A New Climate for Investors

What companies could benefit from the growing consensus to combat global warming? Some pros offer intriguing ideas

by Alex Halperin

Everybody talks about the weather, as the old saying goes, but these days there's a sense of urgency to do something about it. Mild temperatures in the Northern Hemisphere sent oil prices below $50 per barrel and coaxed Washington's cherry trees to bloom in January. On the West Coast, unseasonable freezes wiped out hundreds of millions of dollars' worth of citrus fruit in California. Historic storms hit Europe and the Rocky Mountains.

Environmentalists have long attributed weird weather to climate change caused by accumulating greenhouse gases such as carbon dioxide in the atmosphere. In recent years that view has become increasingly mainstream. It causes "extreme weather events in both directions," says Garvin Jabusch, director of sustainable investing at Sierra Club Mutual Funds. The question for him and other investors is how to profit from efforts to remedy the effect.

Industry Calls for Regulation

President Bush's Jan. 23 State of the Union address called climate change a "serious challenge" (see BusinessWeek.com, 1/24/07, "Salesman in Chief"). One day earlier a group of leaders from industrial giants such as General Electric (GE) and Alcoa (AA) called for greenhouse gas regulations; cars, power plants, and other industrial facilities are all major producers. Climate change is also on the agenda at January's World Economic Forum in Davos, Switzerland (see BusinessWeek.com, 1/23/07, "A Somber Mood at Warmer Davos").

Kevin Trenberth, head of climate analysis at the National Center for Atmospheric Research in Boulder, Colo., says that as a result of greenhouse gas emissions in coming years the southern and western U.S. and other regions of the world are like to encounter "more extremes of drought" and harsher storms and hurricanes, among other phenomena. Events that could be attributed to climate change could affect industries from energy to agriculture to insurance.

Even investors who reject climate change as environmentalist hysterics might want to keep in mind that more and more governments and businesses are operating on the assumption that it's a fact. Many investors will want to tinker with their portfolios to account for new policies that assume climate change is happening (see BusinessWeek, 1/29/07, "Beyond the Green Corporation").

Well-Positioned

"As citizens of the world we should be debating this subject, as investors we should be studying corporate and government behavior," says Citigroup (C) analyst Edward Kerschner. A report that he released Jan. 19 names more than 70 companies positioned to benefit from climate change in coming years.

Companies will likely profit from factors like regulations on greenhouse gas emissions and increasing reliance on alternative fuel. A thematic project, the report looks only at the companies and their potential market opportunities, not at how the stocks are priced. Investors should do their own due diligence.

Kerschner says he believes that some sort of climate change is happening and that regulations of carbon dioxide emissions, in some form, will be implemented. Among the most important is the recently enacted California law that will require automakers to sell lower-emission cars.

"There are a lot of wheels in motion here that don't begin and end at 1600 Pennsylvania Ave.," he says. This is especially true for multinationals, which also face pressures from abroad to conform to stricter emissions standards.

Citigroup Survey

The Citigroup report divides stocks into those with physical, regulatory, and behavioral implications. In the first group are companies whose operations will benefit from the physical results of climate change.