By Ron Robins
Climate change-sustainable investing has a big head of steam. And the effects of planetary climate change on most industries are going to be huge. Trillions of dollars are in play attempting to find the winning industries and companies. And determining who will be the winners or losers is a hot topic for investors today. Fortunately, we have some clues as to who they may be.
‘Sustainable investing′ is the term most used in describing climate change related investing. But this term is a catch-all phrase that often includes ‘green,′ socially responsible, responsible, and ethical investing too.
Sustainable investing assets have grown massively, as can be seen from the following reports in the US and Europe.
In the US, the Social Investment Forum (SIF) recently reported that, “12.2 per cent [$3.07 trillion] of the $25.2 trillion in total [US] assets under management tracked by Thomson Reuters Nelson — is involved in some strategy of socially responsible and sustainable investing.” And the SIF report further states that these assets are up over 13 per cent in two years despite the economic downturn and in an environment where overall assets increased less than 1 per cent.
In Europe, “Eurosif estimates the proportion of rich Europeans′ portfolios managed sustainably was 11 per cent at the end of 2009, up from 8 per cent two years earlier. That represents â‚¬729bn (Â£606bn, $936bn) more than a third higher than in 2007.” Also, Eurosif says, “the total SRI [socially responsible/sustainable investment] assets under management have increased [over two years] from â‚¬2.7 trillion to â‚¬5 trillion, as of December 31, 2009.”
Sustainable investment funds are now common throughout the developed world and are increasingly found in the developing world as well.
When sustainable investment fund holdings are analysed, it seems that they often differ little from regular funds. However, a new Trucost PLC and RLP Capital Inc. study released on November 29 found something important. When comparing the eight largest US responsible mutual funds with the eight largest US traditional mutual funds, they found that, “the Responsible funds analysed are on average 40 per cent less carbon intensive than the Traditional funds.”
And in terms of fund performance, the Trucost/RLP study found, “all eight Responsible funds in this study outperformed their Median Peer Group [Traditional funds] over a one-year period. Seven of eight outperformed their Median Peer Group over a three-year period, while five of eight outperformed over a five-year period.”
So, the inference is that a company′s carbon intensity—its use of carbon—according to this study could be a significant contributing factor to improved stock market performance. (Incidentally, many Trucost company carbon intensity ratings—and how they rank within their industry—can found at this page of the Interfaith Center on Corporate Responsibility (ICCR) site.
Trying to predict which particular industries are likely to benefit from climate change is more difficult than deliberating on those that might be adversely affected.
However, reviewing the top holdings of the large US sustainable funds in the Trucost/RLP study revealed, not unexpectedly, an emphasis on companies in the mostly low carbon intensity sectors: financial, healthcare, pharmaceuticals, technology (cleantech, alternative energy, and electronics), software, media and consumer staples and discretionary.
If lower carbon intensity industries are what sustainable funds invest in, then, it is high intensity carbon usage industries that they deem could be most threatened by climate change. Industries that stand out in this regard include: fossil fuels, mining, forestry, livestock farming and fishing. But even some less intensive carbon industries are negatively impacted too, such as tourism and insurance.
Increasing concerns of carbon emissions adding to global warming will likely, in time, give way to high fossil fuel taxes thereby creating adverse incentives to their use. And with mounting energy costs, energy intensive mining operations will be negatively affected as well. Also, possible future, more stringent, environmental regulations may restrict mining development.
The need to retain forests, both for their carbon cleansing/oxygen production and biodiversity needs, will pressure lumber and paper producers. However, a further problem will be the risk of more and bigger wild fires as global warming mounts.
Livestock farming is going to come under pressure too. According to a UN Food and Agriculture Organization report, the methane gases produced globally by livestock accounts for 18 per cent of CO2 equivalent gases—more than even transportation. Furthermore, a Cornell University study found that a diet high in fats and meat compared to a low fat vegetarian diet may need up to five times more land.
Thus, in an increasingly crowded world rapidly losing its farmland to urbanization and soil erosion, and declining water resources, people may well be compelled to eat less meat. Also, these conditions are likely to produce continually rising food prices, with meat prices increasing the most. Thus, livestock farming could be adversely affected by both human habitat constrictions and by climate change in the decades ahead.
The warming oceans, changing ocean currents and increasing pollution will be detrimental for much of the world′s fishing industry as well.
Tourism will be under threat as fuel costs markedly increase and deter passengers from flying, and climate change causes deterioration of many environmentally sensitive tourist destinations. These range from rising seas that flood popular resorts to species′ loss making safaris unavailable.
The insurance industry could be at considerable risk due to mounting extreme weather events such as hurricanes, tornadoes, droughts, flooding, rising sea levels, and increasing insect populations that lower crop yields and increase in diseases such as malaria and Lyme disease.
Though the negative consequences of climate change on many industries sounds somewhat dire, it might not be for all of them. Scarcity and shortages of products generally move prices higher and so will probably create increased profits for many carbon intensive industries such as those in some extractive and resource industries.
And in a few markets higher prices even lead to more demand. Gold is a good example of that. There are a few new large gold mines coming into operation and gold demand is soaring even as its price rises. Consequently, gold mining companies are enjoying record profits.
In part, sustainable investing has arisen due to the failure of the world community to address the fundamental issue at the root of climate change: human activity that adversely affects the earth′s natural processes. Nonetheless, investing in companies who decrease their carbon use and are optimally efficient with resources seems to improve such companies′ financial performance and stock values. Thus, even with its staggering growth so far, the build up of steam powering sustainable investing is just beginning.
January 12, 2011