Is Climate Change Impacting Your Investments?
When it comes to climate change, most of us are mainly worried about entering a global Jupiter-esque hellscape of boiling seas and raging storms (as we should be!). But don’t just look up at the skies—look down at your portfolio, too.
As the world heats up due to human causes—which at least 97 percent of scientists agree is happening—there will be more storms, more rain, more droughts, and worsening natural disasters. Less obvious is the fact that climate change will likely also bring increased market instability, which could impact your investments. In fact, your portfolio may already be feeling the heat.
The good news: You can do something about it, and by doing so you’ll be positively impacting not only on your own finances, but the larger planet, too. It all comes down to understanding how climate change affects investment finance.
The new normal
Scientists and world leaders agree that global temperatures can’t exceed more than 2 degrees Celsius warmer than pre-industrial temperatures without major consequences, and we’re getting close. According to NASA, the average surface temperature has already risen by about 0.9 degrees Celsius.
For big business, global temperature rise and its impacts are already being felt—or soon will be.
Take the energy industry, for example. Oil production is often affected by hurricanes—with strong storms and subsequent flooding halting production—and as those storms get worse, and sea levels in oil refinery strongholds like the Gulf Coast rise, oil companies will face bigger on-site problems. But that may not be their only problem.
Luckily for the rest of the planet, but not so lucky for big oil, climate change is expected to increase reliance on green and renewable energy as companies and consumers alike turn away from fossil fuels. In other words, “if fossil fuels aren’t being hurt by [climate change] directly, then they are indirectly,” says Peter Krull, CEO of Earth Equity Advisors, an investment management company based in Asheville, North Carolina.
A 2015 report by Mercer, the world’s largest human resources consulting firm, found that the global market is headed toward a low-carbon economy. Depending on the climate scenario— anywhere from a two- to four- degree Celsius global increase this century —Mercer predicts average annual returns from the coal market could fall between 26 and 138 percent over the next 10 years. On the green side, the grass is, well, greener: Mercer says the renewable market’s average annual returns could increase between 4 and 97 percent.
Investments in companies whose main source of revenue relies on burning fossil fuels could take a big hit as governments worldwide impose stricter regulations and other businesses shift to green energy, which can be both cheaper and more appealing to investors. Regulations and a shift toward a low-carbon economy could create “stranded assets”—assets like coal mines or oil reserves once given high asset value for their money-making potential that have become unprofitable due to economic constraints or government regulations.
As temperatures increase along with the frequency of droughts and storms, some regions won’t be able to produce the foods they are known for. Coffee is a delicate bean requiring precise temperature, adequate water, and humidity to grow, which means climate change is likely to render some coffee farms obsolete in the future. One recent study published in Proceedings of the National Academy of Sciences predicts coffee-suitable areas in Latin America, the world’s largest coffee-producing region, could be reduced by 73 to 88 percent by 2050. Another study published by the Climate Institute estimates that all areas capable of producing coffee could shrink by up to 50 percent by 2050.
In the American Midwest, shifts in weather that bring on droughts or excessive rain and increased temperatures can decrease yields by 15 and 20 percent, according to the United States Department of Agriculture. Too much water is bad for agriculture because it can delay or prevent planting in the spring, reducing workable days and resulting in smaller harvest yields. Droughts are worse, with the 2012 drought causing complete crop failure in some areas and reduced overall grain production. In severe cases, demand may not be met industry-wide, pushing up prices to businesses that rely on these base commodities to produce their own goods. Those businesses then typically pass the cost increase off on the consumer by raising their own prices, but higher prices aren’t always a good thing from an investment angle. Even small bumps can lead to fewer sales and less profits.
Short-term gains and losses
Scientists agree that climate change will lead to increasing—and worsening—natural disasters. For investors, natural disasters can result in short-term gains for related investments. However, these market fluctuations can be difficult to reliably predict, so betting on them as an investor also has potential to result in short-term losses. When a hurricane is approaching, some investors buy and sell certain stocks according to weather predictions. Before Hurricane Florence hit Houston in September, shares of Generac, a generator manufacturer, were up 5.6 percent—a four-year high. Stocks of companies performing repairs, like Beacon Roofing and Owens Corning, also jumped, as did the home improvement stores Lowes and Home Depot. Car rental companies increased as investors anticipated the need for hurricane victims to use their services.
Stocks that took a hit include insurance companies, with companies like Allstate taking a 3 percent dip before Florence’s landfall as investors anticipated weather-related insurance losses. A drop in demand for new construction also correlates with incoming hurricanes. Concrete and cement companies, like Summit Materials, dropped 8.1 percent in anticipation of Florence, and other several other peer companies fell between 2 and 3.5 percent, according to Reuters.
Investing for the long term
But shorting the storm is neither a feel-good strategy nor a reliable one, so as climate change awareness grows, many investors are seeking out businesses with sustainable goals. In turn, socially responsible investing, or SRI, has increased in popularity. Currently, it’s estimated that one out of every four dollars of managed investments, or $12 trillion in total, are socially responsible, according to the Forum for Sustainable and Responsible Investment. US SIF also reports that SRI investing increased by 38 percent from 2016 to 2018.
Individuals can help turn the tide by investing in companies that are leaders in sustainable initiatives or in funds that only invest in what’s good for our planet. However, even sustainable investments aren’t a sure bet, says Krull; those interested should look for “a diversified fund that takes active climate change and sustainability analyses.” He also notes that investors should do their own double-checking of those funds, since some of those supposedly SRI investments might be marketing themselves as sustainable just for show.
“It’s called ‘green washing’—a green fund in name only,” says Krull. In an attempt to capitalize on interest in green movements, some indexes that are considered green actually have underlying assets in industries like fossil fuels.
Krull says indexes choose a ‘best in class’ company from each different sector. But those rankings have to do with profitability, not environmental stewardship, and when it comes to best in class in sustainability, fossil fuels don’t even place. “Fossil fuel is fossil fuel. Same with mining,” he says.
A good sustainable investment management company “actually puts sustainability analytics into their own analytical model,” says Krull.
The reality is that climate change is happening, and no person, community, industry, or company is exempt from its impacts. But the good news is that it’s not just climate change that impacts investments. Your investments can also impact the environment—for the better.
Investing in companies actively managing and planning for climate change doesn’t have to mean sacrificing returns. Studies show that corporations who openly disclose their emissions consistently perform better than those that don’t. Aspiration’s fully managed Redwood Fund offers 100 percent fossil fuel free investing in companies with climate-friendly environmental practices.