads to rising sea levels, which in turn worsens flooding and erosion during extreme weather events.

We can see climate change-driven events becoming more frequent and having a bigger impact on our lives. Think the Australian bushfires in 2020, Hurricane Katrina in 2005, and the Amazon wildfires in 2019, which are just a few examples. These environmental disasters and others like them are a very real risk to many of the local companies within our investment universe and they’ve become a very real concern within our investment process. For this reason, over the past few years, environmental, social and governance – commonly termed ESG – factors have become important within the local and global investing landscape. Given climate change and how conscious investing principles are rapidly being adopted, many companies have seen the light and adopted voluntary ESG reporting, but this varies in its depth, quality, and usefulness.

NZ leads the world

So, in April this year, New Zealand became the first country in the world to legislate mandatory climate-related disclosures, a step which will come into effect in 2023. These climate disclosures will be in line with the global best practice set out within the Task Force on Climate-Related Financial Disclosures (TCFD) guidelines. Within the NZX50, an index of New Zealand’s 50 largest share market-listed companies, over half are still non-TCFD compliant, which shows that we still have a long way to go. But some are leading by example. Take Air New Zealand, Fisher & Paykel Healthcare, Spark, and A2 Milk. TCFD disclosures will help New Zealand towards our 2050 net-zero emissions target, but they’ve also become an important resource within the investment process.

Risk and returns

When portfolio managers like me are considering an investment, we have a research process that consists of two core objectives to set a valuation for the company. • First, we must forecast the cash flows that the business is likely to generate.

Will it grow and be profitable? the shore, build a new shed, or construct a flood wall or embankment to protect it against king tide floods and rising sea levels.

Company B: Carbon emissions

Take Company B, which has a factory releasing greenhouse gas emissions. We can look at its emissions data to work out how much this business will be hit by changes in the price of carbon credits. Emissions data is categorised into scopes. Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company. Scope 3 includes all other indirect emissions that occur in a company’s value chain. Management teams that spot these environmental risks and pivot or adapt early will be rewarded because they’re more sustainable companies, so they’ll get a greater share of the investor’s wallet. So, for those of us in the investment business, taking environmental risks into account in our research process will ultimately lead to better shareholder returns.

This new law requiring public companies to make TCFD-compliant disclosures is a huge step for New Zealand and it sets an amazing precedent for many other countries.

Set some incentives

The next step would be for companies to introduce compensation and key performance indicators (KPIs) tied not only to financial targets, but to environmental targets, too. Climate change will continue to be a big factor affecting a company’s operations. Intuitively, we should be measuring their management’s performance on how they deal with this issue.

In life, incentives are the ultimate driver of human behaviour. They will naturally lead to management decisions which consider more than merely their bottom line. Not all organisations have the same capacity to move New Zealand towards a greener future as low-emitting tech companies have, but all of us can do a little bit better.

Collectively, that makes a large difference. All these steps will help accelerate New Zealand and the world towards a greener future.

For those of us in the investment business, taking environmental risks into account in our research process will ultimately lead to better shareholder returns.

• Secondly, we have to understand the risks surrounding those cash flows. What could go wrong that might derail it? Weighing up these factors gives us an estimate of the intrinsic value of the business. We can then compare this value to the current share price to work out when the investment becomes an attractive opportunity. TCFD disclosures are particularly valuable when we’re evaluating the risks facing future cash flows. However, they’re also very useful when we’re making forecasts about cash flow. Let’s take a couple of examples.

Company A: Rising sea levels

Let’s take, for example, Company A, which has a building right next to the ocean, only a few metres above sea level.

We can estimate how much money will be needed to move the structure away from

The Secrets of Crypto

When Mark Wong first bought Bitcoin, he made all the classic newbie mistakes. Now he’s a coach and educator helping others avoid the traps, with his business Altcoin Ignition.

Mark Wong lost a small fortune in his first foray into Bitcoin. It was devastating, but he says it was an important journey to have travelled. “Now it gives me an insight into what people need help with, and it was the catalyst that prompted me to learn more.” Wong first heard of Bitcoin when it was valued at US$1, but thought it was a geek thing, ‘magic internet money’. In 2017 he heard it had hit US$10,000, researched it, and bought some from a friend. He was also talked into buying some Altcoins (alternative cryptocurrencies). His investment multiplied by about 40x almost overnight. When the market crashed, he took bad advice from friends and the crypto community. “At the time I didn’t know it was bad advice; I thought it was great advice. When it goes low, just buy more – buy the dip. “Of course, once you know what you’re doing, you know if it’s a dip or if it’s a crash, but I was an amateur and an amateur doesn’t really know the difference.” He says he fell into every trap waiting for the beginner in currency trading. “It starts with overinvesting, then buying what you think is a dip on bad advice. When you start crashing, you discover leverage trading [borrowing to invest] because you think that’s the way to win back your money. “Of course, that’s an even bigger trap, because it’s so dangerous.” Still, Wong realised there was a lot of potential in cryptocurrency. “I decided that, instead of buying more cryptocurrency, I’d buy some education.” He found real experts online and, starting in 2018, he did some online courses on how to trade.

