Thinking Outside the Box


■ We believe the secular growth tailwinds in the climate change sector will provide investors with strong investment opportunities for decades to come.

■ In our opinion, a well-designed climate change strategy can provide investors with a variety of benefits, including diversification, protection from climate risk, inflation protection, and the ability to invest in growthoriented companies at a discount.

■ For those considering fossil fuel divestment, clean energy solutions provide indirect exposure to fossil fuel prices.

■ A climate change strategy can play an important role in a global equity program, real asset program, ESG portfolio, or as climate risk insurance.

Hurricanes, typhoons, droughts, wildfires, and other extreme weather events are causing record damage. Increasingly, climate change is impacting the economy and our daily lives and has come into focus as an existential threat to the world as we know it.1 We are rapidly approaching a time when the world will be forced to act aggressively in an attempt to overcome decades of inaction. As return-oriented investors, we see this effort providing the backdrop for decades of secular growth in the climate change sector, along with the potential for strong returns.2

Beyond strong returns, we believe a climate change strategy (for our purposes, a strategy investing in the sector) may offer other significant benefits as well. We expect these to include diversification, protection from climate risk, inflation protection, and the potential to buy growth-oriented companies at a discount. However, excitement about these desirable characteristics can be tempered by uncertainty regarding how to position a climate change strategy in the context of a broader portfolio. In this paper, we will explore these benefits in more detail and also discuss how such a strategy may fit into an investment portfolio.

Expected Benefits of a Climate Change Strategy
In our 2017 paper, we made the case that the climate change sector will experience decades of secular growth. The global energy infrastructure is incredibly vast and complex and has been built up over more than 150 years. Transitioning to clean energy will take a tremendous amount of investment and time. Many trillions of dollars will be needed to decarbonize the economy and overhaul our energy grids. Experts project investments in renewables alone to approach $2 trillion per year by 2050.3

We also made the case that the climate change sector is likely to be relatively inefficient with opportunities to add significant value. Given the secular growth tailwinds and the inefficiencies to be exploited, we believe that investors who do a good job of identifying the winners in the fight against climate change will be handsomely rewarded. In addition to strong returns, we have other expectations for a climate change strategy that are worth considering, as they will better allow us to think about how such a strategy might fit into a broader portfolio.