Investing in a changing climate

Graham Smith

Graham Smith - Market Commentator

8 August 2018

Climate change, like most emerging trends, is creating new sets of winners and losers. Any US farmers that took the plunge and substituted wheat for soybeans earlier this year will be among the former.

Soybean prices dropped sharply in June after China, their biggest buyer, confirmed it would apply a 25% tariff to the beans it imports from America1.

However, wheat prices surged to new records in London this week, as a heat wave and lack of rainfall ate into expectations for crop yields across Europe2.

Food producers and brewers worldwide could be about to lose out should the current surge in wheat prices continue. Rising prices stand to endanger their profit margins in the event consumers fail to swallow higher food and drink costs.

Climate change remains a sensitive subject about which not all the experts agree. However, the succession of extreme weather events we have seen over recent years is certainly having an effect on the ways both public and private capital is deployed.

In many cases, technology is being called upon to combat the ill effects of extreme weather events. For example, smart farming techniques involving drones or planes and advanced optical sensing can now be used to remotely monitor the protein levels in wheat crops and maximise yields3.

Increasingly, fund managers may have to factor climate change into their assumptions about the prospects for the companies they invest in. A poor carbon performance or high potential exposure to climate events could have the capacity to endanger a company’s intrinsic worth.

For many businesses, a response to climate change is nothing particularly new; the road is already far travelled. Jaguar Land Rover has already said – surprisingly, perhaps – that all its vehicles will have some element of electric power – from full electric to mild hybrid – by 20204.

Tesla in the US is busily investing in its next generation of electric vehicles, alongside energy storage and solar systems for the home5.

Key to the successful take-up of electric vehicles will be the speed with which battery technologies can be developed. Current lithium-ion batteries, although good, impose severe penalties on users in terms of range.

One current area of research is aimed at metal substituted cobalt oxides, which can be used to reduce the amount of cobalt required in conventional batteries while boosting the available energy per kilogram.

Other potential solutions of the future could include the substitution of batteries with super capacitors or the use of graphene in electronic devices to reduce power requirements. Graphene conducts electricity better at room temperatures than any other material, resulting in less energy being wasted6.

Technology companies have many other important roles to play. Microsoft’s AI for Earth initiative is aiming to root artificial intelligence, machine learning and cloud-based tools into solving climate related problems.

Current applications include monitoring the health of farms in real time; modelling the world’s water supply; and assisting in more accurate climate predictions7.

Industrial drones manufactured by companies like AeroVironment are likely to be in demand for the remote surveying of agricultural lands and disaster sites caused by floods and wildfires.

Then we, as consumers, are making our mark. The global stock of air conditioners is rising rapidly and could pass the one billion mark this year – that’s twice as many as in 20058.

That’s great news for companies such as China’s air conditioning behemoth Gree, as well as large Japanese and Korean makers including Hitachi, LG and Samsung.

Perhaps the most important point here – above these individual instances of responses to climate change – is that the way we view the world and its resources is changing. New terms of reference are more likely than ever to inform the investment decisions we all will make over the years to come.

Microsoft is currently one of the largest holdings in the JPM US Select Fund, a Fidelity Select 50 fund.

Samsung Electronics is a top-10 holding in the Fidelity Emerging Markets Fund while the Janus Henderson Emerging Markets Opportunities Fund has a large position in LG. Both are also Select 50 funds.


1 Bloomberg, 05.07.18
2 Agriland, 05.08.18
3 Smart Farming Conference 2018
4 Jaguar Land Rover, 07.09.17
5 Tesla, August 2018
6 World Economic Forum, 19.07.17
7 Microsoft, July 2018
8 International Energy Agency, 11.08.17

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