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Grantham: ‘Tremendous’ Investing Opportunities in Climate Change

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GMO believes that there are likely to be “tremendous investment opportunities” in the climate change sector for many years to come, according to a new white paper by Lucas White and Jeremy Grantham.

“The consequences of inaction on climate change are unthinkably high, and the world will continue to mobilize in ways not currently foreseen in order to address the biggest threat humanity has ever faced,” White and Grantham write. “We expect the unanticipated growth resulting from these efforts and the uncertainty about the path of the clean energy transition to provide investors with many opportunities.”

GMO believes that a value orientation and a deep understanding of the fundamentals will be the most effective way of identifying the winners.

“Investors that get this right stand to enjoy heroic returns,” according to White and Grantham.

In this paper, “The Good Thing About Climate Change: Opportunities,” the pair addresses these climate change-related opportunities.

According to GMO, businesses that stand to benefit from heightened efforts to address climate change are those focused on the mitigation of climate change and the transition to a clean-energy world, and those that will help the world adapt to the effects of climate change.

Industries involved in the mitigation of climate change and the transition to a clean-energy world include solar, wind, nuclear, hydroelectric, geothermal, batteries and storage, smart grid, and clean power generation, according to the paper. This would also include lithium, copper and other critical materials, as well as companies involved in energy efficiency efforts — including energy-efficient building materials, energy-efficient lighting and electric vehicles.

The paper also looks at companies helping the world adapt to a changing climate, in particular those that would help agriculture productivity and water supply.

“The impacts of climate change on agriculture and water are particularly worrying,” the paper states. “A recent study published by the National Academy of Sciences concluded that as temperatures continue to rise, agricultural productivity could drop to levels last seen prior to 1980 by the year 2050.”

According to the paper, companies helping to support agricultural productivity through the production of seeds, fertilizers, farm machinery and so on would find desperate need for their products.

Meanwhile, the paper states that droughts, floods and changes in precipitation patterns also threaten water supply.

The paper believes companies focused on water recycling and treatment, water use minimization, and water system engineering will also find their services in high demand.

While GMO thinks the opportunities in the climate change sector are “exciting,” it also acknowledges that there are risks.

First, there are policy risks.

“The United States pulling out of the Paris agreement is a good example of a policy change that could impact clean energy efforts,” the paper states.

Unintentionally, though, the decision had a galvanizing effect on those concerned about climate change, according to GMO. Cities, states, universities and businesses within the United States banded together in various forms to commit to meeting — or perhaps exceeding — the U.S.’s Paris agreement commitment.

“In an ironic twist, President Trump’s decision to withdraw from the Paris agreement has drawn more attention to climate change than environmentalists have been able to generate in the last 20 years,” the paper states.

However, if China, India or other major countries wavered on their commitments that would have an impact as well, though GMO says “things seem to be trending in a positive direction right now.”

Another potential risk to investing in the climate change sector is technological disruption, according to the paper.

“For the most part, this risk can be mitigated through diversification,” the paper states. “However, one can’t completely discount the possibility that cold fusion or some unforeseen technology changes the game in a way that affects large swaths of the climate change sector.”

GMO says that this possibility seems remote enough — at least in the next couple of decades.

However, according to GMO, the main risks investors face in the climate change sector are the same risks they face in other sectors of the market, which are “getting caught up in hype and stories, paying the wrong price, and investing in industries with poor competitive dynamics.”

“These risks loom larger in our minds than policy or disruption risk,” the paper says, “but they all must be considered when investing in this sector.”

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