The Green Advisor: Climate Change Opportunities

On the January day that Al Gore testified before the Senate Foreign Relations Committee about the climate crisis, it snowed in Washington. That was apparently enough to convince some conservative (and apparently anti-science) bloggers that global warming isn’t real. They are wrong. The fact of climate change presents a huge challenge for our global society, but it also offers us a tremendous opportunity to rethink how we use our resources, to realize that those resources are not infinite, and to emphasize sustainability.

Global warming can also help improve your clients’ portfolios, which in this economic environment is no small thing. There are numerous “Investment Opportunities in the Climate Change Economy,” which is the title of a new white paper put together by Chat Reynders, chairman and CEO of Reynders McVeigh Capital Management, in Boston, and Rick Duke, director of the Natural Resources Defense Council Center for Market Innovation. (You can download a copy of the paper here.)

The paper stresses that not only is there a tremendous potential investment upside, but that failure to address climate change could lead to global GDP losses of 1% to 5% with much higher losses at the local and regional levels. To get an idea of just what some of those investment opportunities are I spoke by telephone with Reynders and his partner Patrick McVeigh.

There are several ways for advisors to look at investing with a climate change lens, but according to these long-time SRI investors (see “Be Positive,” in the July 2008 issue of Investment Advisor) one of the best places to start is by addressing energy efficiency. It’s one of the easiest approaches and can produce the most immediate results.

“For a long time we’ve believed that efficiency matters and that if companies can do a good job in being progressive in how they manage their costs on the energy side, it’s good for the company over the long term,” says Reynders. “Companies that are aggressive in how they are managing their energy are going to end up being winners.

“Efficiency investments have made a lot of sense to us. For a long time we’ve been looking at things like transportation efficiencies and industrial efficiencies and investing in companies that focus on those areas.”

Reynders thinks that the Obama Administration will institute policies on carbon emissions. The white paper he co-authored predicts that a combination of federal incentives for efficiency and renewable energy technologies and a cap and trade system to control carbon emissions will ultimately give low-carbon players a 10% to 50% cost advantage over their competitors.

Efficiency is really only one part of the climate change opportunity. “We’ve also been focused on the renewable side, understanding that there’s an opportunity if it’s true that the cost of energy is going to go up, decade by decade,” Reynders continues. “We have been an investor in wind energy for some time. It’s the most currently available alternative that has reasonable amounts of economic viability. It only gets better in a tougher carbon environment.”

Complementing Reynders’s thoughts, McVeigh adds that while the increasing cost of energy is an obvious reason to invest in alternatives, there’s a misperception that renewable energy only does well when traditional energy prices are high.

“You can see, if you look at the growth of solar, the growth of wind and other renewables that the growth of the business has been very steady over the years, even when oil prices were relatively low,” notes McVeigh. “The stock prices in the short term do tend to move with energy prices, but the underlying businesses don’t seem to feel that much of an impact.”

Many companies in the renewable sector had become overvalued, but as some investors have moved away in lockstep with the drop in oil prices, McVeigh sees an opportunity for new money to come in. “They’ve come back down to attractive levels and you’ll continue to see growth in these areas,” he says. “We anticipate strong growth and it may even accelerate with what’s likely to come out of the stimulus package.”