Whatever you think of global warming, the fact is corporations and governments around the world understand it as an established fact, and are slowly taking steps to mitigate it.
That brings a host of risks and rewards that will affect your client’s portfolios, argued Zoe Knight, head of HSBC’s Climate Change Centre of Excellence in London and a managing director at the bank, speaking at Schwab’s annual IMPACT conference in Boston.
The indifference to the economic impact of climate change, however, was driven home by the sparse attendance at Knight’s presentation. While she did not give many actionable investment ideas, the thesis is one that investors should be paying attention to, because the ramifications will “affect every economy, country and company.”
“We need to reduce emissions, and we’ve been talking about that for 20 years,” she said. “What’s changed is that this has started to be linked to financial stability.”
On the eve of the United Nations’ conference on climate change in Paris next month, nations are publicly committing to reduce greenhouse gases and pledging to spend billions of dollars to help make the transition.
While the agreements at that meeting will not be legally binding, the pressure, both internationally and from individual consumers, to take some action on reducing greenhouse gas emissions will be unavoidable. How it comes to pass will affect investors.
“It’s difficult to try and drive investment flows away from high carbon emitters,” said Knight, but it’s not impossible; among the tactics governments will use is reducing subsidies for fossil fuel providers, implementing taxes on consumption and setting up trading programs for carbon credits.
On an immediate level, the demand for investments in green technology is driving the growth of Green Bonds, debt funds for environmentally sustainable projects. The market for green bonds, while still a speck in the overall debt markets, has grown ten-fold over the past few years, from $3 billion to $37 billion. Some of the largest investors in the green bonds issued by the world bank are insurance companies, Knight said, as a kind of hedge against future costs they are likely to incur from global warming.
Another factor that could drive investment opportunities is China’s plans for environmental remediation. China has large plans to invest in pollution remediation and other green projects, like renewable energy and energy efficiency projects. Companies supplying some of those services to China should do well.
Another area to consider is building rehabilitation. In Europe, Knight said, 3 percent of the building stock is being rehabilitated annually for energy efficiency, which gives a boost to manufactures of materials like energy efficient glazes, heating and cooling units, or real estate portfolios with an energy efficient focus.
HSBC sees funding the transition to a low-carbon economy like making “early investments in the rail roads,” Knight said. “This may not be a market moving drive today, but you want to be thinking about portfolio managers or companies that are thinking about it.”