The geopolitical implications of a changing climate

Responsible investment
Alexia Palacios
Alexia Palacios
Analyst, Responsible Investment

Since the late eighteenth century, societies have experienced an unprecedented increase in material wealth. This has lifted billions out of poverty and those born today have, on average, a better quality of life and broader opportunities according to the Human Development Index.

Yet industrialisation – the driver of this material progress – has had a devastating effect on the world’s natural capital. Consequently, the world is facing a significant loss of biodiversity, primarily caused by loss of habitat, pollution, acidification of the oceans and climate change.

Financial assets ultimately derive their value from the real world, so the increase in financial capital – to the detriment of natural capital – cannot continue indefinitely on a planet with finite resources. The valuation of financial assets is based on expectations of future returns, but the half-century to come may be environmentally very different from the one just passed. Variability in the natural world is increasing sharply, whether that’s in temperature, rainfall or the strength of winds. Currently, neither the changing outlook nor the capacity for greater variability seem to be sufficiently incorporated into expectations of the future and, therefore, into the valuations of financial assets.

Growth and the greenhouse

The Earth’s temperature has fluctuated naturally for many millennia, but since the Industrial Revolution, global economic growth has been inextricably linked to the burning of fossil fuels. Through the emission of greenhouse gases, this has contributed to an increase of 1.1°C in global average temperatures above pre-industrial levels.1 As the world’s population grows and more people aspire to the lifestyle enjoyed by those in developed countries, the global demand for energy continues to rise. Although progress has been made in de-coupling economic growth from the emission of greenhouse gases, so far this has only been achieved in a few countries. Overall, greenhouse gas emissions are still increasing.

The environmental impacts of climate change – such as storms, extreme temperatures, wildfires and droughts – are already affecting millions of people, disrupting global supply chains and inflicting damage to property and businesses (see box). And while it is difficult to attribute a particular event to climate change, the frequency and severity of extreme weather events and natural disasters are increasing.

A more volatile climate presents growing risks to the companies in which we invest, underscoring the need for them to manage their exposure to climate events to ensure their long-term financial performance. 

A more volatile climate presents growing risks to the companies in which we invest, underscoring the need for them to manage their exposure to climate events to ensure their long-term financial performance. Yet some businesses are underestimating the urgency and significance of these chronic events. Analysing these risks matters – which is one of many reasons why Ruffer fully integrates environmental, social and governance (ESG) considerations into our investment process. But the implications for both companies and countries go far beyond extreme weather events, because climate change is exacerbating geopolitical tensions.

Water and conflict

Geopolitics and commodities have long been interlinked. Oil has dominated such interactions for the past 100 years or so and has contributed – if not directly, then indirectly – to a number of conflicts, particularly in the Middle East. Yet oil is no longer considered a scarce resource partly because shale oil production has allowed the United States to shift from being an importer to an exporter of oil and partly because concerns over climate change are driving an energy transition towards other sources of energy. Water, on the other hand, is arguably the most critical resource for human survival and its scarcity is driving up political tensions, particularly in Asia.

The Tibetan plateau is sometimes known as the ‘third pole’, because its ice fields contain the largest fresh water reserves outside the Arctic and Antarctic. The plateau feeds 10 major rivers, including the Yangtze in China and the Brahmaputra that flows through China, India and Bangladesh. Collectively, these rivers provide drinking water to more than 20% of the world’s population.2 Historically, glaciers have been effective stores of monsoon rains, acting as huge reservoirs that release this water over time. Climate change has already had a devastating effect on the Tibetan plateau, with glacial retreat accelerating in recent years because the build-up of ice and snow is no longer sufficient to match the run-off.

The geopolitical situation has the potential to become much worse, and quickly. Countries are under pressure to reduce their greenhouse gas emissions to meet the goals of the Paris Agreement and air pollution is a problem in towns and cities across Asia. Against this backdrop, China is developing many more hydroelectric dams along the rivers that flow from the Tibetan plateau. By gaining control of its neighbours’ water supply, China would have colossal leverage – a fact that has not escaped the attention of India and others.

