Mention the term “climate change” to most people and you are likely to get some kind of strong reaction. Usually, this is either a passionate response that the Earth’s future is in danger if immediate action isn’t taken to curb man-caused CO2 emissions leading to climate change. Or, a tacit acknowledgment that yes, of course the climate is changing — the climate is always changing. And human activities have little if anything to do with it.
But let’s leave aside the argument of whether human activity is a major factor in climate trends, and instead focus on investing strategies that might enable you to profit from what companies are doing in the face of potential climate change. Let’s also take a look at how climate change might affect certain industries.
In 2012, 450 investors from around the world gathered together for a Summit on Climate Risk & Energy Solutions. They concluded that many strategies for mitigating climate risks present attractive investment opportunities that offer the potential for strong and sustained growth.
For example, global new investments in clean energy rose from $54 billion in 2004 to $260 billion in 2011 — a five-fold increase. Cumulative global investments in clean energy exceeded $1 trillion during this time. Moreover, the economic potential of companies involved in improving energy efficiency in the U.S. alone is estimated by McKinsey to be $1.2 trillion per year.
So companies that are actively involved in the clean energy industry — wind, solar and other alternative energy sources — may offer attractive long-term investment opportunities, even if they are volatile in the short term. Government subsidies to these kinds of businesses could also help boost investor returns, although subsidies can be withdrawn over time. The same goes for companies actively involved in boosting energy efficiency, such as technology companies that control energy usage or manufacture energy-saving batteries or semiconductors.
However, this does not mean that every clean energy or energy efficiency-boosting business is going to be a winner. Solyndra is probably the most well-known example of a clean energy company that received massive government financial assistance but still went bankrupt due to its inability to compete in the open marketplace. So the same kind of careful research and due diligence should be performed before investing in these types of companies that you would conduct before investing in any company.
On the flip side, energy companies that operate in fossil fuel industries could be in for a rough ride. This is especially true of businesses in the coal industry, given the new regulations recently announced by the EPA requiring power companies to reduce CO2 emissions by 30 percent by 2030. Also, oil companies could lose much of the resource reserves that have driven their high valuations because of these regulations.
One new energy technology that could present attractive long-term investment opportunities is fracking, which is short for hydraulic fracturing. This is a new way of extracting natural gas out of shale rock formations located deep underground. Natural gas is a much cleaner-burning and more environmentally friendly energy source than coal. As the American economy gradually shifts from fossil fuels to cleaner energy sources like natural gas, energy companies involved in fracking could be good investment opportunities.
The amount of natural gas extracted via fracking has risen from almost none in 2000 to about 250 billion cubic meters in 2013, and more than one-third of the natural gas that is burned in the U.S. is now extracted via fracking. However, fracking is not without its risks, and remains controversial. The jury is still out on potential long-term impact of fracking on the environment, and on groundwater sources in particular. The EPA is conducting a study on the effects of fracking on groundwater, and the results (expected in 2016) could have a major effect on companies involved in the fracking industry.
The potential for more drastic swings in weather volatility is one of the possible impacts citied by some scientists of climate change. Some experts say this could negatively affect agriculture and increase the cost of food, which could affect the profits (either positively or negatively) of businesses ranging from farmers and packaged food manufacturers to restaurant chains.
Meanwhile, if the prices of food, water and other basic commodities increase due to more volatile weather patterns, investing in these commodities could serve as a hedge in your portfolio against other businesses that would be hurt by these rising costs.
In a report on investing in climate change, Deutsche Bank’s Climate Change Advisors unit summed up the challenges of formulating investing strategies to profit from climate change this way:
“In effect, investing in more diversified companies with either a multi-sector approach to climate change or a mixed exposure to climate change can help lower risk and give access to a broader range of opportunities. It is certainly not just about pure-play wind and solar public equities.”