With increased political risk casting a pall over developed economies, continued weakness in the BRICS grouping of emerging markets, and a persistent slump in the value of African commodity exports, Latin America is an increasingly attractive continent for businesses and investors looking for economically robust and politically stable investment targets. However, for Latin America to shake off its current economic torpor (with Q3 GDP growth coming in at -.6% for the region as a whole) it must overcome the effects of another key global challenge: climate change. From irregular electricity yields to increased potential for lithium exports, the effects of climate change on Latin America are multifaceted and often obscure, but nonetheless critically important for business. Luckily, although the most prominent effects are negative, climate change will also open up distinct investment opportunities.
The effects of climate change, felt everywhere, will be especially potent in Latin America for two key reasons: the continent’s reliance on farming and on glacial water supplies. According to the Inter-American Development Bank, agriculture represents over a quarter of Latin American exports, and in several major Latin American economies, including Brazil, over half of poor households rely on agriculture for their income. Agriculture is also a significant and growing share of Latin American exports, representing around a quarter of the annual total. However, agricultural yields are under extreme threat from climate change: the Food and Agriculture Organization reports that climate change will see a 20% reduction in Latin American production of staple crops such as wheat and barley over the next 40 years, with some yields, such as Guatemalan bean production, falling by up to two-thirds. Overall, the World Bank reports, these consequences are expected to add up to a total loss of 1.9% of GDP, or 143 billion USD, by 2050. Farmers’ attempts to adapt may prove to be harmful as well, by aggravating another key concern stemming from climate change: access to adequate water. As warmer areas become less suitable for traditional agricultural crops, cultivation will shift into highlands, disrupting already parlous efforts to ensure receding glaciers continue to deliver adequate amounts of water to cities and lowlands.
Indeed, water shortages have the potential to cause the worst economic disruptions to result from climate change. Agricultural areas, already stressed by changing climates and decreasing topsoil moisture, will find access to water greatly diminished by the melting of Andean glaciers. Glaciologist Bernard Francou notes that these glaciers have lost an unprecedented 50% of their volume in the last 30 years, with critical Peruvian glaciers predicted to disappear entirely by 2030. While melting glaciers is a world-wide problem, nowhere is more imperilled than Latin America, which contains more than 98% of the world’s tropical glaciers. Not only do these provide critical flows of freshwater to bordering lowland regions, their dependably large melt-water flows allow surrounding nations to generate vast amounts of hydroelectric power. According to Hydro Review, 70% of Brazil’s energy is generated from hydroelectric sources. However, rapidly melting glaciers have combined with shifting precipitation patterns to endanger hydroelectric power production, increasing the cost and risk of manufacturing. The most notable example is during the 2014 – 2015 Brazilian drought, in which unprecedentedly low reservoir levels forced severe power rationing, harming citizens and manufacturers while depressing foreign investment in Brazil. As climate change and glacial melting, accelerate, expect to see this pattern repeated throughout Latin America, with Peru and Brazil especially vulnerable. Tourism, particularly on the coasts, will also be affected by water shortages, with many aquifers in tourist areas experiencing saltwater intrusion thanks to a combination of overpumping, decreased water inflows, and rising sea levels. The UN World Tourism Organization estimates that over 76 million tourists visit Latin America annually; the region cannot afford an uncertain water supply affecting this key source of revenue.
However, the primary effects of climate change on international business will be felt indirectly, as the mounting losses in agriculture, water availability and manufacturing increase political risk and harm the Latin American investment climate. According to the Intergovernmental Panel on Climate Change, 613 extreme climate and hydro-meteorological events occurred in Latin America between 2000 and 2013, of which over 80% are attributable to climate change. Even worse, the effects are disproportionately concentrated on poor and minority populations, who tend to be living in vulnerable housing stock and have less emergency savings to draw on if disaster strikes. The World Meteorological Association (WMO) reported in a 2014 publication that these natural disasters, when combined with reduced crop yields, will drive millions of poor migrants from rural areas into already overcrowded cities. As these rural migrants are likely to arrive with low levels of social and physical capital, the WMO expects increasing unrest, as their inability to integrate into the urban labour force increases crime and social discontent. This will tend to exacerbate one of Latin America’s major weaknesses: a poor investment climate stemming from high levels of political risk. Francisco Rodriguez of the University of Maryland writes that one reason why Latin America has failed to catch up to China and other emerging market hotspots is a long track record of instability, which increases uncertainty for foreign investors and consequently deters them from committing funds to the region. With 83% of the continent’s population already living in cities, many in informal shantytowns, the potential threat of further forced urbanization is quite high. Indeed, this risk has already been demonstrated in Brazil, where extensive favela riots during both the 2014 World Cup and the 2016 Olympics provide a potential taste of the situation to come.
Beyond the threat of rioting and other violent instability, the political climate is likely to grow more hostile to international business. For fossil fuel companies in particular, recently emboldened by the opening of Mexican oil production to foreign multinationals, the political backlash is likely to be severe. While oil and gas majors are facing stormy prospects globally, their Latin American prospects are likely to be particularly dire, thanks to the disproportional effects of climate change on agriculture, water, tourism, manufacturing, and the electricity supply. Moreover, agricultural climate shocks will disproportionately hit large businesses and foreign investors: Brighter Green, an NYC environmental policy think tank, points out that, in many cases, government attempts to mitigate climate change may involve increased subsidies and protection for smallholders at the expense of large agribusinesses.
Fortunately, the picture is brightened by two potential South American opportunities brought on by climate change: exporting the resources to power the global transition to clean energy, and investing in sustainability projects in the region itself. As climate change has forced a transition from oil and gas to renewable power, increased demand for rechargeable batteries (in order to power electric cars and smooth irregular renewable power generation) has spurred interest in one key metal: lithium. According to Citi analysts, lithium prices are expected to rise by 20% in 2017 alone, with further increases in the future as electric cars and smart grids consume more and more lithium-containing batteries. South America is poised to benefit tremendously from this, with Bolivia alone containing over half of the world’s lithium. Neighbouring Argentina and Chile also have significant reserves. Just three years ago, Bolivia had only a single trial lithium mine. Today, however, the government is investing an enormous $925 million into lithium production, almost 3% of total GDP. With governments in all three countries increasingly business-friendly, opportunities abound for outside investors and mining groups to harness the potential of South America’s “Lithium Triangle”.
Beyond mining, the prospects for savvy investors are similarly bright. The International Finance Corporation estimates that there will be opportunities for up to 1 trillion in sustainable investing—funding projects that seek to develop green energy or increase energy efficiency—in South America, as governments and private businesses seek to minimize the impacts of climate change. At the same time as fossil fuels face increasing regulatory scrutiny, governments are cementing clear and fair regulatory frameworks around sustainable finance, to ensure that investors can easily allocate money. To be clear, the returns here are substantial, even overlooking the environmental merits: the We Mean Business Coalition, a group of companies focused on low-carbon solutions, report sustainable investments in Latin America currently yield annual rates of return between 13 and 17%. With persistent near-zero interest rates in the developed world, this represents an attractive opportunity for the innovative fixed-income investor.
Overall, the sunny prospects for Latin America are distinctly dampened by the spectre of climate change: from depressed agricultural yields to an increased risk of violent instability, climate change represents a real threat to the region’s economic future. However, by being cognizant of the likely risks, and taking advantage of the unique opportunities created, it is possible for businesses and investors to not only mitigate the damage they incur from climate change, but turn its effects to their advantage.