A Polar Silk Road?

The Arctic is also suffering from significant loss of ice where the extent of the sea ice (measured at its minimum in September each year) has fallen, on average, by 12.8% per decade since 1981.3 To put this in perspective, an area of ice the size of the United Kingdom and Ireland disappeared from the Bering Sea in February 2019, when the extent of the sea ice was supposedly at its maximum. As the disappearance of sea ice amplifies global warming (because less sunlight is reflected and more is absorbed by the oceans), the extent of sea ice is expected to continue to fall – an example of the acceleration of climate change when particular tipping points are reached.

The melting of the Arctic sea ice is opening up new shipping routes such as the Northern Sea Route – often referred to as the Polar Silk Road – connecting Asia and Europe, which will dramatically reduce distances travelled and journey times. The melting ice will also bring opportunities for mineral and petroleum extraction in areas that were previously covered by permafrost. This is intensifying tensions between Russia and the United States, with other large powers such as China also vying for resources above the Arctic Circle. For decades, the policy of the United States towards the Arctic has been characterised by indifference. The offer to purchase Greenland – an acknowledgement of the island’s strategic importance – and its blocking of a joint declaration from the Arctic Council (due to the inclusion of a reference to climate change) are examples of the recent reversal of this policy stance. Russia and China, meanwhile, have both taken advantage of the United States’ absence to further their commercial and, in the case of Russia, military interests in the region. Russia has spent billions of pounds building new military bases, and upgrading abandoned ones, to give Moscow almost complete coverage of its northern coastline since announcing its intention to increase its presence in the region in its Military Doctrine of 2014. Russia has also conducted significant military operations, prompting NATO in 2018 to conduct its largest operation since the Cold War, involving 50,000 troops in northern Norway. Opportunities due to the retreating sea ice have been particularly embraced by China, which has invested around $90 billion in the Arctic region since 2012, including the financing of strategic assets in both Greenland and Russia.4

Given that the United States is unlikely to accept Russian and Chinese dominance in the region, the Arctic could become a geopolitical flashpoint.

The climate and migration

For thousands of years, environmental changes have shaped patterns and levels of human migration, which is driven by both extreme weather events and natural disasters but also by slow-onset events including desertification, loss of biodiversity and rising sea levels. During the first six months of 2019, seven million people were displaced as a result of weather-related disasters.5 Parts of Central America, as well as Northern Africa and the Middle East, have already been seriously affected by environmental changes, including a sharp reduction in rainfall that has contributed to increasing migration to the United States and Europe.

During the first six months of 2019, seven million people were displaced as a result of weather-related disasters.

Currently, climate change migrants cannot claim refugee status, because climate change falls outside the scope of the 1951 Refugee Convention. In the current political environment, this issue is proving particularly difficult to solve. While migration has many causes – and demographic, political, economic and environmental issues are often difficult to untangle – it is prudent to assume that if environmental migration continues to increase, it will add to tensions within and between countries.

A word to investors

The effects of climate change can be felt in all regions of the world, involving the largest countries, stoking political tensions and intensifying geopolitical instability.

The longer greenhouse gas emissions continue to rise, the worse the effects of climate change will be. This will greatly affect geopolitical instability and make the political co-operation necessary to solve the problem of climate change significantly harder to achieve.

For investors, markets don’t yet seem to be accounting appropriately for these changes, which creates both risks and opportunities. Understanding and navigating our changing environment, therefore, will be an investment challenge for many decades to come.

Extreme weather in action


The strength of storms, be they hurricanes in the Caribbean or typhoons in Asia, fuelled by higher ocean temperatures, are leading to significant economic losses. In 2019, Hurricane Dorian in the Bahamas and Cyclone Idai in Southern Africa brought devastation to particularly vulnerable regions of the world. Although the destruction is often most acute when these storms hit developing countries, the economic losses are still significant for developed ones. Examples include Hurricane Sandy in 2012 and Hurricane Harvey in 2017. When the impact on the local economy is considered, it can be equivalent to that of a financial crisis but occurring in a matter of days.

