For heroic returns, invest in this sector

Exciting opportunities and “heroic” returns are available to investors who focus on the climate change sector, say Lucas White and Jeremy Grantham in a GMO white paper. White is lead portfolio manager for GMO’s climate change strategy, and Grantham is co-founder of GMO and a member of GMO’s asset allocation team.

“The improving economics for clean energy, combined with a growing global awareness of the magnitude of the problem we’re up against, will support secular growth in the climate change sector for decades to come,” says the report.

Read: Tactics for responsible infrastructure investment

The authors concede that investing in the climate change sector requires a lot of homework, since it’s new and poorly understood. But growth projections are likely dramatically understated, they say, as the world continues to address climate change and as the costs continue to fall for clean energy solutions.

White and Grantham define the sector as consisting of businesses that are focused on:

• the mitigation of climate change;
• the transition to clean energy; and
• the adaptation to climate change effects.

Within the sector, public equities offer advantages over private, they add. For instance, “It would be extremely difficult and expensive to pull together a basket of private investments spanning wind, solar, geothermal, smart grid, storage, seeds, fertilizer and water, just to pick a few relevant industries,” says the report.

To make money, investors must focus on individual business fundamentals, understand industry dynamics and pay attention to prices on offer.

“We don’t think it’s enough to invest in the climate change sector and expect things to work out well,” say the authors. “Where there is growth and innovation — and both will surely be in plentiful supply in the climate change sector — there will be hype and hysteria.”

Read: Sustainable ways to offer responsible investing

The risks are the same as investors face in other sectors: you run the risk of paying the wrong price and investing in industries with poor competitive dynamics.

Interestingly, the authors note U.S. President Trump’s decision to withdraw from the Paris Agreement has drawn more attention to climate change. “Cities, states, universities and businesses within the United States have banded together in various forms to commit to meeting, or perhaps exceeding, the […] Paris Agreement” commitment of the U.S.

Referring to U.S. policy, the authors say, “Climate change is a multi-decade problem. In that context, the effects of any one administration’s policies are limited.”

Read the full white paper.

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