The Good Thing About Climate Change: Opportunities

Executive Summary

  • As climate change has become increasingly problematic for the world, the investment community is starting to pay attention to the investment risks it poses. In this paper, however, we focus on the exciting opportunities in companies involved in combating climate change (i.e., the climate change sector), either through climate change mitigation or helping the world adapt to climate change.
  • As costs have fallen for solar, wind, batteries, etc., we are approaching an inflection point where clean energy solutions will be cheaper than conventional alternatives, even in the absence of subsidies. We believe the improving economics for clean energy combined with a growing global awareness of the magnitude of the problem we’re up against will support secular growth in the climate change sector for decades to come.
  • We think current growth projections are likely to dramatically understate realized growth as the world continues to mobilize to address climate change and costs continue to fall for clean energy solutions.
  • Liquidity, cost, and the ability to diversify are advantages to investing in the climate change sector via the public equity market rather than via private investment.
  • We don’t believe that you have to sacrifice returns in order to invest in companies helping the world address climate change; on the contrary, we believe there will be many opportunities to generate strong returns.
  • Despite strong growth projections, the climate change sector has generally been trading in line with the broad equity market from a valuation perspective.
  • We believe that the climate change sector is likely to be a particularly inefficient sector and that a disciplined value orientation will be key to harvesting strong returns.
  • Though there are risks to investing in the climate change sector, the risks we worry about are the same risks investors face in other sectors: getting caught up in hype and stories, paying the wrong price, and investing in industries with poor competitive dynamics.

Rising oceans and intensifying hurricanes threaten our coastlines, more frequent and severe droughts and floods threaten our food and water supplies, and wildfires threaten our forests and infrastructure. As temperatures have accelerated upward and the deleterious effects of rising temperatures have become more apparent, we’ve become increasingly worried about the impact of climate change on the world. We believe the problems and risks associated with climate change are much worse than the average investor or businessperson realizes.

The challenge in heading off climate change is enormous and has profound investment implications. As Jeremy noted in 2010, “Global warming will be the most important investment issue for the foreseeable future.”1 Climate change poses many risks for investors. Carbon pricing, technological disruption in the energy, automobile and utilities industries, and stranded assets (i.e., the risk that fossil fuel producers will be forced to leave reserves in the ground) are just a few examples of climaterelated threats that loom large and must be considered in constructing a portfolio.

In this paper, however, we focus on climate change-related opportunities. Over the past few years, public policy support combined with the dramatically declining costs of solar, wind, and batteries have spurred unexpectedly strong growth in renewables and electric vehicles. We expect strong secular growth in clean energy efforts to continue in the coming decades and to provide investors with opportunities to invest in companies that both deliver impressive returns and help the world avert the potentially disastrous consequences of climate change. Over the past few years, our research into clean energy, batteries and storage, electric vehicles, energy efficiency, and other clean energy solutions has led us to believe there are tremendous investment opportunities for long-term investors willing to take on shorter-term risk.

The climate change sector
As we think about businesses that stand to benefit from heightened efforts to address climate change, we see business models focused on the mitigation of climate change and the transition to a clean energy world. In addition, we see businesses that will help the world adapt to the impacts of climate change. In aggregate, let’s refer to this as the climate change sector.