As the effects of climate change, or global warming, have become more evident in recent years, awareness of its consequences have grown. Investors, also, can no longer ignore the potential impact climate change can have on their investment returns and portfolio allocations. Investing with climate change as a major concern will occupy both institutional and private investors in the decades to come.
Environment, social and governance (ESG) investment strategies
The investment community generally see climate change as part of ESG strategies, which seek to redirect investment to socially responsible companies and industries. This entails negatively screening out undesirable investments, for instance tobacco, arms manufacturers and polluters, and increasing exposure to, for instance, environmentally-friendly businesses.
However, seeing climate change mainly as a social responsibility issue misses the point that the effect of global warming and the efforts to redress it, should also be considered for the potential impact on advantageous portfolio allocations and expected investment returns.
As governments and companies around the world face increasing pressure to address carbon emissions and global warming, those with viable solutions to climate change will turn into growth stories, yielding above-average returns.
Fossil fuel industries
If the projections of the climate science community play out as predicted, it is likely that the fossil fuel industry will come under increased pressure to reduce production of carbon-based output. The changing economics of renewable energy sources and consumer demand for such products may also drive the shift to alternative energy sources.
Renewable energy
Renewable energy, in the form of wind turbines and solar panels, is widely viewed as the most viable replacement for energy from traditional coal-driven power stations.
Transport
Electrically-powered vehicles are expected to replace fuel-driven vehicles in the future. The EV industry is not confined to vehicle manufacturers, but include complementary suppliers and services, such as part suppliers, rare metal producers, battery and charging services, and charging-station software.
“Green” consumption
Demand for so-called “green” products is expected to grow, in order to reduce consumers’ carbon footprint, or carbon emissions. The move to “green” products will also be driven by socially responsible businesses and environmental regulations. “Green” products, for instance, include replacements for fossil fuel derivatives, and for products the production of which are thought to be responsible for greenhouse gases (such as meat).
Innovative solutions
The growing interest in climate change investment has sparked a number of ventures that aim to capitalize on the opportunities in this field employing innovative technologies. These include vertical farming, food waste management, software-based precision agriculture. and back-up power supplies.
Investment strategies for climate change
When investing with climate change in mind, you may choose to take a passive, defensive approach, by screening out companies which will be negatively affect, or to actively invest in companies which will benefit from the mitigation of global warming, such as renewable energy companies.
Climate Change Funds
Rather than investing directly in a selection of companies which may benefit from the transition to a low carbon economy, the most efficient way of gaining exposure to such a portfolio is through investment in a climate change or ESG index funds. There is also a number of green bond funds which finance environmental projects.
Climate change disclosure requirements
You can expect that as the climate change issue receives more attention from financial regulators, greater disclosure requirements will come into effect. For instance, in 2010, the US Securities and Exchange Commission (SEC) provided guidance to clarify disclosure requirements as they apply to the issue of climate change. Currently, many companies still choose not to make any such disclosure.
Early stage investment risk
As the development of internet-related business sector has shown, the early movers do not always turn out to be the ultimate winners. On the other hand, playing a waiting game may result in you foregoing above average returns.
Further reading:
Financial markets are mispricing climate risk
Economics of Electric Vehicles Mean Oil’s Days As A Transport Fuel Are Numbered
