The climate wars

Why rising temperatures mean rising conflict

With tensions set to rise further as disputes over scarce resources intensify, we look at the geopolitical, economic and investment implications.

On 21 July 2020, Ethiopian Prime Minister Abiy Ahmed announced that, following heavy rains, the first stage of filling what is set to become the world’s seventh biggest reservoir had been completed.1

The basin, which according to some estimates could take up to 15 years to fill, will hold 74 billion cubic metres of water and be used as a back-up to power Africa’s largest hydroelectric power plant when water levels on the Blue Nile are running low. Ethiopia says the dam is essential to generate electricity and improve the lives of its 115 million citizens, many of whom live in darkness.

Moreover, it claims the reservoir will provide a greater buffer to water shortages during droughts in Sudan and Egypt, the two downstream nations. Better still, Ethiopia says it will be able to export surplus electricity from the Grand Ethiopian Renaissance Dam (GERD) to the same nations – both of which have suffered chronic electricity shortages in recent years – especially during rainy seasons.

However, these assurances failed to placate Sudan and Egypt, which reacted furiously to news the second stage of filling the reservoir had begun in June. Following more than a decade of fruitless negotiations, they had been hoping to reach a legally binding agreement on filling and operating the dam first.

No one can take a single drop of water from Egypt, and whoever wants to try it, let them try

Egypt’s foreign minister Sameh Shoukry warned if the country’s water rights and survival are threatened, “it will be left with no alternative but to uphold and protect its inherent right to life”.2 His Sudanese counterpart, Mariam al-Sadiq al-Mahdi, pointed at Ethiopia’s “unilateral ability” to “threaten the security and safety” of Sudanese citizens.3 Ominously, three months earlier Egyptian President Abdel Fattah al-Sisi had warned: “No one can take a single drop of water from Egypt, and whoever wants to try it, let them try.”4

Rapid population growth, together with global warming, led the United Nations (UN) in 2015 to predict Egypt faced “absolute water scarcity” within a decade.While the precise impact of the dam on the downstream countries is not known, Cairo fears not only a temporary reduction of water availability as the dam is filled, but a permanent loss because of evaporation from a reservoir that will ultimately cover an area the size of Greater London. Reduced water levels could in turn threaten the generating capacity of hydroelectric plants in Egypt and Sudan.

A problem of the here and now

The dispute is just one of several signs that climate change, once considered an issue of the future, is a problem of the here and now. By hindering the provision of necessities such as fresh water, food and electricity, it is starting to undermine livelihoods and strain government finances. The potential investment implications are vast.

Egypt is heavily reliant on water resources originating outside the country

“Egypt is heavily reliant on water resources originating outside the country, so qualitative monitoring of policy developments such as this is crucial to environmental, and therefore investment, risk. Data on past and current water stress will only take you so far,” says Thomas Dillon, senior environmental, social and governance (ESG) macro analyst at Aviva Investors.

The spat also illustrates how an issue that has hitherto been largely considered an environmental and economic one, seems certain to cause growing tensions both within and between countries, especially where it intersects with rapid population growth.

“Defence ministries all around the world are alive to the potential for water access to act as a trigger of conflict, a weapon of conflict or a target of conflict,” says Abigail Herron, global head of ESG strategic partnerships at Aviva Investors.

According to the UN, 3.2 billion people live in agricultural areas with high, or very high, water shortages. Of them, 1.2 billion – around one-sixth of the world’s population – live in severely water-constrained agricultural areas.Little wonder then that disputes over access to fresh water are becoming increasingly common. Water-related problems are particularly acute in Asia. Home to more than half of the world’s population, it has less fresh water – 3,920 cubic meters per person per year – than any other continent.

India and Pakistan are in semi-permanent dispute over hydropower on the river Indus, while China, Nepal, India and Bangladesh all spar over the rivers rising in the Himalayas that flow through neighbouring countries, providing water for nearly 500 million people along the way.

The combination of an enormous expansion of dam building for hydropower generation in China and Laos, and a severe drought, pushed water levels in the Mekong – a river on which more than 70 million people depend either partly or entirely as a source of income and life – to their lowest in a century in July 2019.7 Tensions in the region have been raised with protests in Myanmar, Thailand, Cambodia and Vietnam. As in North Africa, countries sitting downstream of the dams fear the negative impacts from greater flooding and a seasonal lack of water.

