Should Climate Change Affect Your Investment Strategy?

Just about everyone agrees we need to take drastic steps to deal with climate change, but is it smart for investors to put their money where their ethics are? Our “Money” columnist brings up some important questions to consider.

As Canada gets on the climate-change bandwagon, there will be increased costs for some and opportunities for others. Certainly as an investor you need to know how the changes are going to affect the profitability of businesses in Canada as federal and provincial governments work to implement business and social policy (taxes) in order to redirect financial capital toward reduced or carbon-free technologies and clean energy solutions.

Investors have the right to direct their investment capital toward ethically motivated alternative solutions to support climate-change solutions. But they also need to realize the unintended consequences of such actions. This is especially true when you consider the impact of globalization and free trade.

We could debate the merits, costs and benefits of shipping fossil fuels to foreign markets via different conduits, but we need to recognize that in a competitive landscape, the end user will tend to look for the cheapest alternative, not necessarily the most environmentally friendly one. In the long run, how good will our economy and society be if no one chooses to buy our product because we have lost our competitive advantage?

Unfortunately, this change is coming at the worst possible time for Canadians. According to the U.S. Energy Information Administration, we are “one of the world’s five largest energy producers and the principal source of U.S. energy imports.”

The best time to enact economic policy change is when the industry in question is generating maximum profits. Instead, Canadian consumers and corporate Canada will face increased costs (taxes) at a time when GDP and employment growth are at decade lows. So how do investors protect themselves and profit under this scenario?

How green do you want to go?
The solution or strategy will depend upon the degree to which an investor desires to participate in the spectrum of climate-friendly offerings. Do you want to look at low-carbon or clean-energy solutions, or sustainable investment strategies or Socially Responsible Investing? For example, do you want to avoid all oil and gas companies or focus on the lowest carbon players in the sector?

For some, the use of Socially Responsible Investing (SRI) strategies will soothe their consciences and benefit their retirement portfolios simultaneously. Maclean’s and Forbes put out an annual list of the best SR corporations. With the help of a financial adviser, or perhaps on their own, investors could realign their portfolios to include a selection of climate-friendly companies.

Alternatively, investors can construct a portfolio using mutual funds and exchange traded funds (ETFs) that historically have performed favourably against their broad market indexes. For mutual funds, I recommend investors look at IA Clarington’s fund or NEI Ethical American Multi-Strategy.

What is your risk profile?
For passive investors in Canada who want to use ETFs, the list includes the iShares Jantzi Social Index (XEN). For U.S. and international exposure, I recommend that investors go to or for a list and description of SRI ETFs. Cross-border taxation and currency exposure need to be considered, so consult with your accountant before making investment decisions.

For high-net-worth investors and/or those who want to direct their investment capital to specific investment initiatives, the process can start with looking at the individual securities in each of the ETFs and mutual funds in the SRI space. Sophisticated investors who have risk capital can also look at the holdings inside venture-capital funds and perhaps discover next-generation clean-energy solutions.

For example, there’s a Burnaby-based company called General Fusion. As the name implies, this company is working on the ultimate clean-energy (controlled nuclear fusion) alternative. Its cutting-edge technology may still be decades away from commercialization and only available to high-net-worth individuals, but this technology might reward the right investor in the pocketbook and solve a portion of the world’s energy needs.

Another possible private company to consider is Terrestrial Energy in Oakville, Ontario. It is in the process of commercializing Integral Molten Salt Reactor technology. Think of a closed-circuit nuclear fission reactor that could be smaller and safer than today’s conventional nuclear energy facilities.

On March 7, both companies were awarded grants from Sustainable Development Technology Canada (SDTC). According to John Barrett, president and CEO of the Canadian Nuclear Association, “This funding demonstrates that next-generation and advanced-nuclear is both an innovative and strategic asset for Canada in meeting its COP21 targets.”

Compare that to two Canadian power producers (Capital Power and TransAlta Corp) with interests in coal-fired facilities that will phase out their production in the coming years. Not only will it negatively impact their earnings and balance sheets, but job losses will extend to the miners and ancillary service providers. We could be looking at a new generation of ghost towns.

Making critical decisions?
If social and government policies reduce the profitability of businesses and industries that emit higher levels of carbon, or represent a significant cost of raw materials, then over the long term, those companies will suffer. In contrast, SR corporations, clean-energy alternatives and low-carbon players will experience higher profit margins and better access to financial capital.

As I said, there are costs and benefits. Increasing your knowledge is essential as you strive to get the best for you out of your investment portfolio in a way that meets your ethical requirements.