Last Updated on 20 April, 2023 by Samuelsson
NOTE! This article, written by a freelancer, assumes that the various scenarios depicted by the UN are correct. However, The Robust Trader takes no stance in any debate regarding climate change, its causes, or its effects. The article below is merely a discussion.
With the news about climate change all over the place, it would be reasonable for investors to consider how climate change will affect their investments. Knowing which sectors of the stock market and the stocks that stand to benefit from the situation can guide your investment decisions, but which stocks will benefit from climate change?
Stocks that will benefit from climate change are the stocks of firms at the forefront of the fight against climate change and its effects. Those firms include renewable energy companies, electric car manufacturers, air conditioner manufactures, flood control companies, construction companies, protective wears companies, and agro biotech companies.
But you need to understand the various ways climate change can impact the economy and, by extension, the stock market. Keep reading to find out about them.
How Climate Change Can Impact the Various sectors In the stock Market
Whether it is increasing temperatures, rising sea levels, or higher incidences of extreme weather situations, climate change could put the global economy at risk. The impacts of climate change can be felt in different sectors of the economy from energy to infrastructure and from insurance to agriculture.
Since the companies in these sectors of the economy are quoted on the stock market, climate change can actually affect the equity market. While the impact may be negative in some sectors, in other sectors, climate change may actually drive growth and innovations.
Generally, there are three ways climate change can impact on the economy and equity market:
- Direct effects of climate change
- Government regulations to curtail climate change
- Attempts at finding solutions to climate change
1.Direct Effects of Climate Change
The direct impact of climate change on the global economy and the financial markets is mostly a negative one. The effects will come from rising temperatures and heat waves, melting ice sheets and glaciers, rising sea levels, and extreme weather events, such as tornadoes, hurricanes, flooding, and drought.
1.The Effects of Rising Temperatures
Climate scientists have warned that the global temperatures are going to increase in the coming decades, and we have seen the proof in the increasing heat waves with record-high temperatures in Europe.
Rising temperatures have a negative effect on the productivity of the agriculture and forestry sector since these areas involve working outdoors. Moreover, elevated temperatures can dry freshwater bodies, which are used for irrigation. The effect is a reduction in food production and potential food shortage. So companies in the agricultural sector, as well as food retail services, might take a hit in the stock market. However, it’s also worth noting that climate change will increase productivity in certain areas as well, which could make up for some of the losses in productivity!
Other sectors that depend on agricultural products, such as soft drinks, wines, and others will also be seriously affected. The beverage and wine industries could also suffer from a scarcity of water ensured by rising temperature and loss of freshwater bodies. In fact, a Coca Cola plant was short down in Northern India due to lack of water.
A study by the Federal Reserve Bank of Richmond found that rising temperatures negatively affect people’s health, resulting in more hospitalizations. As a result, health insurers would have to deal with more health claims, which would affect their profitability. There is a large chance that insurance stocks will bear the brunt.
The skiing industry will be affected. In fact, according to a report by the University of Waterloo, two-third of European ski resorts may be closed by 2100.
2.The Effects of Rising Sea Levels
Sea level rise is primarily caused by increasing seawater temperature and melting ice sheets and glaciers. Rising sea levels can impact different aspects of the economy and, by extension, the stock markets.
Coastal flooding is one of the major effects of rising sea levels, and this puts people’s homes at risk. While homeowners and the real estate developers are primarily affected, the ripple effects will be felt by many. Mortgage lenders would surely be hit by high rates of defaults.
Home insurers too will bear the brunt. Flood insurance is a special issue. As floods only affect low-lying areas, homeowners in areas not affected by floods don’t normally buy it. So there are fewer buyers, putting a strain on the insurance companies when there is catastrophic flooding. Agricultural lands can get flooded too, and flooding reduces the fertility of the lands. The effects of poor yields can be far-reaching.
3.The Effects of Extreme Weather Events
Climate change has increased the frequency of extreme weather events, such as hurricanes, tornadoes, droughts, and heat waves. These events come with a lot of damage to both private properties and public infrastructures. However, their effects tend to be short-lived in most cases.
The insurance sector is mostly affected in events of these extreme conditions, but agriculture and other allied industries are heavily affected in cases of drought.
Governments all over the world are making laws that will curtail the rate of climate change. These laws are aimed at reducing the rate of emission of greenhouse gases, which are believed to trap heat in the atmosphere. The laws are often targeted at the industries that operate large polluting factories, such as the refineries and power plants.
For companies in these industries (utility and energy sectors), it could mean making heavy investments to upgrade their facilities and install emission monitors and control systems for greenhouse gases so as to meet up with the requirements of the regulations. This, on its own, could become very costly.
The impact of the regulations does not end with installing emission monitors and control systems. The regulations might also involve a kind of credit system where each company is allotted a specified amount of emission credit. This credit is the quantity of greenhouse gases they are allowed to legally release into the air. When a company exhausts the amount allocated to it, it has to buy more credit to be able to operate.
The implication is that refineries, power plants, and oil and gas companies, which typically emit more greenhouse gases, would have to spend more money on buying emission credits. The cost of the credits will affect their operating cost and inevitably reduce their profit margin. At the same time, companies that don’t emit much carbon dioxide will be left with excess credits which they can sell to those companies that need more.