“It blew away all the stuff I had previously learned, so I added that to my arsenal.” Unable to work after injuring himself in his trade as a builder, he spend hours learning and practising. He shared his trades and soon had a sizeable investment again, and a big online following on Facebook. “People were following my trades and making a lot of money.” Last year, he started Altcoin Ignition as an educational platform to help others avoid the mistakes he made, and he’s now is working fulltime on the business. “I’m still invested, and the returns are definitely life changing but, of course, we’re actually recovering from a decent dip and it’s all starting to come back up again. It’s not about becoming an overnight millionaire; although that does happen.” He’s created his own course and continues to coach on his platforms on Facebook and in a Discord community. “The community is close to having its first Bitcoin millionaire,” he says. The course takes somebody who already knows how to buy Bitcoin through the basic skills of charting, risk management, and correct position sizing, so you’re not exposing yourself to too much risk. And then he moves on to a set of basic strategies he’s used to become profitable. Not everyone will be as profitable as he has been, he warns. “Half of it is having control over your emotions, which is the most difficult part.” One of the first things he teaches newbies is when the market’s choppy, don’t trade it. He knows that from bitter experience. Wong’s happy to give free advice through the Discord community and on his Facebook page. His course is US$300, but half-price for community members. There’s also a sevenday free trial, through his website, www.altcoinignition.io.

Readers of Informed Investor can get Wong’s free beginner course, the Crypto Crasher, by going onto his website, www.altcoinignition.io, or by signing up to his newsletters.

If Your House Is Destroyed

Is your house insurance enough to rebuild if the worst happens? Vero insurance has a way to make sure you don’t end up with half a house, says Laine Moger.

The cost to rebuild your house might be a lot higher today than it was a year ago – and Kiwis’ insurance policies might not be keeping up with the rising costs of construction. When we insure houses, many of us underestimate – or don’t consider – how much money it might take to rebuild our homes, says Sacha Cowlrick, Executive Manager Consumer Insurance for Vero. “Everyone knows how much they can sell their house for, but how many people know how much they can rebuild it for? It should be common knowledge, but it isn’t for a lot of people,” Cowlrick says. This is particularly true of late, with Covid-19 creating supply chain issues and labour shortages that are putting pressure on the building industry. Now more than ever, people should be checking their sum insured.

Use a calculator

Following the Canterbury earthquakes, most of the insurance industry moved to ‘sum insured’ house insurance policies. Homeowners are now responsible for setting the sum insured – essentially the total amount the insurer will pay if the house is destroyed – on their insurance policies. But, says Cowlrick, many people are treating their house insurance as ‘set and forget’. Vero has been progressively analysing its portfolio against CoreLogic data and found that at least a quarter of its customers might not have enough cover. It is contacting customers it finds who may be underinsured to encourage them to check their sum insured. “Homeowners are responsible for getting an estimate of how much it would cost to rebuild their house, and using that estimate to set their sum insured,” she says. “It’s relatively easy using a registered valuer or an approved online calculator, and it makes it more likely you’ll have the right cover if the worst should happen.”

Kiwis aren’t taking advantage of extra cover

Vero’s latest ad campaign is reminding its customers that they could have extra cover available to them, including full replacement cover for damage from a fire – if they are meeting certain conditions, says Cowlrick. To qualify, you need to work out the estimated cost of rebuilding your home using approved calculation methods, like the Cordell Calculator on vero.co.nz, or by using a registered valuer. “If Kiwis are using those tools to set their sum insured, they’re more likely to have the right amount of cover,” she says. “And offering the peace of mind of a little bit of extra cover is one way for us to encourage people to take the time and make sure they have the right sum insured.” Under its policies, qualifying Vero customers are eligible* for 10% extra cover in a natural disaster, or full replacement cover for any other accidental damage, if they have set their sum insured based on an accepted rebuild estimate within the last three years. It might pay to double-check at least annually, even if you think you’re correctly insured, says Cowlrick.

Investors, take care

Cowlrick says with travel restricted by Covid-19, it seems that New Zealanders have taken to home improvement in a big way. Property investors or DIYers should be especially careful to make sure they have the right amount of insurance cover if they’re improving, upgrading, or adding to a house. “Insurers can access only limited data on the homes we insure, but the people who know those houses the best are the people that own them,” she says. “If you’re making improvements to your house, it’s likely to change how much it would cost to rebuild it so it’s important that you re-check your sum insured at that time, ideally using a registered builder or quantity surveyor,” she says. You can contact your insurer, broker, or adviser to update your sum insured amount at any time. And Cowlrick says if you’re a Vero customer and have a record of a rebuild estimate that is less than three years old, you’ll be eligible for the SumExtra benefit if you need it – just like that.