Climate change and investing

Climate change is a complex process that has a detrimental impact on the global environment. Carbon dioxide and other greenhouse gas emissions produced by man-made industries are major contributors. Many countries throughout the world have declared efforts to lower their carbon footprints and cut greenhouse gas emissions. While some investors may not care about their portfolios' environmental consequences, those who do may find green technology and renewable energy more attractive for investment prospects. Institutional asset managers have carved out a larger market for investors looking for more ethical methods to grow their money.

Learn from our article how climate-conscious investors can adjust a portfolio to make a difference, earn returns, and protect assets:

What is climate investing?

Climate investing is a subset of investments made in the environmental, social, and governance (ESG) sector, that aims to generate both financial gain and social benefit. The goal of climate investing is to support technology or businesses that are anticipated to be essential as the world moves from fossil fuels and carbon-intensive industries to renewable energy. Numerous investors and corporations are already putting money into new forms of renewable energy that can be used to replace fossil fuels. Green efforts, such as carbon offsets, have also been a viable financial avenue.

What do investors need to know about climate change?

The influence of the world's changing environment on investors' portfolios can no longer be ignored. Long-term investment results are anticipated to be affected by climate change. Several studies have been undertaken to examine investment exposure to climate risk and its impact on investment returns by 2050. Mercer published an updated study in 2015 regarding the most affected sectors due to climate change and found that the coal industry would suffer the most while the renewable sector would flourish.

Temperature rises and efforts to curb global warming will result in decreased returns on at least certain assets, including equities and bonds. The average annual returns on coal are expected to fall by 26% to 138% by the next decade. Investors should consider this when making long-term investing decisions. Many investors are now looking for greener and more environmentally friendly investments, not only for the good of the planet but also because there is growth potential. There are various choices for investors who want to build a climate change-themed portfolio. Renewable energy investments and companies with green efforts are two of the most well-known paths.

The risks of climate change

Climate change poses risks to all aspects of your life, including your living standards, your health, and the economy all around you. Many people's livelihoods are already being negatively impacted by extreme weather events that are becoming more common and severe as a result of climate change. Many communities, many of which are already in a precarious position, have lost their ability to bounce back from setbacks.

Approximately 60% of European businesses believe they are vulnerable to climate change, particularly in countries in the South, East, and Central regions, which are already significantly affected by extreme heat waves. Spain and France share some of the higher ratios, with climate change being a major concern for 77% of Spanish and 31% of French businesses. Energy, construction, transport, and other operations-intensive sectors are more vulnerable to physical damage from climate change, with almost 80% of firms highlighting the impact of weather events on their business activities. Firms with intense operations are more vulnerable to extreme weather events and perceive physical risk as a significant factor to consider. Utilities relying on natural resources, such as hydroelectric power, heavily depend on weather conditions. Therefore, a change could result in a negative outcome.

How does climate change affect investing?

Climate change has the potential to affect everything, including your investments. It can impact the financial system when the value of financial assets decreases, which could lead to losses for banks, asset owners, and other financial institutions as a result of borrowers losing their money. This would result in a decrease in investment value and an increase in risk for lenders and other market participants.

Climate change's influence on investment has been estimated in a wide range of ways. For instance, temperatures are forecast to rise by roughly 4 degrees Celsius, while asset prices are expected to fall by between 2.9% and 9.7%. The cost of homes near rising sea-levels is lower than elsewhere, but the insurance is higher. This could be specific to certain industries and geographic regions that are more vulnerable to climate change than others. Many companies may be adversely impacted in industries where infrastructure is less mobile and more expensive.

Studies show that 53% of the portfolio cannot be hedged against climate change. While the rest of 47% can be hedged, this only confirms that no strategy will offer more than 50% risk diversification. Furthermore, a portfolio with less than 50% in equities could lose more than 25%, meanwhile, the loss could be more than 45% if your portfolio is aggressive. If you live in a developed economy, chances are the sectors that will be hit the most are construction, real-estate and basic materials. In emerging countries, the impact will be felt by energy and utilities, consumers, and the agriculture industry.

