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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.

The influence of the world's changing environment on investors' portfolios can no longer be ignored. Several studies have been undertaken to examine investment exposure to climate risk and impact investment returns by 2050. Mercer published an updated study in 2015 regarding the most affected sector due to climate change and found that the coal industry would suffer the most while the renewable sector would flourish. The average annual returns in coal are expected to fall by 26% to 138% by the next decade. Many investors are now looking for greener and more environmentally friendly investment, 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.

1. 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).

2. 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 significant 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.

3. What you should prepare for

Renewable energy investors should think long term about their 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.

Investors should also think about how environmental changes may affect more traditional assets. Wildfires and flooding, for example, have already wreaked havoc on the real estate and insurance industries as a result of climate change. Climate-related calamities would very certainly be accompanied by inflation, shortages, and electricity outages. In the event of an emergency, a prudent investor might consider hoarding cash and essentials.

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.

Last update: 03/01/2022

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