From the June 2009 issue of Investment Advisor • Subscribe!

The Green Advisor: More On Climate Change Opportunities

One of Three Themes That Can't Be Ignored

When I last wrote about climate change (March 2009, "Climate Change Opportunities"), it generated a number of negative responses from readers, including one e-mail which stated that "these times are tough enough without my opening a 'trusted' trade journal and finding 'watermelon politics.' Green on the outside...red in the middle." I don't think I've ever been called a red before, but that aside, the real point I was trying to make was that climate change can present some healthy investment opportunities for your clients, even if you don't believe it's real.

Some evidence pointing in that direction comes from the Environmental Protection Agency after a thorough scientific review ordered in 2007 by the U.S. Supreme Court. The EPA's proposed endangerment finding is based on rigorous, peer-reviewed scientific analysis of six gases--CO2, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride--that have been the subject of intense analysis by scientists around the world. According to the EPA, "the science clearly shows concentrations of these gases at unprecedented levels as a result of human emission, and these high levels are very likely the cause of the increase in average temperatures and other changes in our climate."

In announcing the EPA finding, Administrator Lisa Jackson noted that, "This pollution problem has a solution--one that will create millions of green jobs and end our country's dependence on foreign oil." Along with those millions of green jobs and development of new energy sources will come investment opportunities as both the public and private sectors address the combined issues of climate change, greenhouse gas emissions, and energy sustainability.

Of course any scientist will tell you there's always someone with a different opinion or another conclusion drawn from the same data. For example, there were scientists funded by tobacco companies who for years argued that the data did not support the conclusion that cigarette smoking can lead to lung cancer. Any readers who are looking for a counter-argument might want to check out the proceedings from the Heartland Institute's March 2009 conference at Heartland.org--"Global Warming: Was It Ever Really a Crisis?"

Climate Change Investing

Virginie Maisonneuve is head of global and international equities for Schroder, as well as manager of the firm's International Alpha Fund (SCVEX), and an investor who sees climate change as an opportunity. I had a chance to speak with her during a recent visit to New York.

Maisonneuve has identified three key long-term trends that she thinks will have a major impact on earning sustainability for stocks: demographics; the role of emerging markets in a global economy, which she refers to as a "supercycle"; and climate change.

Both Maisonneuve's International Alpha Fund and the Global Climate Change fund are free to pursue investment opportunities around the world. "We look at climate change through two major angles--mitigation and adaptation," she explains. "The origin of the warming which leads to climate change has been quite controversial, but what we're looking at is the fact that temperatures are increasing and that will have an impact that's structurally very large on the world's resources and on the world's operating manner. So we look at it as the world will have to mitigate and/or adapt."

In terms of actual investments, she says it could be a clean energy company, "like British Gas," or it could be a company that saves energy, or is involved in crop protection, "because climate change will have an impact on crops" through flooding as sea levels rise and desertification caused by drought. (Those are among potential impacts of global warming also identified by the EPA in its study, Assessment of the Impacts of Global Change on Regional U.S. Air Quality.) "We attack it really from all the different angles as long as it's a beneficiary of the changes that will take place in climate change," she says.

Maisonneuve expects that governmental spending on infrastructure to mitigate or adapt to climate change, such as modernizing the power grid and reducing greenhouse gas emissions, will result in more than $20 trillion in global spending in the next 20 years.

Another thing she's looked at is how well prepared major cities are around the world for a potential increase in the water level over the next 50 years. "There's going to be much more investment in that area over the next five years and I think people will be surprised by it," she says.

Although there continues to be debate about the impact of carbon emissions, there seems to be universal agreement that we need reliable and affordable sources of energy. Maisonneuve admits that the fluctuating price of energy has had an impact on Schroder's investments. "Renewable energy is costly from a pure P&L approach," she observes. "Once you throw in that fact that you need to save the planet's resources in order to have a planet, you introduce another element which gives a premium to the stocks, but clearly as the oil price comes down, people get less interested in alternatives that are higher on the break-even point with oil."

One of the positive effects of the climate change crisis that Maisonneuve predicts is a "massive explosion of invention and innovation, to the same degree that we had for the Internet."

When it comes to mitigating the effects of climate change, Maisonneuve is certainly a big-picture thinker and can see a lot of factors and sectors coming into play. She says, for example, that videoconferencing can be an indirect climate change play because it eliminates some of the need for people to travel.

"This is why for us it's an overarching theme," she explains. "All aspects of life are going to be impacted. That's the first step. The second step, as an investor, and as a quality-growth-at-a-reasonable-price investor, is to find the companies that will actually derive a substantial part of their earnings growth from having niche products that benefit from those changes."

Other Considerations

Maisonneuve acknowledges that there are definite political aspects to any discussion of global warming, such as the official Chinese position that they shouldn't be penalized for undergoing their industrial revolution much later than the Western world, as well as emotional issues, and the many people who vehemently believe that climate change isn't real, or isn't a problem (see Heartland Institute Conference cited above).

"From what I've observed globally, the main challenge for people is to connect emissions and warming," she says of some of the skeptics. "What we say when we talk about our product is that we are not scientists spending all of our days measuring temperatures, although we do read a lot of reports. What we know is there is change and volatility and the impact is going to be very large. I think, unfortunately, we might need to see another Katrina before some of those people change their minds. That's very unfortunate, because an increase of the water level by one meter in Bangladesh would dislodge 150 million people. We are talking about areas of the world that are even less prepared than we are, where the consequences can be absolutely dramatic."

Regardless of how one feels about climate change, the other two themes that Maisonneuve has identified--demographics and the supercycle of emerging economies--are going to be hard to ignore. "The impact is enormous because the population goes from 6 billion to 9 billion people on the planet between now and 2050, and 98% of the growth comes from emerging market countries." Within the demographic theme, Maisonneuve has identified twin trends that are likely to also present investment opportunities: aging and urbanization.

"Aging happens basically everywhere except for some parts of the Middle East, Africa and India," she notes. "The other major trend is that to lodge that population, it's mostly urbanization because you're talking about mega-cities. Once again this compounds the need for infrastructure."

Maisonneuve is convinced that those three themes are inextricably linked and are going to be on our minds for a very long time to come.

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