Desertification accelerating

Rising temperatures and drought, combined with overpopulation, over-farming and deforestation, are leading to an alarming rise in desertification in many parts of the world. The UN estimates around 30 million acres of arable land across the globe are turned into desert every year, as much as 20 per cent of it in India.8

The Sahel is among the most vulnerable belt of land to desertification

The Sahel – a belt of land running through 14 African countries between the Sudanian savanna to the south and the Sahara to the north, spanning 5,900 km from the Atlantic Ocean to the Red Sea – is among the most vulnerable. The region, where a dense forest can become a field of dust in a matter of years, is under constant stress due to rising temperatures, droughts and soil erosion.

Paul Stevers, co-founder of the Canadian organisation Climate Solutions Advancement Network, describes the Sahel as a ‘canary in the coal mine’. “Rising temperatures and drought are resulting in ever more frequent conflicts over access to scarce resources. The security situation is in danger of spiralling out of control. It could be a foretaste of what is to come in a number of regions,” he says.

Richer nations beware

While poorer nations are especially vulnerable, richer countries in Europe and North America would be mistaken to consider this someone else’s problem. For a start, instability could prove a fertile breeding ground for terrorist groups that aspire to damage Western interests, as seen in the Sahel with the rise of al-Qaeda in the Islamic Maghreb and Al Murabitun. That not only adds to the risk of further terrorist attacks on the West, but will inevitably suck western countries into conflict zones, as has happened to France in the Sahel.

Instability could prove a fertile breeding ground for terrorist groups that aspire to damage Western interests

A coup in Mali in 2012 led to militant Islamists exploiting the chaos and seizing the north of the country, with the insurgency spilling into neighbouring Burkina Faso and Niger. Although French troops, with logistical support from the US, began regaining territory from al-Qaeda-affiliated fighters in 2013, terrorist attacks have continued as the insurgents capitalise on persistent political instability in the region.

The worsening security situation is leading to soaring rates of migration. Nearby Chad, for instance, despite a deep economic crisis since 2015, has had to cope with a huge influx of migrants as well as a sharp rise in the number of internally displaced. According to the UNHCR, the total ‘population of concern’ in Chad – a country of just under 16 million – stood at 919,121 as of December 2020. That represented a 150 per cent increase in just five years. Of them, 52 per cent were refugees and 37 per cent internally displaced.9

According to the Institute for Economics and Peace, a thinktank that produces annual global terrorism and peace indices, 1.2 billion people – living in 31 countries that are not sufficiently resilient to withstand ecological threats – are set to be displaced by 2050.10

Herron says food insecurity, caused by a combination of conflict, a seemingly unstoppable increase in population and climate change, makes it inevitable many migrants will find their way to the borders of richer nations.11

Food insecurity in the West

Many of these issues are starting to impact richer nations more directly. For instance, an acute shortage of water in southern Europe and southwestern US states means some countries are facing food insecurity problems of their own.

The European Environmental Agency says droughts and water scarcity are already putting cultivation in Europe, especially of Mediterranean crops such as olives and grapes, under pressure, and are worsening.12 Similarly, a report mandated by the US Congress warned in 2018 that rising temperatures, extreme heat, drought, wildfires and heavy downpours will increasingly disrupt US agricultural output.

Climate change may eventually lead to significant internal migration in parts of the US as people move to more temperate and wetter areas further north

“Expected increases in challenges to livestock health, declines in crop yields and quality, and changes in extreme events in the US and abroad threaten rural livelihoods, sustainable food security, and price stability,” the Fourth National Climate Assessment said.13

Stevers says climate change, and the natural disasters it is provoking with increasing regularity, is making it harder to survive in parts of the US, especially in the hotter and more arid southwest. This may eventually lead to significant internal migration as people move to more temperate and wetter areas further north.

Even if climate-related disasters, such as the wildfires that struck several Mediterranean countries this summer, become increasingly common, Dillon says predicting specific events is unrealistic. Nonetheless, he believes closely monitoring exposures and readiness is a way to gauge how different countries might be affected.

“While countries’ exposure to these events is often outside of their control, by preparing well they can limit the consequences. Turkey – a country yet to even ratify the Paris Agreement – had no functioning national fleet of firefighting aircraft, contributing to record damages from this year’s fires,” Dillon says.

In a research note published in June, analysts at Barclays identified water scarcity as “the most important environmental concern” for the global consumer staples sector. The sector, which includes everything from food and beverages to agriculture and tobacco, was said to be facing a $200 billion impact from water scarcity, making it the most exposed of all sectors to this risk.

