Tackling Climate-Related Risk with Technology

Meanwhile, technological advances and cost declines in renewable power and electric grids, electric vehicles (EVs), ‎LED lighting (see the chart below), and batteries pose a threat to incumbent industries and demand for fossil fuels. Investors burned by the disruption of the shale oil revolution can expect more of the same in the power generation, automotive and energy industries as a result of these advances.

Technological advancements could help investors who are considering the risks of climate change. There’s technology to reduce emissions, carbon capture, and storage (CCS). This technology, although expensive, could help the fossil fuel sector advance further. If enhanced, it could also benefit the energy sector (VDE). In the process, 90% of carbon dioxide (or CO2) emissions produced from industries are captured and then prevented from entering the atmosphere. The CO2 is then treated, transported, and stored in geological storage sites.

Various efforts are being undertaken to spur innovations in technology. These efforts include phasing out energy-inefficient light bulbs and increasing the use of light-emitting diodes (or LEDs). The above graph shows that LED prices have fallen 90% since 2010 with lights now lasting 84% longer. According to forecasts by the U.S. Department of Energy, this will help reduce power consumption from lighting by 40% from 2013–2030.

Clean energy technology, solar power, and wind energy are attractive opportunities for investors in the current environment. Clean-energy ETFs such as the PowerShares WilderHill Clean Energy ETF (PBW), the VanEck Vectors Global Alternative Energy ETF (GEX), and the iShares Global Clean Energy (ICLN) can give investors exposure to the clean energy industry.

In November 2015, 20 major countries committed to an initiative called Mission Innovation to accelerate public and private global clean energy innovation consistent with global climate change. As part of this effort, these countries agreed to double their clean energy research and development (or R&D) spending over five years. These countries account for 75% of global CO2 emissions from electricity. They also account for more than 80% of the world’s clean energy R&D investments.

The focus of this initiative is to provide affordable, clean energy to consumers and development and adoption of renewables. The iShares Global Clean Energy ETF (ICLN), which invests in renewable and clean energy companies such as First Solar (FSLR), Covanta Holding (CVA), and SolarCity (SCTY), could be an option for investors.

We’ll see in the next part what the climate-related regulatory risks are for investors.