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09.29.21

How climate change can uncover investment opportunities

BY Sabrina Gaya, CFA

There are several themes at the crux of our investment process. They help us identify the most powerful, disruptive, and durable secular drivers and as such narrow our hunting ground for finding best ideas. Examples of these themes include ecommerce, digitization, cloud computing, artificial intelligence/accelerated computing, aging demographics, and climate change.

Given the very recent large scale climate events (Texas deep freeze, California wildfires, South China flooding, etc.) combined with several parallels from COVID-19 from which we can learn, Nixon Peabody’s Investment team thinks it is timely to dig deeper into climate change and discuss how we view it both as a grave risk but also as a vast investment opportunity.

The cost of climate change

At a high level, climate change is the heating of the earth due to human-induced greenhouse gases that trap heat into the atmosphere. Earth’s surface temperature has increased 2°C over the last century and, if left unabated, is projected to increase another 3 degrees by the end of the century.

The consequence of increased temperature is more frequent and severe climate events, which is why it is imperative to meet the Paris Climate Agreement target of limiting global warming to less than 2°C and achieve net carbon neutrality by mid-century.

That said, achieving this goal requires massive infrastructure investment—Morgan Stanley estimates $50T or $1.6T annually.

What are the investment opportunities?

We believe the opportunity is much broader than most realize because climate change isn’t just about natural disasters, but also, as COVID-19 is teaching us, it is the risk of being unprepared and the cost of not being able to respond swiftly.

Therefore, to capitalize on this theme, we are researching sectors that will be able to slow the effects of climate change (renewable energy, carbon capture, electric vehicles, water efficiency, pollution control) as well as sectors that increase resiliency given much of the damage has already occurred and increased frequency/severity of natural disasters is a sad reality (energy and transport infrastructure, agricultural technology, building materials, disaster recovery).

We also research areas that will be disadvantaged such as fixed, long duration assets in high climate risk areas (real estate, municipal bonds, ski resorts, theme parks).

The opportunities in clean energy and transportation are obvious (solar, wind, electric vehicles), but there are several less discussed sectors that we find particularly interesting. Specific examples include cooling systems (a direct play on global warming), agriculture/smart farming (agriculture is one of the worst CO2 offenders), and electric utilities (transition to clean energy depends on electricity vs. fossil fuels).

In conclusion, climate change is a significant risk within an investable timeframe, yet remains underappreciated today. We believe we are nearing a powerful inflection point though, as markets increasingly incorporate climate models into asset pricing/valuation and as massive amounts of investment are unleased to address the issue. As such, identifying players on the right side of climate change, either by mitigating climate change effects or adapting to such effects, can uncover compelling investment opportunities.

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Author

Sabrina Gaya, CFA

Professional Specialist

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