Wherever you stand on the climate-change controversy, it is a market force that is likely to shape policy and business decisions for years to come.
The world’s two largest economies, the U.S. and China, have pledged to cut carbon emissions. President Obama unveiled strict new regulations for power plants earlier this year. And at the 2015 United Nations Climate Change Conference, world leaders arrived at an international agreement that will influence business and technology for years to come.
Policymakers will likely continue to debate environmental regulations, but companies across the globe are increasingly embracing new ways to adapt.
Our perspective is that investors would be smart to pay attention to the response of markets, sectors and companies as they confront the opportunities and risks posed by potential climate-change initiatives. Here are five areas to watch:
1. Possible advantages for large-cap stocks
The marginal cost of adopting climate-change regulations is likely to be lower for large companies than for small to medium-size firms—mainly because of the benefits of scale when implementing environmentally friendly packaging and processes or sourcing fuel and raw materials. In addition, larger firms that move to capitalize on environmental opportunities may be better able to sustain start-up costs and leverage first-mover brand advantages.
2. Upward pressure on agricultural commodity prices
Despite the promise of technology and innovation to increase production and high-quality crop yields, food commodity prices could still rise with the added costs of environmentally friendly cultivation.
Also, any changes in weather patterns, availability of grazing land or water access issues may impact supply and lift prices (as we’ve seen recently with almonds and the California drought). Rising food prices could have an even more negative impact on emerging market economies, where food makes up a larger portion of consumer spending.
3. Potential favorable influences for the industrial, IT and financial sectors
More stringent environmental standards could be a positive for companies involved in producing cleaner, more efficient industrial equipment and technologies, as well as those producing alternative energy solutions. Also, investment banks could benefit from increased trading in markets such as carbon emissions and weather futures.
4. Potential negative influences for utilities, consumer staples and automobile manufacturing
Investors should weigh the escalating cost of doing business for companies in certain sectors and industries:
- Utilities are the most exposed to changing regulations on greenhouse gases, as they have the highest proportion of costs attributed to energy of any sector.
- Higher agricultural input costs for ingredients such as cocoa, almonds and sugar could play into higher costs for some food producers. Also, gaining access to clean water supplies in emerging markets could present a challenge for beverage companies, many of which look to these countries for growth. In addition, companies may have to increase spending for environmentally friendly equipment and vehicles.
- Automakers’ efforts to achieve higher standards for fuel efficiency come at a greater cost. In addition, dominance in the larger, less fuel-efficient categories could act as a negative for U.S. brands if they cede more market share to the generally smaller, more fuel-efficient vehicles of foreign automakers.
5. Higher potential inflation
As indirect costs become incorporated into the price of goods and services, inflation may rise—though the magnitude of rising prices and the offsetting forces are difficult to gauge. Rising global inflation pressures may be welcome at first, but if sustained, may act as a negative for all financial assets. Rising inflation tends to be more negative for bonds, smaller caps and high-yielding global sectors of the stock market, such as utilities and telecommunications services.
What you can do next
- Monitor these trends as they develop, but don’t let climate-change exposure be the single driver of any investment decision. Be aware that companies focusing purely on climate change tend to be small, single-product companies that come with high risks.
- Research so-called green bonds—municipal bonds that aim to invest in environmentally friendly projects.
- Explore investment ideas with the help of a Schwab Financial Consultant in your area.
- Follow Jeffrey Kleintop on Twitter: @JeffreyKleintop.