Should Investors Consider Climate Change Risk in Their Portfolios?
(Continued from Prior Part)
Technology should be a focus for investors. This applies not just for disruptive technologies, such as electric vehicles and alternative energy, but also to fossil fuel producers and utilities. Carbon capture and storage, for example, is a proven but currently expensive technology that can materially reduce emissions. If adapted, it could be a game changer, as could coal-to-gas switching for power generation.
How investors are trying to manage climate change risk
Plan sponsors want portfolios screened for emissions exposure—which in itself may be far greater than immediately apparent. Investment managers engage with corporations to ensure regulatory and environmental risks are managed properly. The VW disaster underlines the considerable sense of this and the price of not doing so. It is an easy bet that positive engagement will receive much increased focus.
The VW scandal shows that managing risk is in itself uncertain. Successful investment is often as much about avoiding losers as picking winners.
Market Realist – Investors looking to factor in climate change risks in their portfolios may want to focus on technology. Clean energy technology such as solar power and wind energy is likely to grow as the world tries to reduce its carbon footprint.
Long-term investors can access the sector by investing in clean energy ETFs such as the Guggenheim Solar ETF (TAN), the PowerShares WilderHill Clean Energy ETF (PBW), the iShares Global Clean Energy ETF (ICLN), and the Market Vectors Global Alternative Energy ETF (GEX).
Investors should also monitor technological advancements in the fossil fuel sector. For example, the carbon capture and storage technology could actually be a game-changer for the sector.
If the technology is made more efficient and less expensive, it would greatly improve the prospects for the energy sector (VDE). The technology traps emissions from power plants and removes them from the atmosphere by treating them and reinjecting them into geological storage sites.
Companies such as Tesla (TSLA) that focus on clean energy could prove to be good opportunities in the future. Tesla is focusing on producing driverless, electric cars, which could prove to be an alternative to gas-consuming vehicles. Toyota (TM) has stated that it plans to eliminate all gasoline-based cars by 2050.
According to the Japanese daily Nikkei index, Toyota plans to reduce its new-car CO2 emissions by 90% by 2050. Apple (AAPL) is also reportedly planning to create an electric car design and launch the vehicle by 2019. The tech sector (XLK) (IYW) is indeed something long-term investors may want to focus on.
The above graph shows the climate impact on returns by asset class in the next 35 years. Timber and agriculture have been estimated to have the largest potential for both additional returns and reduction in returns.
In the long term, climate change risks are likely to play a major role in shaping the returns from your portfolio. Investors may want to pay close attention to climate change risks and account for them in their portfolios!
Read our series on Alternative Energy ETFs: Can They Be a Worthwhile Option? to understand more about the opportunities in clean energy.
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