Companies investing in climate change can play a big role in mitigating the climate change risk and be profitable in the long run.
By Viram Shah
In recent years, the world has woken up to human-induced climate change. Increased carbon dioxide and other greenhouse gases in the air have led to rising sea levels, retreating glaciers, droughts, cyclones, wildfires, and floods. This has threatened human life and has also led to water and food scarcity at a global level. According to CNN, the US alone has suffered $750 billion in damages from extreme weather events driven by climate change in the last five years.
Today however, governments across the globe have woken up to the threat of climate change and have announced plans to curb carbon emissions and reduce carbon footprint. Many countries have also set zero-carbon goals for the future. This has provided opportunities to companies that invest in environment-friendly technologies. Investing in climate change comes under the purview of what is called ESG or Environmental, Social, and Governance-based investing. Though you can invest in ESG companies through the Indian stock market, investing in the US stock market gives you access to some of the leading companies in this space.
Let us look at opportunities in the US markets for investors who want to invest in climate change:
First, there is renewable energy. Renewable energy includes solar power, wind power, geothermal power, hydroelectric power, biomass energy, wave, and tidal power, among others.
In a broader sense, investing in renewable energy would mean investing in companies that invest in technologies that can replace fossil fuels with renewable energy resources. Since the world is making an effort to transition toward renewable energy, there is a big opportunity for companies operating in this sector. According to data published by Allied Market Research, the global renewable energy market stood at $88.17 billion in 2020 and is estimated to reach $1,977.6 billion by 2030, growing at a CAGR of 8.4%.
One way to tap into renewable energy investments is solar technology. Companies in this space include First Solar and Sunrun, both of which are in the business of manufacturing solar panels. The Chinese company JinkoSolar Holding, which is the world’s largest solar panel manufacturer, and NextEra Energy, which generates renewable electricity energy from solar, and wind resources are two other companies operating in this space.
Another possible route to invest in climate change would be investing in companies that facilitate green initiatives such as electric vehicles. This would include electric vehicle companies like Tesla and others who have announced plans to have an all-electric supply in the next decade or so. Companies that are into the design and manufacture of electric batteries would also feature in the mix.
Most investors find it difficult to invest separately in different companies across the spectrum and to find individual winners and losers. One less risky and cumbersome way of investing in climate change is through Exchange Traded Funds (ETFs) that track climate-friendly indices and help you spread your risk.
One such ETF is the ALPS Clean Energy ETF (ACES), whose investment results (before fees and expenses) correspond to the performance of the underlying CIBC Atlas Clean Energy Index. The CIBC index is an adjusted market cap index designed to provide exposure to a diverse set of US and Canadian companies involved in the clean energy sector. The ETF has companies like Sunrun, First Solar, and Tesla among its top holdings.
Another such ETF is the Invesco WilderHill Clean Energy ETF (PBW), which is based on the WilderHill Clean Energy index. The index is composed of stocks of companies that are publicly traded in the United States and are engaged in the business of advancement of cleaner energy and conservation. The ETF has companies like Livent Corporation (which produces electric vehicle batteries) and Ormat Technologies (which supplies renewable geothermal energy technology) among its top holdings.
The First Trust Nasdaq Clean Edge Green Energy ETF (QCLN) seeks to track an index of US-listed companies engaged in the manufacturing, distribution, and installations of clean energy technologies that include solar photovoltaics, wind power, advanced batteries, fuel cells, and electric vehicles. Companies like Enphase Energy (an energy management technology company) and Tesla are among its top holdings.
Investors in climate change will need to take a long view as in the short term returns from some of the companies could be lower than companies in industries it is trying to replace. Although it may not be possible to eliminate carbon, companies investing in climate change can play a big role in mitigating the climate change risk and be profitable in the long run.
(Author is Co-Founder and CEO of Vested Finance)