Financial giants report climate risks
UBS Wealth Management released “Climate Change: Beyond Whether”, a sector-by-sector analysis of key investment opportunities and risks for individual investors. According to UBS, investors who wish to incorporate climate change into their portfolios have several options, including:
- Equity strategies to underweight carbon intensive sectors and companies that are likely unable to adapt and lower emissions
- Targeting companies involved in low-emissions or renewable energy and energy efficiency
- Theme funds focused on climate change mitigation
- Responsible Investment funds with a climate change focus
Lehman Brothers’ released its report, “The Business of Climate Change”, warning that companies which respond slowly or ineffectively to physical and economic implications of climate change could become defunct. “The pace of a firm’s adaptation to climate change is likely to prove to be another of the forces that will influence whether, over the next several years, any given firm survives and prospers; or withers and, quite possibly, dies,” the 143 page report says.
Global banking giant Citigroup also released a report, identifying a number of leading companies that will likely benefit from efforts to mitigate and adapt to climate change. In the report Climatic Consequences: Investment Implications of a Changing Climate (PDF), Citigroup expresses certainty about the likelihood of regulation in North America and identifies possible investments.
Citigroup Investment Research, along with the World Resources Institute (WRI), identifies 74 companies in 21 industries and 18 countries that will be the beneficiaries of climate change. As governments, regulators, corporations, and individuals react to the threats of climate change, a number of near-term opportunities have been created.
Citigroup identifies a climate ‘tipping point’ that may result in greenhouse gas regulations in a number of countries, and notes that climate initiatives undertaken by consumers, litigants, and investors may also lead to a tipping point in corporate behaviour.
Climate change presents physical implications, such as warmer winters, hotter summers, increased droughts, and more intense Atlantic hurricanes, that will affect businesses both in the short and long term, says the report.
Due to growing political engagement on climate change, there have been moves to regulate greenhouse gases, ranging from international efforts like the Kyoto Protocol to potential cap-and-trade legislation in the United States and Canada. Increasingly, companies with international operations are subject to existing regulations in key markets, including Europe, notes Citigroup.
Companies will be impacted by such legislation, but even without imminent regulation a growing number of corporations are pursuing climate change strategies, and consumer behaviour is reflecting growing public awareness of the issue. These climate change factors will increase risk for certain sectors and companies, but will also create ‘winners’ who will benefit from regulation, physical impacts, and changing preferences, predicts the Citigroup report.
Natural gas companies stand to benefit as power generators choose gas over coal to meet greenhouse gas (GHG) caps. Utilities with lower emissions per unit of energy output, and industrial firms or car manufacturers that have changed their processes and products in response to climate change will also benefit. Other natural beneficiaries include renewable energy and biofuels firms.
Of the two Canadian companies on the Citigroup list, auto parts supplier Magna International will benefit from its products that facilitate automobile GHG emissions reductions by reducing vehicle weight. Potash Corp of Saskatchewan, a fertilizer company that supplies important nutrients for grain cultivation, will benefit from a boom in demand for biofuels created by regulation in Canada, the United States, and other countries.
All three reports signal clearly that the investment community is now cognizant of the material risks and opportunities related to climate change. As the scientific case is solidified in the public mind, attention is now turning to managing climate change mitigation and adaptation efforts in a way that will maximize long term wealth and prevent losses.