Most Important Climate Change Question: How Will Investors React?

Newsrooms and dinner table talk hum with observations about crazy weather patterns and natural disasters from Hurricane Sandy to Philippine typhoons.  Scientists blame rising CO₂ levels caused by human activities, mainly energy production and use, and the greenhouse effect. The energy industry is finger-pointing at the coal sector in a battle over solutions between nuclear energy, clean burning natural gas and natural resources like wind and solar power.  Glowing articles on the “fracking revolution” and the rapid rise of new energy technologies have dominated the financial presses.

Meanwhile, academic institutions and government-funded programs are fueling research on the potential impact of climate change by the end of the century. There are countless studies on the potential impact of rising CO₂ beyond key thresholds calculated by parts per million in our atmosphere (last year CO₂ concentration levels exceeded 400 ppm for the first time in more than 800, 000 years). In the absence of aggressive actions to limit emissions, they are projected to reach about 800 ppm by the end of the century.  The entire world will become much warmer – heat waves, severe forest fires, intense rainfall, and floods will be more common, and sea levels will rise by as much as a meter. The consequence will be both a natural and economic disaster for our entire planet.

Many are asking, what governments around the world will do to avoid such a calamity? Will they ever organize themselves under a Kyoto-style framework to address the problem by putting a price on carbon through either capping and trading emission allowances or imposing a global tax? The question is a good one. But the more important question is, how will investors and businesses respond to limitations on emissions, or even the likelihood of limitations? And how will they respond when they realize climate change itself threatens their operations and future income opportunities?

Let’s look beyond the emergence of the so-called “impact investors” that are gaining steam in every trading market center, investing in renewable energy or sustainable agriculture. Let’s, in fact, dismiss them as just another trendy rebranded phenomenon of socially responsible investing.

Let’s instead focus on the steely-eyed hedge fund trader with one finger on the buy button and one on the sell. Let’s go to the extreme. Imagine the math wizard who graduated from Wharton who trades by day and plays on-line gambling at night just to keep the adrenalin flowing. How will new climate data begin to shape his thinking?