Climate change investing: Here’s everything you need to know
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The World Health Organization says that climate change is the single biggest health threat to humankind. It’s not just the usual suspects – such as energy companies or seaside property owners – expecting to feel the cost of climate change. It’s companies in many sectors, such as agriculture, consumer goods companies, insurance companies and even many tech firms.
To mitigate the effects of climate change, companies across the globe are investing in a range of technologies and processes to “green” their supply chains. This change might lead to investing in green energy directly but it may also mean devoting substantial capital to greenfield projects.
With carbon dioxide levels continuing to rise aggressively for decades, according to the National Oceanic and Atmospheric Administration, experts think climate change will continue at a quick pace, leading to a feedback loop and a vicious circle. And that poses serious risks to investments, even as it offers new potential for investing in a green world.
Investing and climate change by the numbers
- Green companies may receive a boost from the $1.2 trillion Infrastructure Investment and Jobs Act, signed into law by U.S. President Joe Biden on Nov. 15, 2021. It earmarks substantial expenditures — in many cases, the largest in U.S. history — on green initiatives such as renewable/alternative energy sources, public transit and clean water.
- The Inflation Reduction Act of 2022 also makes substantial investments in environmental technologies, including incentivizing investment in energy-efficient buildings and electric vehicle charging stations, providing tax credits for investing in green energy and building supply chains for green energy in the U.S.
- Bank of America analysts estimate that the climate adaptation market could double, to $2 trillion a year by 2026.
- The insurance conglomerate SwissRe warns that a global temperature rise of 3.2°C by 2050 would wipe out 18 percent of global GDP.
- China has by far outpaced the rest of the world with its renewable energy investments. From 2010 through 2019, China reported $818 billion in renewable energy investments, beating out all of Europe at $719 billion and nearly doubling the U.S. in the second-place ranking at $392 billion, according to 2020 research by Frankfurt School-UNEP Centre/BNEF.
How the world is investing to prepare for climate change
Investing in climate change can take many forms, from developing new energy technologies to finding new processes to produce the same standard of goods and services expected today. The approaches differ by country, and each has different needs, so slowing climate change is a complex process that has many different “answers,” depending on where you live.
- The U.S. has committed to reducing emissions by 50-52 percent below 2005 levels by 2030, and is working with the private sector to further climate innovation and investment. In June 2021, the U.S. and its G7+ allies pledged to direct support for unabated international thermal coal power generation by the close of 2021, and the plan went into effect in 2022.
- Since January 2020, companies have announced around $100 billion in investments in American electric vehicle capacity, and the U.S. government has authorized the first commercial-size offshore wind project in federal water.
- In July 2021, the European Union formally developed plans for how it was going to meet its target of a 55 percent reduction in emissions by 2030 on its way to climate neutrality in 2050. The EU is working on an emissions trading system, energy efficiency tech, renewable energy, low-carbon technology and many others.
- In Nigeria, climate change is causing water stress, so the country is investing in sustainable landscape management to slow desertification, among other goals.
- India is subject to extreme weather conditions such as floods and droughts, and the country worked with the World Bank on launching its first green bond, which will help finance sustainable infrastructure and develop a domestic carbon trading market.
- A bank in Thailand issued blue bonds to help develop sustainable access to water and other “climate-smart” technologies.
- Malawi is diversifying its energy grid, where hydropower dominates, by investing in solar power and a battery system.
Of course, many countries are also making promises to drastically reduce carbon emissions by certain dates, helping to push industry to make the investments needed to meet the goals.
Risks to investing posed by climate change
Climate change poses risks to current investments in ways both big and small, and in industries both obvious and not so obvious.
- Agriculture: Climate change means not just warmer weather but also more extreme weather and even dryer seasons. Extreme weather can disrupt established patterns of farming, lowering crop yields or making it impossible to grow in established areas.
- Real estate: As sea levels rise, property owners and cities in low-lying areas such as the Florida Keys are being forced to make tough decisions about whether to try to protect their homes or let them be overrun by rising waters.
- Banks: Banks can be affected by climate change as well since they invest in properties that are potentially exposed to rising seas. As sea levels rise, they may decide to stop financing properties in certain areas that are the most prone to flooding.
- Insurance companies: Similarly, insurance companies are affected by more extreme weather, whether that’s hurricanes, floods or some other event. So extreme weather could lead to higher insurance premiums or the potential that a property is uninsurable.
- Utilities: As consumers face higher average temperatures, they turn to power companies to supply electricity to run their air conditioning units and other devices to keep them cool. This move can strain the electricity grid, though of course it creates further investment opportunities as well.
- Consumer goods companies: These companies, such as those that provide branded food products, rely on a steady stream of fruits, vegetables and other comestibles. With disruptions in agriculture, their reliable access to these goods may be impaired or at least cost more.
- Tech companies: Many tech companies, including data centers, require massive amounts of energy to run, so anything that disrupts the supply of energy poses a threat.
Given the interconnected nature of so many of the world’s industries, climate change in one area can easily affect the supply of goods fed to another area. So climate change has the potential to severely disrupt established patterns of trading and hurt the global economy. For instance, the insurance company SwissRe says that a global temperature rise of 3.2°C by 2050 would wipe out 18 percent of global gross domestic product.
Climate change investing trends
Countries and even companies are investing in a broad range of energy technologies that they hope will curb the production of greenhouse gasses:
- Solar: The abundance of solar energy and the increasing efficiency of capturing it through photovoltaic panels has made it a popular choice for both individual- and commercial-scale power generation, though growth has only started to take off.
- Wind: In 2021, the U.S. generated about 9 percent of its total net power from wind, according to the Office of Energy Efficiency & Renewable Energy. Wind is one of the fastest-growing sources of energy, and one of the lowest-priced sources available now.
- Carbon capture: The idea behind carbon capture is to remove carbon dioxide, a greenhouse gas, from the atmosphere and then store it in a place where it won’t escape. About 90 percent of carbon dioxide produced from power plants and industry can be captured and used, according to the Center for Climate and Energy Solutions.
- Geothermal: Geothermal is an abundant energy source, since it’s produced by the Earth, but is not particularly widely tapped, except in a few instances. For example, Iceland generated about 31 percent of its electricity production in 2020 from this source.
- Hydropower: Hydropower involves harnessing the power of water flows to generate energy, and that can be on large scales such as major dams or on small scales. Just 6 percent of U.S. electricity generation was from hydropower in a given year, according to the Office of Energy Efficiency & Renewable Energy.
- Biofuels: Biofuels consist of biomass converted directly into liquid fuels, and the two most popular are ethanol and biodiesel. Work is ongoing to develop other biofuel sources, including those from waste, cellulose and algae.
- Nuclear: While many don’t consider nuclear a source of green energy, it actually produces little carbon as a byproduct of energy production. Nuclear sources provide about 20 percent of the electricity generated in the U.S. in a given year, says the U.S. Department of Energy.
If you’re looking to invest in companies developing green technologies or incorporating them into their daily business, explore how to invest in socially responsible companies.