Investors, corporations and governments’ discussion are focused not only around climate change issues such as regulatory risk and stranded assets in portfolios -but also opportunities- as well as how best to tackle the challenges.
“Even if you are sceptical of global warming and its causes, no one should ignore that significant regulatory, economic and technological factors make this a major investment issue,” said Ewen Cameron Watt, chief investment strategist at BlackRock earlier this month. “These profound changes have the potential to affect asset prices in all areas for a long time to come,” he added.
But some investors point out the difference between the upcoming summit’s short term and long term impacts. “While there is unlikely to be a direct impact from the Paris Climate Conference on the renewables market in the short term, more significant is the potential for a shift in investor sentiment if talks yield a legally binding agreement on climate change,” said Roberto Cominotto, investment director at GAM.
The long term developments point towards businesses providing energy efficient technology for reducing emissions, although it might take some time. “Electric vehicles have had a slow start and will only accelerate towards a mass market by putting in place additional incentives to change consumer behaviour,” said Cominotto.
In addition, investor sentiment is expected to continue to shift away from the traditional energy sector. “We have recently increased our exposure to North American shale oil and gas producers, who we believe are set to benefit over the next twelve months from lower costs and predictions that the oil price will rise,” he said, adding: “We favour mid-cap stocks in this arena with low production costs, robust balance sheets, and the ability to grow production even at oil prices well below 60 USD.” Examples, he says, include Diamondback Energy, Memorial Resource Development and Whitecap Resources.
However, Malcolm Keay, senior research fellow at Oxford Institute for Energy Studies, doubts the summit’s influence on investor sentiment completely. “[The] short answer is that it probably won’t have all that much impact,” he said.
Keay continued: “We already know the main inputs (ie the self-imposed targets of the US, China and the EU). One outstanding question is what the formal framework will look like. It’s likely to be process-focused (ie based on regular reviews) so it will take time to see whether it has any effect in practice. The other question is how much money the rich countries will pledge for decarbonisation in the developing world but again it’s difficult to see how solid the pledges are until after the event – headlines often conceal a lack of substance.”
