There is big money to be made while fighting climate change

• A new white paper lists out reasons why investors should invest in fighting climate change.
• Early birds will not only make big money, the investments will also limit the damage from natural disasters.
• For example, investments in renewable energy alone is likely to hit $2 trillion by 2050: GMO.

The threat of climate change is real whether one believes in it or not. The actual choice is whether you want to invest in battling hurricanes, typhoons, droughts, and wildfires or to invest in averting such tragedies in the future.

Battling climate change has emerged as a sector to invest in. "We see this effort providing the backdrop for decades of secular growth in the climate change sector, along with the potential for strong returns," a recent white paper from the asset management firm GMO said.

According to the authors, GMO's founder Jeremy Grantham and Lucas White, the portfolio manager for the Climate Change and Resources Strategies, investments in renewable energy alone to approach $2 trillion per year by 2050. "Transitioning to clean energy will take a tremendous amount of investment and time. Many trillions of dollars will be needed to decarbonize the economy and overhaul our energy grids," the report said.

India, for instance, has pushed for more investments in renewable energy last couple of years.

There are three reasons why it is wise to invest in companies that are working to limit the impact of climate change.

Protection: On the one hand, there are tangible losses from natural disasters due to climate change that can severely damage economies and the value of investments. On the other hand, as more countries move towards sustainability, there is an additional risk of more taxes on fossil fuels and regulatory curbs to force traditional businesses to reduce carbon footprint. Investing in companies working on renewable energy can offer protection in such cases.

Diversification: However, the returns in these investments will not correlated to broader economic growth and consumption. As the GMO paper puts it, "expect to see periods where a climate change strategy performs well in a weak market and vice versa."

Early mover advantage: The early bird has a better chance of catching the worm. The key is to identify companies in the 'climate change sector' that are undervalued, according to GMO. "Since inception in April 2017, the earnings growth of the GMO Climate Change Strategy has been higher than the MSCI All Country World Index (ACWI)
while consistently trading at a 15-20% discount to ACWI," the paper said.

The MSCI ACWI "represents the Modern Index Strategy and captures all sources of equity returns in 23 developed and 24 emerging markets." It's an index of stocks around the world whose cumulative performance reflect the way global share markets have performed in any given period of time.

Hedge against inflation: When oil prices rise, clean energy becomes more competitive. "When oil spiked to $150 per barrel and coal and natural gas prices also soared. Solar and wind companies performed extremely well leading up to the peak in fossil fuel prices," according to GMO.

The flip side
However, when fossil fuel prices crash like they did in the years after 2015, alternative energy companies suffer too. Electric vehicle sales slump when driving petrol cars become cheaper.

Moreover, GMO, clean energy relies on materials too just like the traditional energy infrastructure. Instead of oil, coal, and natural gas, clean energy companies need copper, lithium, nickel, cobalt etc. While it limits the impact of the battle against climate change, money managers invested in sustainability the exposure to these alternate materials can act as a buffer.

SEE ALSO:
Here's where India stands on climate change.