There’s no denying climate change is a dominant subject the world over. And as an investor, you may wonder how it could impact your investments and whether you need to change your investment strategy. We’ve done the digging to understand the link between climate change and the stock market, and how the phenomenon may very well transform long-term investing in the future.
Is there a link between climate change and the stock market?
Neither climate change nor the stock market exist in isolation from one another. In fact, according to experts at the Grantham Research Institute on Climate Change and the Environment, the two are deeply linked because carbon emissions are a direct byproduct of economically valuable activity.
However, despite the obvious connection between the two, it’s worth noting that no-one can predict with absolute certainty how the market will fare from the consequences of climate change.
Scientists speculate about which climate change effects are inevitable and which can still be mitigated, but this is precisely what it is: speculation. Similarly, the stock market is a topic of intense speculation on a daily basis. Put them together and you have an extremely variable situation subject to many outside influences.
That being said, here are some scenarios we could see in the coming years.
How climate change could influence the stock market
Economic ramifications
The Swiss Re Institute predicts that by mid-century, around 10% of the world's economic value will be lost to climate change. As countries are increasingly affected by the changing climate, their gross domestic product (GDP) will fluctuate.
According to various experts , this is down to several factors, including:
- Labour costs and productivity . The human body struggles to perform optimally in temperatures of 35 degrees Celsius and above
- Physical risks . More extreme weather events lead to property, land and infrastructure damage
- Agriculture . A warming climate significantly affects growing seasons globally
- Mitigation strategies . The cost of doing business is higher in a low-carbon economy, and carbon taxes used to combat emissions are an additional financial burden
Looking locally, NSW Treasury projections for Australia show between 700,000 and 2.7 million more days of work being lost to the Australian economy by 2061 due to harsher heatwaves.
Other consequences could include:
- The halving of agricultural output in the Murray-Darling basin area due to extreme weather events by 2050
- Reduction in the value of the Australian property market by $571 billion by 2030 due to extreme weather events
- Risks of energy service failure due to heavy demand for cooling during heatwaves
- Increased premiums for crops, property, health and life insurance
Impacts on individual markets
According to a Schroders Economics Group report , we may see colder markets benefit from a warmer climate. This would be due to economic growth from a potential boost in productivity.
On the other hand, warmer markets will (economically) bear the brunt of a warming world. India is an excellent example of a market already altered by the changing climate. Not only is the nation struggling with extreme heatwaves, but energy-intensive activities are also the subject of a quasi-carbon tax – one of many mitigation strategies that hamper economic activity.
Likewise, markets that rely heavily on carbon-intensive activities to grow and sustain GDP could be hit hard economically as mitigation strategies increasingly come into play.
Other countries, like Australia’s low-lying island nation neighbours in the Pacific, face existential threats due to climate change. It goes without saying that a nation swept away by rising sea levels would have no GDP and wouldn’t contribute to the global economy.
New industries
Many companies are working on ways to mitigate the effects of climate change. One example is Tesla, which is one of the biggest players in the electric car space.
While Tesla is probably the most well-known carbon-alternative stock option, it’s far from alone. Whole industries have cropped up dedicated to finding ways to manage climate change.
Solar technology is a big one, and includes both solar energy production and energy storage. There are also other emerging industries and innovations to invest in, like carbon capture and storage technology, green manufacturing, sustainable packaging, alternative protein sources, and environment-focused artificial intelligence.
The rise of sustainable and ethical investing
Regardless of whether climate change affects the strength of the stock market, it’s certainly shaping the types of investments that Australians are choosing. Increased awareness of the looming impacts of climate change has changed Australians’ appetite for how and where they’re willing to invest.
Australians are increasingly investing in green or sustainable markets according to the RBA’s Head of Domestic Markets, Carl Schwartz, with new strategies like climate-focused investing entering the fold. This kind of investing focuses on shares that actively address climate change and support climate solutions.
Ethical investing (or socially responsible investing) is also on the rise and is especially popular among millennials. In fact, a 2020 report by Betashares found that 28% of investing millennials want more socially responsible investment products.
Socially responsible investing does consider the environment, but it’s about more than divesting from climate-unfriendly activities. It covers individual stocks and funds (including ETFs) that have divested from fossil fuels, weapons manufacturing, military funding and deforestation funding (to name a few). Instead, these funds have opted to invest in socially beneficial areas like healthcare, renewable energy, sustainable food, social housing and the like.
What now?
There’s no denying that climate change will have an impact on stock markets around the world. Exactly what that impact looks like is still fairly unknown. But as an investor, it pays to be prepared for an inevitable shift in the market and what you might choose to invest in.
