Today's investor is not only concerned about changes in the global markets climate but also over global climate changes.
Climate change is altering our world. It is potentially the single greatest threat to our planet and the survival of mankind. Evidence of this environmental change is all around us and society must take responsibility now to prevent irreparable damage. The development of clean renewable energy and the efficient management of water and waste are just a few examples of how we can face this challenge. There are clear opportunities for investors to benefit over the long-term from investing in companies and industries that have the technology and potential to combat climate change.
Investment in sustainable and ecological companies is not only likely to assist their development and promote their positive influence on the planet, but their performance is also likely to be influenced by the growing urgency to reduce carbon emissions and limit global warming.
Companies with viable solutions are likely to have the support of both consumers and governments, and are likely to witness increasing revenues.
Legislation is now being drawn up around the world to make the goal of reducing carbon emissions legally binding. The EU has recently agreed to reduce carbon emissions by 20% by 2020, and the UK is likely to have the world's first legal framework for the transition to a low carbon economy, if the Climate Change Bill is passed in early 2007.
There has been a surge in public, corporate and governmental eco-awareness over the last 12 months, spurred on by increasingly peculiar weather patterns and two landmark pieces of research on climate change, the Stern Report and the International Energy Agency's World Energy Outlook. Both of these reports stress the importance of immediate action to combat the potentially devastating effects of climate change. The Stern Report also predicts severe social consequences should climate change exacerbate, and with potential economic costs of up to 20% per annum of global gross domestic product (GDP), the "Doomsday" scenario. However, the Stern Report potentially sweetens the transition to a low carbon economy by indicating that this change could eventually benefit the global economy by $2.5 trillion a year.
What is the Evidence of Climate Change?
The Earth's climate has changed over the last century and there is now new and powerful evidence that most of the warming observed over the last 50 years can be attributed to human activity. Computer models predict that temperatures are set to continue to rise over the 21st century. An increasing number of observations indicate that the world has warmed. The average surface temperature of the Earth has increased over the 20th century by approximately 0.6 C . This increase occurred mainly between 1910 and 1945 and from 1976 to 2000. The increase is greater both at night time and over land area.
Variations of the Earth's surface temperature for the past 140 years
Over the past 1,000 years in the Northern Hemisphere, the temperature increase of 20th century was the largest of any recorded century, the 1990s was the warmest decade and 1998 the warmest year globally. Temperatures have risen during the past four decades in the lowest eight kilometers of the atmosphere. Snow cover and ice extent have decreased. The sea level has risen by 10 to 20 cm. during the 20th century. Ocean temperature has increased since the late 1950s. Changes in climate have happened because of both internal variability within our climate and external factors.
Industrial production and by-products have released massive quantities of gases into the atmosphere and these are significantly changing their concentrations in the atmosphere.
Some of these gases are expected to affect the climate by changing the Earth's radioactive balance, measured in terms of "radiative forcing," which is any change in the radiation energy entering or leaving the climate system.
The greenhouse effect
Greenhouse gases, which have a global effect, tend to warm the Earth's surface by absorbing some of the infrared radiation it emits. The principal human contribution to greenhouse gas is carbon dioxide. Its concentration has increased by 31% since 1750 to a level that is not likely to have been experienced for the 20 million years prior. This increase is predominantly due to fossil fuel burning, but also to land-use change, especially for agriculture and due to deforestation. Deforestation contributes to the increase in carbon dioxide levels as trees and plants remove carbon dioxide from the atmosphere through the process of photosynthesis.
By the year 2100, many extreme weather events such as storms, floods, avalanches, landslides, droughts and heat waves are expected to increase in frequency and severity, others such as cold spells are projected to decrease. The problems associated with these weather problems such as damage to buildings, hardship due to loss of shelter and food, and fatalities are also expected to increase with global warming.
The poorer and less developed regions of the world will bear the brunt of the impacts of climate change. There is a potential for large-scale and possibly irreversible effects of climate change, but the extent of this risk has not yet been reliably quantified. Examples of effects include the slowing of the warm North Atlantic currents, large reductions in the Greenland and West Antarctic ice sheets and accelerated global warming due to releases of terrestrial carbon from permafrost regions and methane from hydrates in coastal sediments. The likelihood of these changes occurring is expected to increase with the rate, magnitude, and duration of climate change.
How to benefit
Investors should seek out companies that are likely to play a key role in tackling climate change. These companies should be leaders in environmentally crucial sectors, such as renewable energy, water and waste management. Beyond investing in single companies, it also is possible to invest through managed funds and equity baskets (e.g. - certificates).
The author is global investment strategist at Tandem Capital.