Climate Change Is Real: The Investing Implications

Still, there is precious little reason to expect that Mr. Trump will go green. But irrespective of any position his Administration ultimately takes, since causation is such a difficult matter to ascertain to everyone’s satisfaction (and especially to the asserted satisfaction of those whose financial status is threatened by climate change), there will be some kind of debate about this issue for the foreseeable future.

So What’s the Investment Play?

The reality of climate change doesn’t mean that there’s a trade to be made, especially if and where the U.S. government does nothing about it. Jeremy Grantham has addressed the issue directly: “Global warming will be the most important investment issue for the foreseeable future. But how to make money around this issue in the next few years is not yet clear to me.”

However, in September, the world’s largest asset manager, BlackRock, said that all investors need to factor climate change, and the investment needed to halt it, into their future risk-assessments. The firm also argued that “curbing carbon emissions requires significant spending on green infrastructure and a reduction in fossil fuel subsidies. This creates large investment opportunities in areas that attract capital or industries at risk of disruption.” I agree.

With the possible exception of the inverting demographic pyramid, I expect climate change to be the dominant investment challenge and opportunity of our time over the long term. But I don’t expect it to play out quickly. For most traders, an actionable item is one that can and should be undertaken right now and is expected to pay off essentially right away. But no matter how often I point out that lunch tomorrow is not a long-range plan, I don’t seem to get heard all that often on this point. What I offer is an action item that will almost surely pay off in the longer term for those with the necessary patience based upon any reasonable interpretation of the available data. The climate is changing and those changes will have to be dealt with sooner or later.

The “skeptics” and even governmental opposition conceptually do not trouble me in the least. As Bruce Chadwick put it, “if your investment horizon is long enough and your position sizing is appropriate, you simply don’t argue with idiocy, you bet against it.”

Investment opportunities in this area fall into two general categories. Climate mitigation focuses on reducing greenhouse gas emissions while climate change adaptation refers to actions taken to address the risks and opportunities associated with the physical effects of climate change such as changes to temperature, rainfall and ecosystems.

I remain unconvinced about the investment opportunities available with respect to mitigation. Since entrenched energy interests have a strong economic incentive to delay governmental initiatives towards climate mitigation, since climate “skeptics” are likely to oppose such initiatives, since the Trump Administration will likely deny the need for any such measures, and since it remains decidedly unclear which approaches will succeed (even assuming the “correct” approaches currently exist), Grantham’s uncertainty is well placed in this regard. BlackRock’s advice with respect to risk assessment holds, but there isn’t a clear affirmative investment thesis to promulgate.

A Suggestion on Investing
However, we can avoid arguing about the causes of climate change — which are fraught with political peril — and simply put our money to work in companies that deal with the consequences of climate change while avoiding those entities and regions with the most to lose. Thus the better investment opportunities exist in climate change adaptation. Adaptation efforts include improved infrastructure design (Hurricane Sandy clearly demonstrated the fragility of our energy infrastructure), more sustainable management of water and other natural resources, modified agricultural practices, and improved emergency responses to storms, floods, fires and heat waves. Infrastructural improvements include sea walls, dykes, tidal barriers and detached breakwaters – like the project Mr. Trump wants to undertake at his Ireland golf course.

Since these improvements may have unintended and damaging side effects, perhaps by displacing erosion and sedimentation, for example, we might also consider “softer” accommodation options that involve restoring dunes or creating or restoring coastal wetlands, or continuing with indigenous approaches such as afforestation. Given Mr. Trump’s clear commitment to major infrastructure spending generally, reiterated in his victory speech on election night, this general approach has the added benefit of being broadly consistent with expected policy.

Other accommodation options include warning systems for extreme weather events as well as longer-term measures such as improving drainage systems by increasing pump capacity or using wider pipes. Of particular interest ought to be food technologies that are resistant to heat, drought and flooding. Water needs provide opportunities in adaptation strategies for water conservation, storm water control and capture, resilience to water quality degradation, preparation for extreme weather events and diversification of water supply options.

Harsher and more widespread droughts will lead to a strain on communities and farmers that need fresh water. At the same time, rising sea levels will affect coastal regions, potentially leading to an increase of salt in ground water. So-called desalination technology has largely been a non-starter to this point; venture capitalists may want to re-think that. Other water recycling approaches are also promising. Further opportunities exist with respect to innovations in dealing with infectious diseases and pest control, weather forecasting technologies and more efficient irrigation systems.

Because the facts (and the science) are inexorable, society is going to have to adapt to higher temperatures and rising sea levels. Obviously, it’s much cheaper to deal with climate change before a crisis hits than after a city has been flooded. But there is no reason to believe or expect that we will have the public policy sense to do so. Moreover, green-energy technologies are still too speculative for the type of call I’m making here. The obvious investment priority is in adaptation technologies that will prepare and help us to deal with effects of climate change.

It is a highly speculative play. It is a very long-term play. But it is the right play. Our warming atmosphere and rising sea levels have inevitable consequences. Investment in climate change adaptation is the most important hot action item of our time.

Save