In other words, the regulation is designed to punish big emitters of greenhouse gases by making them pay for it. And, at the same time, reward the companies that don’t pollute the environment and those that produce some sort of solutions to climate change, such as producers of renewable energy sources and energy-efficient products.
2.Higher Costs for Consumers
To be able to achieve reasonable profit after all the expenses, those affected energy and utility companies have to pass on the cost to their consumers, thereby increasing the cost of energy and utilities. Since energy is a very important commodity used by everyone (including other businesses), the rising cost of energy can affect the profitability of other companies in other sectors.
Furthermore, the stringent regulation in the energy sector could lead the companies to abandon their projects (stranded assets), leading to losses and, even, bankruptcies.
Attempts at Solving Climate Change
Efforts are being made to combat climate change by looking for clean and renewable sources of energy. A lot of investments are now going into solar energy, wind power plants, and biomass, while traditional sources of energy like coal and oil suffer neglect.
Institutional investors (Church of England and Stanford University, for example) are divesting from stocks of companies that deal on coal and oil. This divestment campaign by large institutions can have an impact on the traditional energy sector. The companies in this sector are still surviving at the moment because alternative energy sources are still more expensive. But this may not be for long.
Apart from energy companies, appliances that depend on electrical energy are undergoing new changes. Companies are coming up with energy-efficient appliances, with less energy consumption, to replace the old ones. So companies that cannot meet up with this new trend may actually be left behind.
The same trend is going on in the transportation sector — we are gradually moving away from gasoline vehicles to hybrid and even completely electric vehicles. Vehicle manufacturers that cannot make the shift in time may lose out in the near future.
Furthermore, because renewable energy is more expensive, businesses generally will bear the brunt of the rising cost of energy. The implication is increased cost of operations, which will lead to reduced profit margins. This may reflect on the stocks of companies that more severely affected.
The Sectors and Stocks that Might Benefit From Climate Change
Although the effects of climate change can be devastating for many businesses, some industries actually stand to benefit from the problem. With growing opportunities in these industries, their stocks may perform better than others. These sectors include the following:
1.Agricultural Biotech Sector – Stocks of Biotech Companies
Partly because of the effects of floods and drought, the agricultural sector is one of the sectors severely affected by climate change. And as the population of the world continues to increase, the demand for food, especially organic food will keep increasing.
However, biotech companies that develop genetically modified crops, designed to withstand a harsh climate with prolonged droughts and produce higher yields, stand to benefit from the shortage of food that could arise from climate change. Examples of stocks in this group include Monsanto (MON) and Bayer.
Other stocks that may benefit in the situation are chemical companies that manufacture fungicides and seed coatings which will enable crops to be more resilient in harsher environments. BASF SE, a German chemical company and the largest chemical producer in the world, is a typical example.
2.Renewable Energy Sector- Stocks of Companies Focusing on Renewables
It is generally believed that the major cause of climate change is the gaseous emissions from fossil fuel. Fossil fuels have been the major source of energy since the industrial revolution. Governments around the world have been advocating for a shift towards clean energy. By clean energy, they mean energy source like solar, wind, and biomass, which are renewable and nonpolluting.
As of 2016, renewable energy contributed over 15% of the U.S. energy production, and it has been increasing since then. So companies that produce solar energy, as well as wind energy and biomass energy companies will definitely benefit from the effects of climate change.
Stocks in this group include Brookfield Renewable Partners, Acciona, Aleo solar, Alterra Power, Azure Power, Ballard Power Systems, and Aventine Renewable Energy.
3.Air Conditioning Suppliers – Stocks of Air conditioning Suppliers
Climate change is causing a steady rise in temperature all over the world. Many cities are getting record-high temperatures on a yearly basis. Thus, the opportunity is huge for suppliers of air conditioning systems.
However, air conditioning systems can be energy demanding, and some produce hydrofluorocarbons, which could be major contributors to climate change. So companies that produce clean and energy-efficient air conditioners are in better positions than others.
Stocks in this sector include General Electric, Johnson Controls, Lennox International, United Technologies Corp., Daikin Global, Ingersoll-Rand PLC, Fujitsu, and Comfort Systems USA Inc.
4.Electric Car Manufacturers – Stock of Electric Car Companies
Fumes from vehicle exhaust pipes are believed to immensely contribute to the damage in the atmosphere which brings about climate change. The world is trying to see how to reduce this aspect of atmospheric pollution. It started with hybrid cars which combine gasoline energy and batteries.
Now, we have solar-powered vehicles that don’t need fossil energy at all. There are even complete electric cars that can move for several hours before recharging, and the charging doesn’t take much time — about the same time it takes to refill gasoline.
Stocks here include Tesla, General Motors, and Volkswagen. Other stocks to consider here are those of companies that supply important components (such as battery and electronic components) to the car companies. Examples in this group are Aptiv PLC, Delphi Technologies, TE Connectivity Ltd, Amphenol Corporation, Magna International Inc., and BorgWarner Inc.
