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Climate Change: What It Means for Advisors

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While the nation watches as California experiences a devastating drought, and as the world waits for the U.N. climate change meeting in late November, economists, current (and former) policymakers and advisors are assessing the ways that climate change is impacting the economy and what risks and opportunities for investors lay in nature’s unpredictable unveiling.

Higher seas mean greater financial exposure for coastal cities, where populations are growing and the value of buildings and infrastructure is increasing. More frequent flooding would likely disrupt insurance underwriting and with it the financing that drives development in cities such as Miami. If sea levels rose just 16 inches by 2050, the flood damage in port cities could cost $1 trillion a year. With ingenuity and significant investment, new fortifications might limit flooding, but cities would need to keep improving and maintaining them. Inevitably, an extreme weather event would overwhelm defenses. World Bank researcher Stéphane Hallegatte, who has estimated how much such events could cost urban areas at midcentury, says, “Protection protects us until it fails.”

President Barack Obama released in early August his final EPA rule designed to curb power plants’ emissions output. Many say the plan could revive the carbon tax at the state level as states are allowed to use “fees” (taxes) as a tool for meeting their emissions-cutting requirements.

The EPA issued in mid-August standards on the amount of methane that new oil and gas industrial operations are allowed to emit. Nicole Lederer, chairman and co-founder of Environmental Entrepreneurs, a nonpartisan group that advocates for policies that protect the environment and the economy, said the standards “will send another strong, clear market signal to the private sector that now is the time to invest in cleaner, more efficient energy technologies,” which she said translates into “more innovation, more jobs — and lower methane emissions.”

However, Lederer noted the logical next step to continue to cut methane emissions is “a standard for existing oil and gas industry infrastructure.”

Wrangling over the EPA’s budget will begin in earnest in October, when the congressional appropriations committees begin debate on how to allocate money to various federal agencies. Obama’s budget provides $8.6 billion for the EPA in fiscal year 2016, which is $452 million above the agency’s enacted level for FY 2015.

Of course, researchers as well as climate change activists view gas emissions output as the key driver of the world’s increasingly erratic climate patterns — rising temperatures, droughts, swelling seas and hurricanes to name a few.

Ellen Siegel, a financial planner with Ellen R. Siegel & Associates in Miami, says she’d advise clients to invest in technology companies that see “opportunity” in climate change, but as a Miami resident, she’s also “keenly attuned” to the devastation that rising sea levels will wreak on tourism, agriculture and international trade — most notably in Florida but in other coastal states and cities as well.

Investors in Florida and Miami would do well to look toward investing in companies whose business is “inland,” she says, “and not likely to be in a state of collapse in 20 to 30 years.”

The Scope of the Problem

A recent report from the Risky Business Project argues that while the Southeast U.S. and Texas are experiencing an “economic boom, mostly due to manufacturing and energy industry growth,” that boom is at risk from “unchecked climate change.” The Project is co-chaired by former New York Mayor Michael Bloomberg, former Treasury Secretary Henry Paulson and Tom Steyer, the now retired founder and senior managing member of Farallon Capital Management. It focuses on quantifying and publicizing the economic risks from the impacts of climate change. The Project report notes that climate change in the Southeast and Texas could put the region, “already one of the hottest and most weather-vulnerable of the country, at significant economic risk.”

The study notes, however, that if policymakers and business leaders act aggressively to “adapt to the changing climate and to mitigate future impacts by reducing their carbon emissions, this region can lead in responding to climate risk.”

The report, “The Economic Risks of Climate Change in the United States,” goes on to note that Louisiana and Florida will be hit hardest by property damages due to rising sea levels. By 2030, existing coastal property worth $19.8 billion in Louisiana will likely be below mean sea level, and by 2050, the value of that property increases to between $33.1 billion and $44.8 billion.

In Florida, losses of existing property will likely range between $5.6 billion and $14.8 billion by 2030 to between $14.8 billion and $23.3 billion by 2050, the report states.

The Investing Opportunity

Planner Siegel notes, however, that investors can also find opportunities in companies that view sea level rise as an “investment opportunity,” for instance, companies that will look to offer “alternative housing” or provide a “quick turnaround” for real estate investments. “If you are in the flood zone and want to get your equity out” of real estate, she suggests it would be wise to “do it sooner rather than later.”

Climate change disasters also push up the number and severity of insurance claims, which in turn has caused insurers in some parts of the country to limit — or stop offering — certain types of coverage.

Siegel predicts higher insurance premiums will lead to a dire outcome. “As soon as we reach a tipping point where insurance is not affordable or available,” she says, “housing will crash because mortgages won’t be available.” That will make the 2008-2009 financial and housing crisis “look like a walk in the park.”

Michael Whitty, a CFP and lawyer with Handler Thayer in Chicago, says that investors may do well by taking “opportunist” George Soros’ lead and investing in coal. In early August, Soros opened new equity stakes in Peabody Energy Corp. and Arch Coal Inc., just as Obama is cracking down on coal-fired power plants.

Helga Birgden, global business leader for responsible investing at Mercer, said in a recent video interview to discuss Mercer’s report, “Investing in a Time of Climate Change,” that climate change “is an investment risk, and it’s here and now.” So it’s important that investors build “resilient portfolios — and we need to act now. And the way to do that is to understand what it means at an asset class level and also at a sector level.”

She noted “wonderful opportunities” to invest in are “sustainability and cleaner energy.”

Russell Clarke, global CIO of mainstream assets at Mercer, noted in discussing the report that understanding the risks and opportunities in climate change investing is a “very complex topic.” Investors can, however, plan a course of action and build resilience into their portfolios despite that uncertain future.

The Mercer report notes that the biggest risk is at the industry level. “Differentiation between winners and losers is most apparent at the industry level,” the report states. For instance, depending on the climate scenario that plays out, average annual returns from the coal sub-sector could fall by between 18% and 74% over the next 35 years, and average annual returns could erode between 26% and 138% over the next 10 years.

Conversely, the report states, “the renewables sub-sector could see average annual returns increase by between 6% and 54% over a 35-year time horizon (or between 4% and 97% over a 10-year period)” depending on the climate scenario.

Market Winners and Losers

Which companies will benefit and which will lose as climate change affects business and the economy? Jeffrey Kleintop, chief global investment strategist for Charles Schwab & Co., said in an Aug. 18 interview that larger-cap companies rather than small caps will benefit in the reaction to climate change legislation. In addition, technology companies who “build solutions” for climate change are likely to do well, as will battery makers, he said in the interview.

Legislation and regulation — such as the Aug. 18 standards announced by the U.S. Environmental Protection Agency on the amount of methane that new oil and gas industrial operations are allowed to emit — may well result in “higher prices for inputs” into many industries, with the effects felt in the consumer staples industry, Kleintop said.

So far, however, businesses’ climate change actions constitute “very small parts of big companies,” he said, noting that while surveys have indicated that millennials are more interested in combating climate change with their investing money, “we haven’t seen that actually” reflected in investing flows.

Jamie Green contributed to this article.