Isn’t climate change simply a “risk” issue? No, it presents investment opportunities as well. In our view, investors can create a natural hedge against climate-related risks by tilting their portfolios toward a growing set of opportunities in energy efficiency and resource optimization sectors. For example, Impax and FTSE have identified over 1,000 listed companies for which a majority of their business focuses on resource efficiency themes related to climate change. An October 2013 report from Goldman Sachs identifies several investment themes associated with climate change risk: energy efficiency, electric/hybrid vehicles, gas and nuclear (as alternatives to coal) and carbon capture and sequestration.
Isn’t it sufficient for now to put climate change on the radar but wait for more clarity before altering investment decisions? One last, resounding No. Awareness is important but action is imperative. Only by consciously allocating at the portfolio level can investors have a reasonable chance of establishing meaningful protection against risk while availing themselves of the upside opportunities associated with climate developments. To effectively confront the investment risks and opportunities associated with climate change requires an experienced, specialist manager with deep understanding of these issues and their potential impact, together with the ability to identify and value the best technologies and growth opportunities.
The recent financial crisis demonstrated that most investors are woefully unprepared for the unexpected, the “unknown unknowns.” Unlike a classic bubble that bursts catastrophically, climate change is a more complex issue that will impact portfolios through both incremental and quantum change. In our view, investors who recognize this and act accordingly will have a better chance to outperform in the period ahead.
Joe Keefe is President and CEO of Pax World Management LLC and Ian Simm is Chief Executive of Impax Asset Management, adviser and sub-adviser, respectively, to the Pax World Global Environmental Markets Fund (PGRNX).