Aviva Investors ESG analyst Andrea Perales Padron, believes engaging with companies over water scarcity is critical.

“For instance, with food and beverage companies we are assessing how well they are managing water risks, which are paramount to their business model. This is an increasingly important consideration when making investment decisions, as it is a marker of climate change resilience and supply chain strength,” she says.

It makes sense to be investing in companies that help the world adapt to the consequences of global warming

Julie Zhuang, global equities portfolio manager at Aviva Investors, is assessing companies likely to benefit from helping nations adapt to rising water scarcity. For instance, her portfolio has a stake in one company that uses GPS and sensoring technologies to help farmers maximise crop yields while ensuring more accurate deployment of resources and minimising water waste. A second investment is in a company that provides water control and rainwater-harvesting systems to help conserve water resources and enables the filtering of safe drinking water in isolated, weather disaster zones.

“It makes sense to be investing in companies that help the world adapt to the consequences of global warming, specifically droughts and water scarcity. This issue is only going to grow in importance,” Zhuang says.

Rising sea levels

Arguably climate change’s gravest threat to global security comes from rising sea levels. The global mean sea level has risen about eight to nine inches (21–24 cm) since 1880, with about a third of that coming in the last two and a half decades. The rising water level is mostly due to a combination of meltwater from glaciers and polar ice sheets, and thermal expansion of seawater as it warms.

Figure 1: Sea level since 1880 (in mm)14
Source: Climate.gov, January 25, 2021

Rising sea levels are already putting economic pressure on several important countries in the coastal areas of the Indian Ocean, notably Bangladesh and Myanmar. Both have large populations, and large tracts of their agricultural land are in low-lying areas heavily exposed to rising sea levels.

The US, India and China are all vying for influence over Myanmar. It is seen as a strategically important country, not least by China, since it potentially provides it with an alternative route into the Indian Ocean, bypassing the Malacca Straits.

For several small island states, sea-level rise could jeopardise their very survival

For several small island states, sea-level rise could jeopardise their very survival, with far-reaching implications for others. The US, for instance, has several important military installations in the Western Pacific.

It is not just foreign military bases that are vulnerable. In June 2019, the US military said 46 of its domestic bases were ‘particularly threatened’ by the effects of climate change, notably the risk of extreme heat and flooding. The majority were in states such as California, Florida and Virginia.15

According to the US Navy, the world’s largest naval station in Norfolk, Virginia is experiencing sea-level rise averaging 4.6mm per year, with a 5.1mm increase in 2017. It says land subsidence and changing ocean currents “have resulted in more frequent nuisance flooding and increased vulnerability to coastal storms”.

National security issue

In January 2021, US President Joe Biden signed an executive order in which he stated Washington would put the climate crisis at the centre of US foreign policy and national security.16 Following the announcement, Defense Secretary Lloyd Austin said the Pentagon would begin incorporating climate analysis into its war-gaming and analysis efforts, as well as featuring the issue as part of its future national defence strategy. “There is little about what the department does to defend the American people that is not affected by climate change. It is a national security issue, and we must treat it as such,” Austin said.17

With its position as global hegemon already under threat18, many believe climate change, by provoking rising conflict in many parts of the world, will make it that much harder for the US and its allies to retain influence beyond their borders.

“Climate change is causing a number of problems around the world, which is leading to the US military getting stretched. This helps explain why, even though the country was in a mess, they pulled out of Afghanistan,” says Steve Waygood, Aviva Investors’ chief responsible investment officer.

As polar regions continue to warm, ice is melting. In the Arctic, that is making the region’s vast mineral wealth more readily accessible, potentially putting the eight Arctic nations, including the US, Russia and China, on a collision course. It could also lead to competition to open, and ultimately control, shipping lanes.

Although the area within the Arctic Circle is still almost entirely covered with ice during the winter, coverage in September has decreased more than 25 per cent since 1979. With sea routes staying navigable for longer, Russian President Vladimir Putin is mulling an ambitious but controversial project to develop the Northern Sea Route, which he wants to become a major shipping lane.

That could lead to big changes in international trade and shipping. Typically, shipping to Japan from Rotterdam uses the Suez Canal and takes about 30 days. But if the Northern Sea Route along the northern coast of Russia were used, the trip would shrink from around 11,500 nautical miles to 6,900 and take around 12 days less.19

Control of these routes could bring significant advantages to countries and companies looking for a competitive edge, prompting one former NATO commander to warn global leaders against proceeding “down the icy slope towards a zone of competition, or worse a zone of conflict".20

Implications for instability

While it is hard to dispute climate change is leading to rising conflict in many parts of the world, tackling it will not be without its dangers either. Should the world successfully wean itself of fossil fuels, that could have dire economic implications for Russia, Saudi Arabia and other petrostates in the Middle East and elsewhere. Social unrest in these countries could have implications for regional and even global stability.

