Adding Climate Change Values to Your Strategy
Updated: Mar 30
Most experts, and frankly, most humans agree that the climate is changing as a result of human activity. Many people are looking for ways to lessen their carbon footprint. As consumers, we often use reusable shopping bags, opt for fuel efficient vehicles, and adopt smart technology to decrease our energy usage. These decisions have economic impact in addition to their environmental benefits.
Some of us are so concerned about how climate change can affect us in our lifetimes and our children’s lifetimes, that these changes in behavior are not enough to reset our trajectory. As investors, we can consider incorporating climate activism into investment decisions. In this way, we can make a statement about our beliefs and ensure that our dollars are going toward climate change solutions we believe are necessary for the future.
In an April 2019 white paper, Lucas White and Jeremy Grantham of GMO discuss ways to incorporate climate change into investment strategy and what you can hope to achieve by doing so. When we talk about climate change strategy, we’re looking at clean energy, green infrastructure, sustainable agriculture, and water conservation. Climate strategy is a catch all term that crosses multiple sectors of the economy.
There are many reasons someone might consider using a climate strategy in their investments, beyond the fundamental existential concern. For instance, a climate strategy can add global diversification to a more traditional portfolio. We expect the transition to clean energy will drive economic growth. But this growth is not necessarily fueled by profitability, so we expect that returns may be favorable even in times when the broader market is not performing well. Less correlation to the broader market adds diversification in a portfolio.
Additionally, a climate change strategy provides long term solutions with opportunities to invest at a discount. Industry analysts expect secular growth to continue over the next decade. And currently, opportunities exist for investments with low relative valuation, meaning these investments are lower in relative price than their peers. Long term expected growth coupled with low relative price can provide a potential for higher expected returns for investors.
As competitors to fossil fuels, clean energy solutions tend to gain more traction and greater adoption when energy prices rise, making them a more viable alternative in times of high fossil fuel prices. This competition can provide indirect exposure to fossil fuel prices, helping investors protect against inflation without investing in oil and gas oil and gas outright. This indirect exposure can offset the pain some investors may experience when forgoing the returns from oil and gas during times of high fuel prices.
What’s really fascinating is that some investors, particularly those that are heavily concentrated in energy, can incorporate a climate strategy as a way to insure against climate risk. This type of strategy can hedge against any change in future energy reliance in a more flexible and long term approach.
There are a number of approaches investors can use to incorporate climate change strategies into their portfolios. For instance, you can add climate change investments to potentially enhance performance while adding diversification in global equity. Alternatively, you can pursue a climate strategy using Environmental Social Governance (ESG), Socially Responsible Investing (SRI), or impact investing. A third option could be to add green building and infrastructure as real estate assets.
Basically, you can add diversification, protect against inflation, and potentially earn higher returns by incorporating a climate strategy in a portfolio. All the while, you’re literally investing in the climate change revolution. It’s like taking your every day decisions to go green and incorporating them into a long term investment strategy.