How Climate Change May Affect Investors

Climate Change

A lot of people are concerned with the effects of climate change, and although this process may seem to be so gradual as to not affect investing, Jeremy Grantham doesn’t think so.

Jeremy Grantham, now in his eighties, has been at this game for a long time, and created one of the world’s first index funds. His fund, GMO, has $118 billion in assets under management, and Grantham is widely regarded as a knowledgeable and esteemed investor.

Grantham’s main focus these days is on how climate change may affect the investment horizon, which is quite interesting on the face of things at least. We may disagree as far as what our contribution to the current warming phase that the world is currently in, but most agree that it is indeed warming and that this will produce future changes that are going to need to be adapted to.

However, from an investing perspective, we would at least think that none of this should be something we should be too concerned about as investors, due to the very slow nature of this warming process. Sure, things might be dramatically different decades from now, where businesses will need to adapt and new opportunities may even emerge, but that’s quite a way off at best.

As investors, we’re much more concerned with right now and what is right before our faces. What happens beyond 2019 even should not really matter much to us, unless we are quite confused and actually think that we are deciding on the future of our investments in 2029 or 2039 right now.

Funds do need to worry about these things more than individual investors do, because funds require a longer-term commitment to their positions due to the sheer size of them. However, this size isn’t so big that adjustments can’t be made fairly efficiently over the longer-term as needed, for instance with exiting sectors that are performing very well now but may not do so well in the future. If they are doing well now, there shouldn’t be much of a reason to bail now if we’re worried about a time far off.

Perhaps we may be able to deal with these changes better as they arise from being more familiar with what might happen in the future and what effect this might have on the companies that we’re concerned about here. It’s always good to have more knowledge and to prepare well.

We already see some pretty big changes over time in the world of business, and all we have to do is look back 20 or 30 years and see how much things have changed. The internet has in itself produced some dramatic changes, and technology will continue to shape our landscape going forward.

We Are Seeing Some Effects of This Already

Grantham does point out that changes from global warming are already having an impact, and we could at least say that changing weather patterns certainly are, regardless of the cause. We’ll have to wait for things like the polar ice caps melting and sea levels rising enough to put some big cities underwater, but things like more rain or more drought are being experienced today.

The risk for farmers has therefore gone up lately, and this does affect the supply of agricultural products, when weather events result in crop losses. This means that we will pay more for food overall, and companies may also sell less of it from the decreased supply and the higher price points.

Spending more on food also means less to spend on other things, and therefore this can affect everything, every company, even though they may be far from the battleground. This in itself really wouldn’t impact our wanting to invest very much though, although it could mean that expected returns may decline at least somewhat as a result.

This really is all about the economy though and not just how a sector will be affected by this change, and therefore we can just look to the economy to tell us what is going on that really matters. It’s been slowing lately, and while global warming hasn’t been the main reason, it does exert at least a little influence.

It doesn’t exert enough though that we should be really worried about this very much right now, and can comfortably look at economic growth and get all the information we really need just from that. We certainly do not want to vault a concern like global warming well beyond its actual scope and this scope is measured in economic growth numbers just like all other influencers are, to the extent that they influence it.

Combatting Global Warming Offers New Opportunities

On the positive side, being aware of how certain companies may benefit from our response to global warming may provide some good opportunities, such as those who whose business is to offer greener technologies. We do need to be careful not to jump the gun here, as these companies do need to show us enough for us to want to actually invest our money in them, as should be the case with all investments.

Grantham is very outspoken on global warming, to the extent that we may even worry about this being a bias in his investment decisions. He rather proudly proclaims how his fund has invested in so many green companies, and while these may indeed be good investments, if our primary goal is to make money, we need to make sure that we are never selecting these just because this gives us a warm and fuzzy feeling.

However, if this is important to us personally, to the extent that we are willing to sacrifice at least some returns to satisfy our personal preferences and build our conscience, that’s another matter. There’s little question, when hearing Grantham speak, that this is the case with him, but if it isn’t for us, that needs to be taken into account.

Make no mistake though, Grantham is a skilled investor, and certainly isn’t casting his stones randomly or without some real justification. He’s one of the people who does beat the market with his fund consistently, albeit by only a little, but this is a world where most fail to do even that.

He also tells us that the market overall looks pretty good right now, and that we should expect positive growth of about 3.5% on average over the next 20 years. This is well off the normal 6-7% that we’ve been used to, and seems to be a reasonable prediction given the level of global economic saturation we have which makes economies harder to grow at the same rate.

We do need to be aware of how global warming will continue to effect things, including even our investments depending on what we’re invested in. We also may be in a period which we could call economic cooling, and those who are relying on the level of return on their investments that they have been accustomed to may have to adjust to this as well.



Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.

Contact Monica: [email protected]

Topics of interest: News & updates from the Office of the Comptroller of the Currency, Forex, Bullion, Taxation & more.