In the wake of Hurricane Sandy's path lay fallen trees, defunct transformers, submerged public transit, and scientists more heartened than ever to explain the consequences of climate change. Typically, investors have shrugged off most environmental concerns unless it meant billion-dollar lawsuits, and even then, some companies have, admirably or not, done the best they could to protect shareholder value over any other concerns. However, now's the time to heed warnings, get ahead of the market's turn toward more sustainable practices, and shelter your portfolio from extreme weather.
No one weather event
As the debate over global warming and then climate change has developed over the years, it's clear that a majority of scientists believe humans are responsible for changing the climate, yet public opinion still believes there's a significant disagreement. According to a Yale and George Mason University survey, "only 39% of the public believes that most scientists agree on global warming." But from another George Mason survey, only 5% of scientists "disagreed with the idea that human activity is a significant cause of global warming."
Additionally, it's difficult to attribute one single weather event to climate change because of the complexity of climate science. However, Scientific American does an excellent job of summarizing how Hurricane Sandy strengthened due to Arctic sea ice melting:
[Hurricane Sandy] got even larger when a cold Jet Stream made a sharp dip southward from Canada down into the eastern U.S. [which] added energy to the atmosphere and therefore to Sandy ...
The atmospheric pattern that sent the Jet Stream south is ... a big pressure center stuck over the very northern Atlantic Ocean and southern Arctic Ocean. And what led to that? A climate phenomenon called the North Atlantic Oscillation (NAO) -- essentially, the state of atmospheric pressure in that region. This state can be positive or negative, and it had changed from positive to negative two weeks before Sandy arrived. The climate kicker? Recent research by ... climate scientists has shown that as more Arctic sea ice melts in the summer -- because of global warming -- the NAO is more likely to be negative during the autumn and winter. A negative NAO makes the Jet Stream more likely to move in a big, wavy pattern across the U.S., Canada and the Atlantic, causing the kind of big southward dip that occurred during Sandy.
Waiting for the consequences
With our mental biases that mean we must take repeated hits on the head for something to register, we may not have taken Al Gore's An Inconvenient Truth seriously back in 2006. The thought of New York City's subways flooding seemed alarmist, like something that the guy screaming about the apocalypse on the corner of the street would shout. And even with one or two odd storms, and major droughts, we may not put the pieces together. But as these weather patterns become more extreme, the public and the market will take notice, and favor the companies that are shielded from environmental risk and regulation.
Those with plenty of exposure to such events, insurance agencies, have already taken notice. After a study by Munich Reinsurance that found North America to be most affected by extreme weather events, a board member said: "In order to realize a sustainable model of insurance, it is crucially important for us as risk managers to learn about this risk of change and find improved solutions for adaptation, but also mitigation. We should prepare for the weather risk changes that lie ahead, and nowhere more so than in North America."
There are plenty of sectors to avoid, like companies tied to fossil fuels that might come under increased regulation. For example, according to the World Resources Institute, the coal industry is responsible for a third of U.S. greenhouse gas emissions. In March, the Environmental Protection Agency introduced new rules that could block the construction of new coal plants, which would hurt coal miners like Alpha Natural Resources (NYSE: ANR), Arch Coal (NYSE: ACI), and Peabody Energy (OTC:BTU), all of which have underperformed the market since the proposed rules.
As far as potential investments go, Al Gore's own Generation Investment Management's top holdings are health care supplier Henry Schein (NASDAQ:HSIC) and scientific supplier Danaher (NYSE:DHR). Of course, the usual caveats of following the public disclosures from investment funds apply, since the fund may have already sold off these positions.