How The Climate Change Summit Impacts Your Portfolio

You’ve probably seen coverage on the news: This week marks a summit of global leaders to talk about the challenges of climate change, and how they will pledge to reduce greenhouse gas emissions. Named the “twenty-first session of the Conference of the Parties” by the United Nations, or COP21 for short, the Paris talks include delegations from 195 countries, representing most of the world and all of its largest economies.

Unlike past conferences intended to address climate change, this one is expected to result in a global plan to reduce greenhouse gas emissions considerably over the next decade through legally binding commitments — in effect, a global climate change treaty. Many countries, including the United States and China, have already made formal commitments to reduce emissions; there’s also stronger political support than ever before to do so — outside of the United States, where climate-change skepticism remains a political force, the overwhelming consensus is that action is urgently needed, supported by scientific evidence that no credible scientist disputes.

The biggest potential snag to an international climate change treaty: the largest emerging markets, such as India and Brazil, which plan to expand energy use dramatically in the coming decades and fear that restrictions on fossil fuel use will constrain their economic growth. (Brazil is an especially interesting challenge because climate change could be mitigated in part by preserving its massive rainforests as a so-called “carbon sink” — again, potentially interfering with the country’s economic growth plans.) Any deal may need to include incentives that compensate those countries, and others like them, for their contributions to lower emissions.

Assuming a deal is worked out, we can expect several long-term trends already in place to be accelerated and intensified. These include a shift in energy production from fossil fuels to renewables; stricter emission standards on vehicles, factories and other major carbon sources; increased efforts to reduce electricity use in myriad ways; and greater investment in sustainable and resilient infrastructure around the world.

Setting aside the environmental and political ramifications, how would this affect your portfolio? Let us count the ways — starting with sectors that could be hurt:

•    Coal. It’s been clear for years that the coal industry has the most to lose from any effort to lower carbon emissions. The reason is simple: electricity generation is the single biggest emission producer, and traditional coal power plants emit way more carbon than other fuels: more than 200 pounds of carbon dioxide per BTU of energy, vs. 117 for natural gas. Power companies in the United States and Europe already have shifted considerably away from coal toward other fuel sources — in the United States, toward abundant, inexpensive natural gas; in Europe, toward nuclear and alternatives. That shift will accelerate in the coming years. Coal remains a major fuel source, especially in the areas of the world that don’t have easy access to oil and natural gas. But I wouldn’t want much of my portfolio dependent on coal at this point, and you shouldn’t either.

•    Oil and natural gas. The oil and natural gas sectors have already taken it on the chin this year, as vast investment in production has resulted in historically low prices. They’ll rebound, and I’d take a close look at some of this sector’s stocks as value investments today. Natural gas is especially interesting, as long-term demand is certain to rise as power plants shift from coal to natural gas and the liquefied natural gas (LNG) market grows over the next several years. However, the COP21 agreement almost certainly will include major investments and incentives in renewable energy sources that compete directly with oil and natural gas, and that’s not good news for companies in the fossil fuel space. Furthermore, it’s hard to see how the world will achieve the kinds of emission reductions that scientists recommend without leaving some oil and gas reserves in the ground, never to be used — which isn’t good for the companies that own them.

•    Paper and packaging. This massive sector operates behind the scenes of almost every consumer-facing and many business-to-business functions — think of everything that comes in a box or on paper. Its long-predicted demise at the hands of the online economy never occurred; in fact, the Amazon-led online retail revolution has produced an even greater need for cardboard boxes! But climate change policies are likely to include restrictions on deforestation in areas like Brazil and Southeast Asia, potentially raising the worldwide cost of wood fiber and pulp, the raw materials used by paper and packaging companies. Long story short, higher commodity prices could constrict profit margins in this sector going forward.

•    Chemicals. Chemical production is essential to the world economy. It’s also a major producer of emissions, both because chemical plants use a lot of energy and because major chemical processes result in carbon and other emissions that contribute to climate change. While the largest global chemical companies are well aware of their emissions footprint and have made investments to mitigate it, the COP21 agreement could result in stricter regulations, particularly in China and India, that raise expenses and lowers profit margins for companies in the sector.

While these industries may struggle to find profitable futures once serious climate change policies have come into effect, there are a few other industries that are positioned to benefit from these same policies. In my next article, I’ll show you the industries that I think could be helped by the promises made at COP21.

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