Climate change has become a widely discussed issue in the last few decades, with many of us trying to reduce our carbon footprint and protect the planet. Yet, the idea isn’t as new as you might think.
According to the BBC, Swedish chemist Svante Arrhenius published a paper in 1896 describing how burning coal would enhance the “greenhouse effect” – gases in the atmosphere insulating the planet and increasing the surface temperature. However, at the time, Arrhenius believed the greenhouse effect might actually benefit future generations.
It wasn’t until 1938 when a British engineer named Guy Callendar reviewed records from 147 weather stations and found that the planet was heating up, and carbon dioxide concentrations increased over the same period. He concluded that carbon emissions were causing global warming and this could be problematic, but his findings were largely ignored.
Today, we know he was right and climate change is affecting many areas of life. But did you know that it could affect your investments?
As the planet changes, we face new challenges and the economy is adapting too. This could mean that the value of certain investments changes. Fortunately, the battle against climate change might also present new opportunities to grow your wealth.
Read on to learn how climate change might affect your investment portfolio.
97% of those working in financial services believe that climate change will affect investments
As the economy responds to environmental issues, many people working in financial services believe that climate change will have a significant effect on investments.
Indeed, according to FTAdviser, representatives from around 100 leading financial institutions gathered at an event to mark Earth Day on 22 April 2024. When asked whether they thought that uncontrolled climate change would affect their investments, 97% said it would.
Within that group, 50% of people believed that the climate would affect their investments in the next one to five years, while 36% thought that they would see changes in five years or more.
If many financial experts agree that climate change could affect investments, it could be likely that you’ll see changes to your portfolio in the future.
Investments in fossil fuel companies could lose value
Fossil fuels such as coal, oil, and gas currently generate a significant portion of the world’s energy – according to the Environmental and Energy Study Institute, the figure is around 80%.
As a result, the fossil fuel industry is incredibly profitable. The Guardian reports that the world’s five largest listed oil companies earned more than a quarter of a trillion dollars since Russia’s invasion of Ukraine, which caused a spike in energy prices.
This could make fossil fuels an attractive investment. Indeed, the “big five” – BP, Shell, Chevron, ExxonMobil, and TotalEnergies – are expected to pay more than $100 billion (£79 billion) in dividends to shareholders for 2023.
However, reducing our reliance on fossil fuels is one of the key strategies for combating climate change. Additionally, fossil fuels are in limited supply and, according to Infinity Renewables, could run out by 2060 if we continue using them at our current rate.
Consequently, the fossil fuel industry could become less profitable as we increasingly move towards sustainable energy solutions.
That’s why FTAdviser reports that 97% of the representatives at the Earth Day event said it doesn’t make sense to invest in energy companies if they don’t have a plan to transition away from fossil fuels.
Yet, in 2023, PensionsAge revealed that the average UK pension holder invests £3,096 in fossil fuels. Certain managed funds may invest heavily in fossil fuel companies too, even funds that claim to be sustainable.
For example, in 2023, the Guardian reported that environmental, sustainable and governance (ESG) funds that claimed to support green practices invested $1.5 billion in bonds for coal, oil, and gas companies.
This means that you might be more exposed to fossil fuels than you realise. This could affect the value of your investments in coming years if the share price of fossil fuel companies begins to fall.
As such, you may want to review your portfolio so you know what exposure you have to non-sustainable investments.
The “green economy” could create new opportunities for investors
The “green economy” describes companies that aim to reduce environmental risk and achieve sustainable growth. This could include businesses developing renewable energy technology, electric cars, or more sustainable farming practices.
Other businesses that don’t directly contribute to “green” technology but seek to be carbon neutral might also be considered part of the green economy.
As we take steps to combat climate change, the green economy is growing rapidly and this could create new opportunities for investors.
A report from the London Stock Exchange Group (LSEG) revealed that in 2023, the green economy had a total market capitalisation of $6.5 trillion and made up almost 10% of all listed equities.
If we consider the green economy as a standalone sector, it would be the fourth largest in the global economy behind tech, industrial goods and services, and healthcare.
Additionally, the green economy may be likely to keep growing. The LSEG estimates that to achieve net zero by 2050, we’d need to collectively invest $109 to $275 trillion in the green economy.
This would mean that around 20% of revenue from listed equities would be “green”, making the green economy the largest sector.
So, although climate change could affect the value of certain investments – particularly fossil fuels – in the short- to medium-term, other opportunities may emerge from the rapid expansion of the green economy.
Get in touch
If you want to revisit your investment portfolio and explore sustainable options, we can guide you.
Please get in touch to find out how our team of VouchedFor Top Rated planners could help today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.