What are the best investments for climate change?

Many experts believe that when the rising temperatures are realised, alternative energy, transportation, and green projects will become increasingly common. If fossil fuels and other polluting technologies are restricted by the government, clean alternatives could become immensely profitable. The following explores renewable energy and green initiatives.

Renewable energy

The utilisation of renewable energy is critical to phasing out the usage of fossil fuels. Natural energy sources such as wind and solar may supply cheap electricity without polluting the environment or emitting carbon dioxide. Many businesses are looking for innovative methods to develop and scale up these technologies. According to a Mercer analysis, average annual returns in the renewables sector might rise by 4% to 97% over the next 10 years. The renewables sub-sector could have average annual returns increase by 6% to 54% over the next 35-years.

Solar technology is an up-and-coming niche in the alternative energy business if you're ready to take a chance. Solar panel output has expanded at a compound annual growth rate of more than 40% over the previous 15 years, making it one of the world's fastest-growing industries. Market Vectors Solar Energy ETF (KWT) and Guggenheim Solar Fund are two examples of equities and funds (TAN).

Green initiatives

Companies that have significant green energy programs might also be a good fit for a climate-change-focused portfolio. These businesses have made large investments in carbon offsets, sustainable materials, meat replacements, electric cars, and other low-carbon technology. These funds have been accessible in Europe for decades, but they truly took off between 2006 and 2008, when government subsidies aided the growth of green sectors and renewable energy.

Investing in green projects has long been regarded as a risky proposition with high capital costs and complicated infrastructure needs. Costs frequently outweigh revenues, especially in the short term. The financial crisis caused a reduction in the subsidies in green ventures and struck their operations severely between 2009 and 2012.

Many businesses still recognise the long-term advantages of these investments and have taken efforts to ensure a brighter future for themselves and the environment. By the end of the crisis in 2013, assets management began to climb again, increasing by 16% in 2016 and 47% over the previous three years, making the green market larger than it was in 2009. While fund performance barely kept the market afloat between 2011 and 2013, net inflows have been positive for the past year (5.3%), fueling asset growth. A solid financial performance of the funds in 2016 (on average, 6.3%) and the introduction of new funds totalling €600 million by year's end fueled the market expansion. With an average inflow rate of 11.8% in 2016, hydro-based projects accounted for most inflows (€ 760 million). Several funds have risen significantly in size during the last five years, with assets totalling more than €1 billion.

STOXX Global Climate Change Leaders Index is a well-known fund created to honour the world's most environmentally conscious firms like Apple, Bank of America, Microsoft, and Alphabet.

Returns from climate investments

The returns on green enterprises have generally been lower than the earnings of the traditional sectors that they seek to replace, making these investments difficult to justify. Furthermore, renewable and green technology investments might take years to pay off, forcing investors to wait for long-term benefits rather than immediate ones. But one should not be disappointed by the slow pace of climate investment as research shows that the gap is closing. ESG funds reached $51.1 billion in net assets in 2020 and 2021 saw a sustainable debt market exceeding $1.6 trillion. 2022 predicts that clean energy investment will grow by 8%.


Climate change investing has been rising in popularity due to its gradual rise in returns. Climate investing has persuaded people to think about the effects of climate change on not only the environment but also traditional assets. As a result of climate change, for example, wildfires and flooding have already wreaked havoc on the real estate and insurance industries. Although it cannot eradicate all climate-related calamities, climate change investment has the ability to minimise the losses. Nowadays, there are many investments, funds, and stocks that cater to investors who want to positively impact the environment through their investments.

When creating a climate change portfolio, there are several aspects to consider. Although the global economy will not completely eradicate pollution overnight, even a small reduction might pay off in the long run. Furthermore, if these technologies are effective, the firms that create them might be very profitable. Investing in green energy and businesses has the potential to yield substantial returns while also benefiting the environment.

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