Flooding is one of the worst consequences of climate change. It destroys people’s homes, public buildings, roads, and other important infrastructures, all of which will always have to be repaired afterward.
While the insurance companies may be at the losing end after extreme events like hurricanes, the companies at the center of the repairs and reconstructions will surely stand to benefit from the effects of climate change. Stocks here include KBR Inc., Jacob Engineering Group Inc., Emcor Group Inc., Argan Inc., and Ameresco Inc.
There are also special construction firms that specialize in coastal flood control. An example here is the Flood Control America, a Massachusetts company that is creating innovative ways of controlling coastal flooding. According to them, their ‘’invisible flood control wall” — a removable steel wall system — can easily be set up anytime there’s a warning about coastal flood.
As climate change causes ice sheets and glaciers to melt, it is now possible for ships to cross the Northeast Passage from Europe to Asia without the need for icebreakers. For ships going from Europe to East Asia, this offers a faster route than traveling more than 11000 miles through the Suez Canal and Indian Ocean.
The shorter route can save a lot of money per trip. Due to the melting ice sheets, ships may also be able to go to the Arctic and Antarctic regions. Stocks of shipping companies to consider include A.P. Moller Maersk Group, Mediterranean Shipping Company S.A., CMA CGM Group, China Ocean Shipping Company, and Evergreen Marine.
7. Producers of Specialized Clothing
The frequent incidence of heat waves and other extreme weather situations make it necessary to have special clothing that can help us stay safe and comfortable. Call it smart clothes or whatever, companies can use technology to produce clothes that can adapt to different environmental conditions. Stocks to look out for include JUTEC and HB.
8. Companies With Innovative Solutions
Some companies are coming up with innovative ideas to reduce the amount of CO2 in the atmosphere. Companies, like Rayonier, dedicate millions of acres of land for producing special breed of trees that can more efficiently remove CO2 from the air.
A Canadian company, Carbon Engineering, uses special technologies to convert the CO2 in the air to energy. The Direct Air Capture technology can directly remove CO2 from the air, while the AIR TO FUELS technology can convert it to energy.
There’s no doubt that these companies will blossom as the effects of climate change bite harder.
9.Producers of sun-protective products
Just like the protective clothing, other products that can help people cope with increased exposure to the sun, such as sunscreen, umbrellas, and sunglasses, will likely be in high demand because of the effects of climate change. These types of products become necessary to protect people from sunburn, and skin cancers.
The stocks of companies, like Neutrogena, Coppertone, Skinvisible Inc., EssilorLuxottica, and Kering, may benefit from the effects of climate change.
10. Oil Giants
Ironically, big traditional energy companies may also benefit from climate change. One of the reasons for this is the rising energy needs due to increasing temperatures and the fact that renewable energy is still expensive.
Another reason is the melting ice in the Arctic region, which has exposed the untapped oil reserves in the region. This has facilitated oil exploration in the Arctic, with many big players in the oil industry already setting up projects there. Beneficiaries include the Royal Dutch Shell, Exxon Mobil Corp., Rosneft, and Gazprom.
The Adjustments Humanity Might Have to Make
Climate change can have devastating effects on human lives, as well as the financial markets. To cope with those effects, we need to reduce the rate of progression of climate change. By looking at what we might have to do, we could also gain clues about more stocks that stand to benefit from global warming.
Invest in renewable energy
Studies have shown that carbon dioxide and hydrofluorocarbon are the major culprits in climate change, and these gases are mainly produced by burning fossil fuels, such as coal, natural gas, aviation fuel, and gasoline.
By shifting towards renewable sources of energy, such as solar energy, wind energy, and biomass, we can reduce the quantity of greenhouse gases released into the atmosphere. For investors, investing in green energy doesn’t only help save our planet but also presents huge opportunities for growing wealth, as the sector has prospects of sustainable growth
Develop better means of transportation
Transportation is another area that contributes a significant amount to the greenhouse gases emitted into the air. So developing better transportation systems can go a long way in reducing hydrocarbon carbon emissions.
Production of solar-powered vehicles and electric cars presents good investment opportunities that can help reduce the rate of climate change, as well as help investors grow wealth. Electric vehicles are the future of the automobile industry.
Plant more trees
Plants help to absorb carbon dioxide from the air. This is the reason huge vegetation like the amazon forest is very important to the world. Planting more trees can help reduce the amount of carbon dioxide released in the air, so forestry may be a good investment option.
Prepare for effects of climate change
Extreme weather events, like hurricanes and tornadoes, are occurring more frequently in recent times, and they are often accompanied by flooding and loss of life and properties. We need to be more proactive in tackling flooding. Innovative ideas like the “Invincible Flood Walls” may offer some proactive solutions to the problem of coastal flooding.
Develop crops that withstand harsh climatic conditions
Food security is very important if we are to survive the effects of climate change. Biotechnology may be our only hope of ensuring food security for more than 7 billion humans on our planet. Investing in biotech companies is a must.
Stocks that will benefit from climate change are the stocks of companies at the forefront of the fight against climate change and its effects. Those firms include renewable energy companies, electric car manufacturers, air conditioner manufactures, flood control companies, construction companies, protective wears companies, and agro biotech companies.