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Climate Change Is Coming: How to Prepare Your Portfolio

The topic of climate change has become extremely politicized, despite the data clearly pointing to rising air and water temperatures and increased severe storm activity. As investors, something like climate change can't be looked at through a political or emotional lens; it has to be looked at objectively. Depending on where you're investing, climate change is either a grave threat or a massive opportunity for your investment. 

In light of the devastating hurricanes that have hit the Caribbean and Southern U.S. already this year, one devastating Puerto Rico and leaving its infrastructure in shambles, I think it's about time investors consider how their portfolios are prepared for climate change. It could have a bigger impact on your finances than you think. 

Image source: Getty Images.

Understanding the risk of climate change

As temperatures and weather events change, different businesses will see different impacts. For example, Arctic Cat and Polaris (NYSE: PII) have seen snowmobile sales plunge as winters in the northern half of the U.S. and Canada have gotten warmer. In Minnesota, where both companies are headquartered, winters have gotten significantly shorter over the last three decades and shorter winters mean fewer snowmobile sales. 

Insurance companies have already started adjusting premiums to account for climate change risk. A few years ago, Frank Nutter, president of the Reinsurance Association of America, said, "It is clear that global warming could bankrupt the industry." 

Insurance companies are in the business of pricing risk and they don't want to be on the hook for billions in losses when a hurricane or wildfire sweeps through a major city. They know climate change is a risk they have to account for. 

Real estate is another industry that could be affected by climate change adversely. According to REITs Across America, there are $112.8 billion in REIT assets in Florida, behind only California, Texas, and New York nationally. The city of Miami is already spending $100 million to update roads and adjust sewer systems so the city doesn't continue to flood during high tides. If predictions of rising sea levels continue to come true it could sink a lot of real estate held by public companies. 

Even a company like Disney (NYSE: DIS) is reliant on Disney World in the high-risk state of Florida for a significant percentage of revenue. More frequent hurricanes and rising water levels in the state could put the resort at a lot of risk long-term. 

Understanding the policy risk of climate change

National policies are also changing based on climate change. One of this year's trends that I don't think is getting enough attention is countries around the world discussing the end of gasoline-powered vehicle sales. France, the U.K., and China have all discussed or put goals in place to end sales of gasoline-powered vehicle, pushing for electric vehicles instead. This could put billions of dollars of oil company revenue in danger if demand for oil falls. 

The supply glut that led oil prices to fall from over $100 per barrel to $30 per barrel a couple of years ago was only about 2% oversupply annually. Imagine if half of the world's new cars each year are EVs a decade from now. The oil markets could collapse up and down the energy industry. We're already seeing a similar impact on coal, where climate change has led many governments to impose regulations intended to reduce emissions. That's made coal uneconomical for use in the U.S., and even developing economies like China and India are clamping down on coal use. 

Industries that contribute to climate change will only see more pressure in coming years as large nations put policies in place to reduce the impact of climate change on their populations. And for a lot of companies, that could mean a paradigm shift in how they do business. 

Image source: Getty Images.

Opportunities climate change presents

There are plenty of companies with upside from likely responses to climate change. EVs, wind, and solar energy are all booming around the world and plenty of companies are growing along with them. Tesla (NASDAQ: TSLA) is the name that comes to mind first, pushing EVs, energy storage, and solar forward with its grand ambitions. First Solar (NASDAQ: FSLR) and SunPower (NASDAQ: SPWR) have actually installed more solar, reducing greenhouse gas emissions in the electricity sector. But all three companies will see a tailwind from climate change response. 

If climate change floods poor countries there could be a refugee crisis, leading to the need for more border security. Companies like Raytheon (NYSE: RTN) and Aerovironment (NASDAQ: AVAV) make drones that could be used for surveillance around the world and they've said global upheaval from population displacement could lead to a boost in demand. 

Air conditioners from United Technologies (NYSE: UTX) may also see a tailwind from climate change. At the very least, consumers won't need fewer air conditioners in the future. 

Consider climate change in your portfolio

Climate change is now something investors need to think about when they're investing. Is climate change a headwind or tailwind for a company? Are there rare one-time events that could devastate your investment? Will the changing policy environment around climate change help or hurt a business you own? 

These are questions worth answering as the world grapples with climate change. Investors caught unaware of the impacts of climate change could be in for a world of hurt long-term. 

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Travis Hoium owns shares of AeroVironment, First Solar, and SunPower. The Motley Fool owns shares of and recommends Polaris Industries, Tesla, and Walt Disney. The Motley Fool recommends AeroVironment and First Solar. The Motley Fool has a disclosure policy.