As people around the world acknowledge climate change on Earth Day, investment firm GMO has released a white paper arguing that not only is climate change good for the planet but also for investor returns.
The white paper concluded that a well-designed strategy would provide benefits including diversification, protection from climate risk and the ability to invest in growth-orientated companies at a discount.
Jeremy Grantham co-authored the report with GMO co-founder Lucas White and in the report they acknowledge the threat of climate change but also the opportunity.
“Beyond strong returns, we believe a climate change strategy (for our purposes, a strategy investing in the sector) may offer other significant benefits as well.
“We expect these to include diversification, protection from climate risk, inflation protection, and the potential to buy growth-oriented companies at a discount,” said Mr Grantham.
It is not the first paper produced by the group who in 2017 made the case for growth in the climate change sector arguing that there was room to grow and inefficiencies to iron out in the move from carbon to sustainable energy sources.
“Given the secular growth tailwinds and the inefficiencies to be exploited, we believe that investors who do a good job of identifying the winners in the fight against climate change will be handsomely rewarded,” they said.
Mr Grantham said the drivers of climate change return would be different from the broader equity market but would increase portfolio diversification.
“Diversification that addresses a major risk to the broad economy compelling. The Trump Administration’s Fourth National Climate Assessment concluded that climate change “is expected to cause substantial… damage to the U.S. economy throughout this century,” he said.
One such way to form a strategy was to divest from fossil fuels said Mr Grantham and instead invest in clean energy solutions which provided indirect exposure to fossil fuel prices.
“Fortunately, by investing in the clean energy solutions that compete with fossil fuels, one can maintain that exposure to traditional energy prices. When fossil fuel prices rise, clean energy solutions become more competitive, and market forces accelerate the transition to them,” he said.
The white paper advised investors to frame their climate change strategy as a global equity alpha play with diversification benefits.
“Outside of global equities, the most natural home for a climate change strategy for many portfolios may be in the real assets allocation. There’s also a growing trend toward making specific allocations to ESG, impact, and sustainable investments,” Mr Grantham said.
The paper concluded that a climate change strategy was not standard operating procedure for investors, but significant rewards would follow those who were willing to take a chance.
“Not only should investors be intrigued by the potential for returns, diversification, and inflation protection, but a well-designed climate change strategy should also help protect a portfolio from a major risk to the economy.
“It’s up to investors to figure out how a climate change strategy fits into their particular investment process, but we expect it will be worth the effort,” Mr Grantham said.
