What Stock Investors Should Do About Global Warming

By Fisher Investments

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.

Or consider solar. Just four years ago, solar was all the rage, the answer to global warming. Administrations globally were subsidizing the heck out of solar firms, and to many they likely appeared to be can't-miss investments. They were the future!

Except they weren't -- not yet, anyway. As typically happens when governments subsidize an industry, the market got out of whack. Supply became overabundant, but demand stayed low. It turned out people didn't have much interest in inefficient, often unreliable power sources. What solar panels firms did sell fetched bargain-basement prices, thanks to subsidies and supply gluts, killing margins. Then, when governments started pulling the plug on their investments, some firms went belly-up. Investors who went hog-wild for solar likely lost out.

What policies should investors consider today? Australia's carbon tax is one -- though perhaps not for long, since new Prime Minister Tony Abbott has pledged to kill it. Hydraulic fracturing bans and approvals are another. Natural gas is generally cleaner to burn than coal, so it should be a winner as the global warming battle intensifies, but environmental concerns over the extraction process are holding it up. Companies with access to areas with drillable shale deposits probably fare best (though may not be surefire winners right now, depending on natural gas prices in a given area). Nuclear providers, too, could get a lift if anti-nuke sentiment continues easing and more new plants are green-lit.

Global warming isn't unique in its ability to impact upon stocks through related policies. Any number of issues can inspire legislative change, and those changes can create opportunities in some areas and risks in others.

Policies matter for stocks, and that's something investors should always remember.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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