The magnitude of insured losses has had significant implications for the insurance industry, particularly in 2017 when Hurricane Harvey, along with Hurricanes Irma and Maria, for example, contributed to a profit fall of 85% for German reinsurer Munich Re.6 Predicting the frequency and severity of such events is vital for the insurance industry, although this is proving to be increasingly challenging given the complexity and interconnectedness of natural disasters caused by climate change.

Record temperatures

Temperature records were shattered in the summer of 2019, with almost 400 new records set in the Northern Hemisphere. July 2019 was the hottest month on record and the 415th consecutive month with temperatures above the twentieth century average.7 In Europe, there were new highs in Belgium, Germany and the United Kingdom, where Cambridge University Botanical Garden reached 38.7°C. The heatwave across Europe was made more likely and more intense due to human-induced climate change, according to a group of scientists led by the World Weather Attribution.8


In 2019, wildfires affected places from California to Australia, and from the Amazon to the Indonesian rainforest. Perhaps even more shocking were the fires in the Arctic Circle where, in the summer of 2019, 2.6 million hectares of Siberia were ablaze as temperatures soared to over 30°C. While it is too early to estimate the economic losses from these fires, the Camp Fire, in Northern California in November 2018, caused overall losses of $16.5 billion, the highest wildfire loss on record according to data from Munich Re.9

The implications for some companies were serious, not least for the Californian utility company Pacific Gas and Electric (PG&E). It filed for bankruptcy in January 2019, in part due to the billions of dollars in claims it is facing; the Camp Fire is believed to have started when a PG&E power line came in contact with nearby trees.


Water is already a scarce resource in many parts of the world and is becoming increasingly so. Some of the world’s major cities, including Cape Town and New Delhi, have almost reached Day Zero in recent years – the day when you turn on the taps to find no water coming out. Extreme shortages amplify the inequality between the rich, who can pay for continued access to water, and the poor, who cannot.

Cities and countries don’t need to be approaching Day Zero for companies to be severely affected though. The share price of German chemical companies suffered in the autumn of 2018 when the water level in the Rhine fell to a record low, preventing barges from delivering raw materials and leading to the temporary closure of plants. Other water-intensive industries, such as the textile and clothing industry, also face major challenges.

Responsible Investment Report 2019
We believe that investing responsibly will lead to better long-term performance for our clients. As an investment manager with a relatively concentrated portfolio of equity holdings, we believe ESG considerations represent both sources of value and also investment risks.
Food waste: a triple win opportunity
If food waste were a country, it would be the third-largest emitter of greenhouse gases (8% of annual global greenhouse gases come from food waste).
Climate change
To tackle climate change, both governments and companies need to act; how companies manage their greenhouse gas emissions has become fundamental to their long-term financial performance. For investors seeking to influence the behaviour of companies, it is not necessary to choose either divestment or engagement, it can be a combination of both.
  1. WMO,
  2. China Water Risk Report (2018), No Water, No Growth – Does Asia have enough water to develop?
  3. NASA,
  4. Financial Times (2019), US envoy warns of Chinese and Russian aggression in Arctic
  5. Internal Displacement Monitoring Centre,
  6. Financial Times (2018), Munich Re slides 5% after profits blown off-course by hurricanes
  7. Washington Post (2019), July was Earth's hottest month since records began
  8. World Weather Attribution (2019), Human contribution to the record-breaking July 2019 heatwave in Western Europe
  9. Munich Re (2019), Extreme storms, wildfires and droughts cause heavy natural capital losses in 2018

The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument, including interests in any of Ruffer’s funds. The information contained in the article is fact based and does not constitute investment research, investment advice or a personal recommendation, and should not be used as the basis for any investment decision. This document does not take account of any potential investor’s investment objectives, particular needs or financial situation. This document reflects Ruffer’s opinions at the date of publication only, the opinions are subject to change without notice and Ruffer shall bear no responsibility for the opinions offered. Read the full disclaimer.

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