Climate change will continue to compel change within Russia

According to a January 2021 report published by the Center For Strategic & International Studies, climate change will continue to compel change within Russia, with the most immediate and significant thrust coming from abroad as major energy export markets accelerate their environmental policies.

“This poses an existential threat to Russia’s economic model of hydrocarbon and mineral export, a threat heightened by years of weak domestic growth and a global economy suppressed by the pandemic,” the report’s author, Heather A Conley, wrote.21

In recognition of this danger, Saudi Arabia in 2016 laid out a plan to reduce its dependence on oil by investing in renewables and diversifying its economy by developing sectors such as health, education, infrastructure, recreation and tourism. Abu Dhabi is doing the same.

Developing countries have a critical role to play in addressing climate challenges

“Developing countries have a critical role to play in addressing climate challenges, particularly those with heavy fossil fuel dependency,” says Liam Spillane, head of emerging market debt at Aviva Investors.

He argues that although the potential economic hit to these countries means investing in their debt is becoming riskier, particularly as markets pay increasing attention to environmental considerations, there is an opportunity for governments, multilateral institutions and investors to work together to improve their access to capital markets.

“While this will need to support key climate objectives, it could have the effect of reducing the risks to people and potential conflict,” Spillane says.

Whether from increased migration and local conflicts, as in the dispute over the building of the GERD, or from changing patterns of stability and instability in great-power relations, climate change looks set to affect international security in myriad ways over the coming years. Investors should take note.

References

  1. ‘Ethiopia says it has reached first-year target for filling divisive mega-dam’, France 24, July 21, 2020
  2. James Reini, ‘Egypt will protect its 'right to life’ against Ethiopia’s mega-dam, Shoukry says’, The National News, July 8, 2021
  3. Ahmed Aboudouh, ‘“The country may lose the dispute, and its future”: The dangerous standoff over Ethiopia’s Nile dam’, The Independent, July 12, 2021
  4. Bassant Mohammed, ‘No one can take single drop of Egypt’s water: President Al-Sisi’, Daily News Egypt, March 30, 2021
  5. Mohamed Ezz and Nada Arafat, ‘'We woke up in a desert' – the water crisis taking hold across Egypt’, The Guardian, August 4, 2015
  6. ‘Water scarcity’, United Nations, 2021
  7. Stefan Lovgren, ‘Mekong River at its lowest in 100 years, threatening food supply’, National Geographic, July 31, 2019
  8. Lucas Schmidt, ‘The effects of desertification in Africa', The Borgen Project, April 22, 2020
  9. ‘Chad’, UNHCR, 2021
  10. Jon Henley, ‘Climate crisis could displace 1.2bn people by 2050, report warns’, The Guardian, September 9, 2020
  11. ‘The big interview with David Miliband: The West in retreat’, Aviva Investors, January 31, 2019
  12. Gerardo Fortuna, ‘Climate change will dramatically devalue farmland in southern Europe, EU agency reveals’, EURAKTIV, September 4, 2019
  13. ‘Fourth national climate assessment: Volume II: Impacts, risks, and adaptation in the United States’, U.S. Global Change Research Program, June 2019
  14. Rebecca Lindsey, ‘Climate change: Global sea level’, Climate.gov, January 25, 2021
  15. Ben Watson and Patrick Tucker, ‘These are the US military bases most threatened by climate change’, Defense One, June 12, 2019
  16. ‘Executive order on tackling the climate crisis at home and abroad’, The White House, January 27, 2021
  17. Aaron Mehta, ‘Climate change is now a national security priority for the Pentagon’, Defense News, January 27, 2021
  18. AIQ Editorial Team, ‘Empire states of mind: Is the age of US exceptionalism at an end?’, Aviva Investors, January 25, 2021
  19. Dr Nathanael Melia, et al., ‘Future of the sea: Implications from opening arctic sea routes’, Government Office for Science, July 2017
  20. Terry Macalister, ‘Climate change could lead to Arctic conflict, warns senior NATO commander’, The Guardian, October 11, 2010
  21. Heather A Conley, ‘Climate change will reshape Russia’, Center for Strategic and International Studies (CSIS), January 13, 2021

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