The United Nations released aÂ sobering reportÂ on climate change this month, stating that the Earth is warming faster than even scientists thought and that without far-reaching action, the planet is likely to warm to a dangerous level by 2040.
Scientist have been sounding the alarm about global warming for decades, but the report hit a chord: Time is running out before serious and possibly irreversible effects are felt.
Debate on the causes and effects will continue, but money managers say this stake in the ground gives investors a concrete guide to understand how climate change will affect their investments.
âWhen you lay out what the challenge is, youâre in a better position to attack it,â said Stephen M. Liberatore, a fixed-income portfolio manager at Nuveen who manages $9 billion with an environmental, social and governance mandate.
âA report like that lays out the solutions,â he said. âIf we need $2 trillion to invest to save the planet, hereâs what we need to do. I think it allows people to see what they need to do to accomplish their goals.â
It has been getting easier for individuals to invest with climate change as a focus. Since 1995, assets in sustainable and responsible investments have grown 18-fold, to more than $11 trillion, according to US SIF, a membership organization of sustainable investors.
There are two main approaches to creating a climate change investment strategy. One is investing in alternative energy. This can be done in a variety of areas, including solar, wind or geothermal production and distribution, or companies that make the infrastructure, like battery cells that power electric cars.
The other way is what some call climate-proofing a portfolio. The premise is that a warmer Earth will create economic disruption and that companies need to prepare for this.
Walmart, for example, has worked to make its more than 5,000 stores more environmentally responsible, from demanding that suppliers use less packaging to turning off lights at night. These are small steps that, given the retailerâs size, have saved it billions of dollars and reduced waste. This week, Walmart signed a deal toÂ increase the use of solar panelsÂ on its stores.
In another example, Toyota, the maker of the Prius, has sold bonds whose proceeds were used to promote its hybrid technology.
Here are three ways to consider climate change as a criterion for making investments:
Tap public markets for green investing
Investing in publicly traded equity and debt is an easy way to express a view on climate change. And their availability, along with the increasing number and size of mutual funds with a focus on the environment, offer plenty of choices.
Yet these investments, like any other, carry risk. âYou still have to do your homework,â said Lloyd Kurtz, head of social impact investing for Wells Fargo Private Bank. âIf you buy an expensive stock with bad fundamentals, it could be green but itâs still going to perform badly.â
That was the case with many early solar investments and the selections that early green energy funds made, Mr. Kurtz said. But he said the case for renewable energy had been bolstered by companies, like Apple and Google, that adopted these sources to power their operations in the United States.
The debt market has developed to a level that there are offerings for retail investors.
Louise Herrle, managing director and head of socially responsible investing at Incapital, which underwrites bond offerings, said she had seen an increased interest from baby boomers who want a portfolio aligned with their values. This could mean offerings from the World Bank to fund water projects or bonds like the one from Toyota.
âRetail is going to drive this,â she said. âThey want to put their money where their mouth is. People are talking about the financial return and the social return.â
Seek companies expanding responsible business
Constructing sustainable buildings is a major source of green investment, as are wind farms and solar arrays. But there are plenty of companies in a middle ground, working to retrofit buildings or using alternative energy to add to existing power sources.
Kevin Walenta, who manages Fidelityâs select environment and alternative energy portfolio, said he followed companies that saved energy in more traditional ways. These companies, like Ingersoll Rand, Lennox International, Honeywell and Johnson Controls, install efficient lighting or heating and cooling systems in commercial buildings. The result is significantly less energy consumption, higher green ratings for a building and returns in just two or three years.
Mr. Walenta said he looked at both parts of investing, the environmental impact and the total return.
âI am looking for the companies that are driving environmental change but have a durable business model, good returns, positive cash flow and strong balance sheets,â he said. âWithin the context of environmental change, I want them to drive profits over long periods of time.â
Another area for investors is electrical utilities, he said. In regions like Southern California and Arizona, the cost of solar energy makes it competitive with traditional energy. The same, he said, holds true for wind power in parts of the Midwest like Oklahoma.
âA decade ago, they werenât the best investments because you had significant premium for a wind turbine or a solar panel relative to the other options, like natural gas and coal,â Mr. Walenta said. âToday, that difference is nonexistent.â
Such strategies aim to rebut the common belief that investing with an environmental focus reduces returns. There are examples of inferior investments made to achieve a social good, but there are companies focused on green initiatives that are profitable and may be more so as climate change intensifies.
âThere are three main misperceptions that I talk to every investor about: You give up performance to be responsible investors, responsible investing isnât mainstream, and you canât make an impact in public market securities,â Mr. Liberatore said.
Our investors are âlooking for return potential and impact,â he added.
Look to Asia for a big impact
Its decision to pull out of the Paris climate agreement was big news, but the United Statesâ pollution of the environment has stayed roughly consistent over the past 25 years, and Europe has decreased its carbon levels. The big polluters have been countries in Asia, China in particular.
Vivek Tanneeru, portfolio manager of the Matthews Asia ESG Fund, said that 85 percent of the growth in emissions had happened in Asia, and that China had accounted for 61 percent of that growth.
On the positive side, he said, the solar panels that China installed in the first nine months of 2017 exceeded all the solar panels in the United States up to 2016.
âIt tells you the Chinese government has the political will to do this,â Mr. Tanneeru said. âAnyone who is serious about addressing climate change needs to begin in Asia to have any global impact.â
His investment focus is not in renewable energy. That industry, and solar panels in particular, has not had a great track record over the past decade, largely because of government support and low barriers to entry, which led to oversupply.
Mr. Tanneeru said he was focused more on battery technology, which is produced almost entirely in Asia. Tesla uses Panasonic battery cells, BMWâs i3 runs on Samsung technology, and GM used batteries from LG Chemical. Itâs also an area, he noted, that has high barriers to entry.
Another climate strategy in Asia is investing in the companies that run high-speed rail networks, like MTR in Hong Kong. In a decade, China went from zero to 125,000 kilometers of high-speed rail, making living outside polluted cities like Shanghai a possibility.
Regardless of the investment type, most investors suffer from home-country bias, which is a tendency to invest more where they live even if concentrating their money there increases their risk. The same holds true for climate change investing, a fact that seems baffling given that by definition, rising temperatures are a global problem.
âThe U.S. has walked out of the Paris climate accord, but all of Asia is in,â Mr. Tanneeru said. âThereâs a lack of appreciation of Asiaâs leadership in addressing these challenges. Thatâs the big constraint in my mind.â