Profiting from Climate Change

Given that Wall Street analysts typically focus on a single company’s performance for a quarter or two, a report that looks at the history of climate for 420,000 years, explains the dry corn milling process that produces ethanol and peeks under the hood to check out the workings of the internal combustion engine is eye-catching, to say the least.

Climatic Consequences, a 120-page report from Citigroup analysts Edward M. Kerschner and Michael Geraghty, ranges far and wide to look at the investment implications of climate change. Kerschner is chief investment officer at Citigroup research, and an influential voice on the street. So this report is a sign that Wall Street, along with Washington, is waking up to the threat of global warming.

That’s significant: If investors begin to calculate what global warming could mean to their stock portfolios, corporate America will take notice—and adapt.

Kerschner and Geraghty clearly believe that climate change is real. They survey the science and reach the Gore-like conclusion that “it would seem that anthropogenic activities that create GHGs are a key cause of variability in the climate system.”

More important, they argue, is the mounting evidence that the world is responding to the threat of global warming:

For investors, the issue is not whether climate change is occurring. Today a variety of entities (governments, regulators, corporations, and individuals) are reacting to the perceived climate change threat, creating a number of near-term opportunities.

Kerschner and Geraghty identify 74 companies across 21 industries, based in 18 countries, that seem “well-positioned to benefit” from the apparent physical implications (warmer weather, droughts, intense hurricanes), likely regulatory implications (carbon regulation or taxes) and growing behavioral implications (companies acting differently) of climate change.

They turn up some of the usual suspects—Honda and Toyota for their energy efficient cars, General Electic for its “clean coal” and ecomagination products, Vestas Wind, the Danish manufacturer of wind turbines, and Archer Daniels Midland for its stake in the fast-growing ethanol markets.

Other companies are not as well known. They point to Aguas de Barcelona, the biggest water company in Spain, which has been experiencing drought, pushing per-capita water consumption to all-time highs. Johnson Controls sells products that improve the thermal efficient of buildings, as well as services that promote energy efficiency.

Some of the stocks they highlight won’t please environmentalists. The Citi analysts are bullish on utilities Constellation Energy, Entergy and Exelon which operate nuclear power plants, which don’t emit carbon dioxide.

Indeed, as they note, activities that limit GHG emissions are not necessarily “green” and cause other environmental problems. Biofuel production, for example, is causing the destruction of tropical forests in Indonesia.
There’s lots more in this report–an analysis of the global state of renewable energy, comments on solar technologies and companies, the impact of climate change on consumer choices (minimal, alas), and the growing impact on business. More than half of companies in one survey, they report, say they have a program in place to reduce GHG emissions, and another 33% said they were developing one. Kerschner and Geraghty say:

“We believe that, as a direct result of pressure from consumers, litigants, and investors, there will, in the next few years, be a “tipping point” in corporate behavior with regard to climate change issues.”

You should be able find a PDF copy of the Citigroup report on the web. (I tried adding a link here, but it’s not working, for some reason. I found my copy at the Pew Climate Center website. If you can’t find a copy, I’ll email you one.) You can watch an interview with Kerschner at thestreet.com website after sitting through a commercial. And thanks to Joel Makower, who called my attention to the report in a blog posting that skewers a foolish Wall Street Journal column about “climate profiteers.”