Global warming and your money

The buzzword in every newspaper is Climate Change, but what does it actually mean for you as an investor, asks Candice Paine, Head of Glacier Research?

Carbon dioxide and methane levels in the atmosphere are higher now than they have been for 650 000 years. Both of these gases allow heat from the sun to enter the atmosphere more readily, resulting in rising temperatures. The Amazon forest has been seriously compromised as heating increases and the Arctic continues to shrink as oceans warm. Scientists are predicting that, as temperatures continue to rise, some populations will suffer from severe water shortages whilst others will be devastated by inclement weather like that seen in New Orleans post Hurricane Katrina. Food shortages will become commonplace, which will result in the mass migration of people - mainly in developing countries.

The financial sector is trying to come to grips with what this all means for investments and shareholder value going forward. Their primary concern is which industries will be spawned or flourish and which will suffer and potentially disappear as governments rally to adapt legislation to more efficient use of energy resources.

Evidence has shown that solar, wind and hydro power all have limitations. According to Sprott Asset Management in Toronto, nuclear energy is emerging as the only real alternative and even environmentalists are starting to realise that there is no other choice. Transportation fuels are still the biggest headache and scientists are starting to advocate conservation in this area.

The effect of legislation and carbon taxation on big corporates will be widespread, with car manufactures being the hardest hit. In this respect Toyota is way ahead of the rest in the manufacture of hybrid vehicles. Chemical companies, electric utilities, the metals and mining industries and oil and gas producers will face heavy taxation on carbon emissions and will need to find ways of producing more efficiently. The nuclear power sector will be an obvious benefactor (watch the price of uranium and the mines it comes from) as will any company able to produce sustainable, renewable energy. The clean production of hydrogen will also pique investor interest. At present the cost of producing hydrogen is expensive and the process has high carbon emissions as a byproduct. Pharmaceutical companies may benefit from changing health patterns.

Towards the middle of 2006, a coalition of environmentalists and institutional investors calling themselves Ceres, put out a report looking at how the worlds largest 100 companies are positioning themselves to interact in what they called a "carbon-constrained world". General Electric, DuPont, Cinergy, American Electric Power, BP, Toyota and Honda are companies which are all showing a commitment to dealing with climate change in their businesses.

British supermarket chain Tesco has become the first supermarket to let consumers know how much carbon dioxide was emitted during the production, transport and consumption of all 70 000 products it sells. More recently, Sir Richard Branson offered a $25m prize to anyone who invents a viable and economical way of removing carbon from the atmosphere.

Embracing climate change means huge business opportunities for entrepreneurs and scientists alike. One industry that is really going to have to reinvent itself is that of insurers. As one of the worlds largest industries, insurers are finding that more and more, changes in weather patterns are accounting for huge claims on property which may become unaffordable in the longer term.

There is much that investors can do. For a start, they should let asset managers know that they are serious about carbon friendly investments not only because these are the companies that will benefit shareholders going forward, but also because each and every one of us needs to be thinking about climate change.

Sources:
Sprott Asset Management, Toronto (www.sprott.com)
The Financial Times (www.ft.com)
www.ceres.org
Heat: How to stop the planet from burning by George Monbiot
www.climatecrises.net