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Will Global Warming Also Heat Up Markets? Or Should We Prepare For A Hellacious Downside?

Will Global Warming Also Heat Up Markets? Or Should We Prepare For A Hellacious Downside?

April 18, 2022

The news is in. And it’s alarming.


According to the world’s foremost forum on international relations, global warming is dangerously close to spiraling out of control. They’re even calling it a “Code red” level event.


The United Nations released a statement recently, declaring that “Climate change is widespread, rapid, and intensifying, and some trends are now irreversible, at least during the present time frame”, according to the latest much-anticipated Intergovernmental Panel on Climate Change (IPCC) report, released on Monday.


This, of course, begs many questions. Ones such as:


1.) Just how irreversible are we talking about here?

2.) Just how long is this time frame?

3.) What sorts of measures are proposed?

4.) What solutions are in place, or are currently developing?

5.) Also, just how bad will the climate change be?


If you’ll allow us to suggest you put aside skepticism (for a moment, at least), and just consider the United Nations a bastion of goodwill toward humanity – and a gatekeeper of your better future – this is by no means something to be taken lightly.


So, while scientists, climatologists, bureaucrats and other assorted experts quibble over the details, timelines and management of tackling this problem, the financial world lies in wait, determining how to react.


Interestingly enough, as the prime drivers of the economic growth that caused this dilemma (and could hopefully fix it), the world’s CEOs, financiers and central bankers certainly have massive forces to reckon with, the least of which being, “Are we beginning to see this as opportunity? Or are we girding for impact?”


So, what might this mean for the above-average investor like yourself?

a.) There are many ways that might trickle down individually. Some are predictable. Some aren’t.

b.) Macroeconomic forces themselves could swing either way. Sometimes both.


If that sounds a little wishy-washy, you’ll have to excuse us. Unfortunately, we can’t predict the future. But we can trust the science. And go where the money flows.


 So first, let’s look at the downside:




“Simple” Weather Events:


One of the hallmarks of climate change is the belief that our world will experience greater bursts of erratic weather events, such as tornados, hail, etc.  Simply put, it won’t always be hotter. But the weather will get weirder. Which means worsening blizzards in some areas, hurricanes which strike in areas not typically accust


It’s predicted that a larger portion of the world’s already-growing population will be exposed to events that damage properties. As this happens, it could have a ripple effect on the financial system at large.


“In the case of a severe flood, for instance, a mortgage owner might lose the house and not be able to repay the full amount to the bank,” says CNBC.


“When this happens to a wider group of people, then banks might struggle because their capital levels would become more limited.”


As a result, lenders might decide to cut the number of loans they provide, triggering a credit crisis – or worse.


The Impact Of Moving To A Low-Carbon Economy:


There can be a bright side, even in the downside: The old-guard, natural-resource dependent energy companies and legacy manufacturers which powered growth in the 19th or 20th centuries will likely have an ultimatum: change or die.


The other side of that? Rest assured, these industries won’t fade quietly into the night. After all, as sensible consumers, we’ll look to power our automobiles and homes with reliable energy for as long as feasible. 


The main problem with this massive shift, as we move toward green energies, is that industries which are in areas of high intensity become less valuable. Think of the impacts to the S&P 500 if suddenly Chevron, Exxon and BP were to suddenly decline in profitability.


The Economist asks, “Could climate change trigger a financial crisis?” And while the esteemed publication offers no real hypothesis or consensus within the article, they do state  that, “The clearer governments are about emissions reduction, the less likely financial turbulence becomes.”


Destabilizing The U.S. Financial System:


There’s one big trend that’s emerging: Both big business (typically right-leaning) and progressive causes (typically left-leaning) are starting to see eye-to-eye on climate change and its impact.


Recently, the Commodity Futures Trading Commission (assumed right-leaning) last year published a 200-page report beginning “Climate change poses a major risk to the stability of the us financial system.”


And the Center For American Prograss recently published a piece claiing that “Climate Change Threatens The Stability Of The Financial System”. In it, they quote statistics which estimate that up to a full one-third of all equity and fixed income assets are tied to carbon-sensitive industries.

Both political persuasions agree that the revaluation of these assets would place losses on the investors and financial intermediaries holding them, and a price shock could ripple across financial systems as investors offload assets as low prices. Simply put, an ensuing chaos would happen if the carbon-price bubble were to burst, and would precipitate large-scale financial instability.


The Upside:


If you’re still reading, you now know that if the transition to a low carbon society happens without too much preparation, this could cause a shock to financial markets.


But as with any bear market, there are always strategies and opportunities – especially regarding green companies.


Emerging Fields, Emerging Markets, Emerging Alpha:


Seeing as low-carbon emissions will (likely) be the goalposts by which a new green societal paradigm is measured, many investment firms will play a key role in enabling the low-carbon energy transition.


These firms will put focus toward energy transition solutions, products and services that can support an increased demand for low emissions products, emissions monitoring and measurement solutions, as well as low-carbon energy technology and services.


The opportunities will be manyfold -- a variety of financial instruments can be used to provide climate finance from green bonds to direct project-based loans to direct investments in energy or technology providers. 


SRI and ESG investing


The good news is that many of the companies and opportunities above fall in line with SRI and ESG principles.


As experts in SRI and ESG investing, the professionals at Signet Wealth can help you better align your investing tastes, tolerances and goals with the specter of a newer, carbon-neutral green future.


How Signet Can Help:


What’s our main takeaway from this article? That trend-driven and hotly-contested ideas or strategies should always be talked over with a qualified investment professional – one who specializes in impact investing, as well as a wide range of investment specialties. To begin developing and implementing your impact investing strategy, contact us today.


At Signet, it’s our mission to provide investment resources and strategies to clients and financial institutions, helping them develop a greater knowledge and passion for sustainable, responsible and impact investments.


Let us help you find your mark with our experience.


Fine Print:


The return may be lower than if the adviser made decisions based solely on investment considerations. All investing involves risk, including loss of principal. No strategy assures success, or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.)




Source 1.) “IPCC report: ‘Code red’ for human driven global heating, warns UN chief” – UNITED NATIONS   

Source 2.) “Could climate change trigger a financial crisis”— ECONOMIST

Source 3.) “Why Climate Change Is A Risk To Financial Markets – CNBC

Source 4.) “Climate Change Threatens the Stability of the Financial System” – Center for American Progress  

Source 5.) “The trillion dollar climate finance challenge (and opportunity)” – United Nations