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NEW YORK (
TheStreet) -- Global warming. Scientists can't seem to agree on its existence, and politicians can't seem to agree on how to address it. Or if it exists.
Confused? You aren't alone -- especially if you're wondering how the heck climate change can impact upon your stock portfolio. Should global warming even be a factor in your stock-selection process?
Yes, but perhaps not for the reasons you think.
It's all about asking the right questions. When considering climate change's potential impact on stocks, investors might be tempted to ask things like, "Is this company contributing to global warming?" and shun the stock if the answer appears to be yes. Bad stock! It must be punished!
Problem is, this potentially ignores significant opportunities -- carbon emitters could very well be quite profitable, leaving investors who avoid them with big opportunity costs. Compounded over time, this can get long-term growth investors off-track from their goals.
Instead, think about policies -- namely, policies governments might enact in order to fight climate change -- and how they could impact upon firms' profits over the next 12 to 18 months. Carbon taxes, cap and trade, levies on air travel, solar and wind power subsidies and the like create winners and losers globally. For equity investors, the key is identifying whom these measures impact and how, and the opportunities (and risks) that arise. This can be tricky, however.
For example, think about Europe's carbon trading scheme. Every year, the European Commission issues a set number of carbon permits, and companies may purchase and trade them on the open market. When it was launched, the obvious move for investors would have been to avoid companies with high emissions -- they'd have to pay more for more carbon permits, dampening profits.
However, this policy didn't work out as officials intended and the law of unintended consequences took effect. Firms found ways to use carbon more efficiently because the profit motive gave them incentives to find a workable solution to keep margins intact. As a result, carbon prices tanked to the point where they take little bite out of businesses' bottom lines.
Investors who shunned European industrials might have missed some perfectly fine opportunities.