Like many in the American West, Arizona’s Sen. Mark Kelly is worried about Lake Mead.
The lake on the Arizona-Nevada border has the capacity to hold more water than any other reservoir in the U.S., but it’s far from full. Last year it fell to its lowest level since it was filled in the 1930s amid a historic drought exacerbated by a warming climate and a swelling population demanding ever more water.
“Lake Mead supplies nearly 25 million people with water,” Kelly said recently in a March tweet featuring NASA photos that show a drastic reduction in the lake’s shoreline from 2000 to 2022. “It’s one of the largest reservoirs in the U.S., and climate change and overuse have taken a toll on it.”
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“Massive amounts of capital are moving toward innovations and infrastructure that support the transition to a low-carbon and sustainable world,” says Kelly Hagg, head of responsible investing strategy and solutions at asset manager Nuveen
The problem is hardly localized to the American West. As climate change coincides with population growth around the world, experts expect that natural resources — especially water and agriculturally productive land — will become more scarce.
“Extreme weather events as a result of an increased global temperature cause much of the problems with resource scarcity,” says Vincent Dessale, chief operating officer of Nexans, a cable technologies and services company involved in the burgeoning U.S. offshore wind farm industry. “Droughts and floods can reduce overall potable water supply, rising temperatures can causes problems with agricultural supply, and increased storms can put supply chains into gridlock.”
That poses huge risks for both people and companies. But it also provides opportunities for businesses working to solve problems such as water and food scarcity, create renewable energy, make low-carbon alternatives to all sorts of industrial processes and products, and even remove planet-warming gases from the atmosphere.
For investors, that means adjusting portfolios to reduce exposure to stocks of companies that have the most risk from climate change and adding equities of companies that stand to profit from fighting global warming.
“Massive amounts of capital are moving toward innovations and infrastructure that support the transition to a low-carbon and sustainable world,” says Kelly Hagg, head of responsible investing strategy and solutions at asset manager Nuveen. “The conversation needs to move from how climate change is a risk factor in an investment to how we ‘scarcity proof’ a portfolio for the long term.”
Here are five major investing themes related to climate change and ways to get exposure to them through the stock market:
— Water
— Food
— Green metals
— Renewable energy
— Carbon capture
SEE: 7 Best Water Stocks and ETFs to Buy.
Water
Water scarcity may be the single biggest natural resources risk posed by climate change, and there are plenty of companies trying to do something about that.
There are multiple ways to invest in water, including through utilities, metering, infrastructure and desalination companies, says Peter Klein, chief investment officer with wealth management firm Aline Wealth, who has managed a water portfolio there for more than 15 years.
One niche that will become increasingly important is water recycling, and one company that stands to profit from the combination of increased need for water recycling and population growth is Global Water Resources Inc. (ticker: GWRS).
The company owns and operates 29 systems that provide water, wastewater and recycled water services in corridors around metropolitan Phoenix, a region that has above-average population growth.
For those who prefer a one-stop shop instead of picking individual water stocks, ETFs offer a diversified way to play the broader water trend — as well as other climate change and resource scarcity themes — in a single holding. The downside to that diversification is that ETFs probably won’t perform as well as the stock of an outperforming company.
One option is Invesco Water Resources ETF (PHO), which tracks U.S. exchange-listed companies that create products designed to conserve and purify water for homes, businesses and industries.
Another is First Trust Water ETF (FIW), which tracks an index of companies that derive a substantial portion of their sales from the potable water and wastewater industries.
Food
Without water, farmers can’t grow crops and ranchers can’t raise livestock. Climate change both exacerbates drought as well as floods, both of which are problematic for the supply of water for agriculture. Land area is also an issue, as a warming planet can mean changes in farmable land.
“Climate change can lead to phenomena like altered precipitation patterns, such as droughts,” says Riggs Eckelberry, CEO of OriginClear, a clean water innovation hub. “This then leads to water scarcity as we’ve seen in places like Lake Mead, which is vital to the livelihoods of many. Likewise, floods can also pollute our water supply and cause similar issues. These then impact agriculture and our food supply — it’s a domino effect.”
Beyond Meat Inc. (BYND) — which makes plant-based alternatives to burgers and sausages — offers a food solution to both the land area and water issues. Production of its Beyond Burger uses 99% less water and 93% less land than it takes to produce a beef burger, according to a University of Michigan study commissioned by the company.
One ETF investing in the global food systems transformation is the VegTech Plant-Based Innovation & Climate ETF (EATV), which counts Beyond Meat as one of its holdings. It’s an actively managed fund that, depending on its holdings, may offer exposure to indoor vertical farming, cell-based agriculture and plant-based food companies.
Another offering is the VanEck Future of Food ETF (YUMY), which invests in agri-food technology and innovation companies involved in new environmentally sustainable agriculture and food products and services.
Related: 7 Best Socially Responsible Funds
Green Metals
Electrification — or replacing fossil fuel-dependent technologies with ones that run on electricity that can be made from renewable energy — is a key pillar of the energy transition.
And that relies on metals mined from the ground, such as lithium, copper, aluminum and rare earth elements. They’re needed for the wind turbines and solar panels that create renewable energy, the wiring to connect that production to the grid and the batteries that power electric vehicles.
“Copper is the most crucial resource in the energy transition,” says Dessale. “Without copper, we have no electronics or cables to deliver electricity. Couple increased demand with an electrical infrastructure in serious need of repair and/or replacement, and we have a supply problem with a detrimental impact on the transition to sustainable energy.”
High demand for copper will benefit Freeport-McMoRan Inc. (FCX), one of the biggest copper-mining companies in the world. To avoid some of the risk that comes with investing in just one company, investors can consider the Global X Copper Miners ETF (COPX) and United States Copper Index ETF (CPER).
Copper isn’t the only metal that will see high demand as the energy transition matures.
“Overall, there will need to be an increased supply of lithium and rare earths for electric cars and for the storage of intermittent electricity produced by wind and solar energy installations,” says Andrew Benedek, CEO of Anaergia Inc. (ANRGF), a Canadian company that coverts organic waste into renewable fuel, recycled water and fertilizer.
Amid the growing demand for lithium, Livent Corp. (LTHM), a leading producer, is working to build up its capacity, saying it expects expansions to drive sales volumes 20% higher in 2023.
On the fund side, the Global X Lithium & Battery Tech ETF (LIT) invests in a broad array of lithium products and services, such as mining, refining, distribution and sales.
“The world’s attention on electric alternatives has increased the demand for copper, aluminum and a host of other ‘green metals’ at the very time when supplies are constrained,” Klein says. “In order to electrify the world, to make improvements to the grid for more efficient transmission of electric power — in addition to the electric vehicle charging stations buildout — more metals are needed, and not soon enough.”
Renewable Energy
“In the next five to 10 years the world will undergo a major and rapid shift in the use of renewable energy, but in the interim we will continue to develop new sources of fossil fuels because we don’t have enough energy today,” says Deborah Brosnan, a climate scientist and environmental risk reduction consultant.
“Demand for renewable energy and low-carbon alternatives will continue to skyrocket for decades to come,” says Sam Adams, CEO at Vert Asset Management
In the U.S., the Inflation Reduction Act has sufficient incentives to help accelerate the transition to renewable energy, she says.
In Europe, the REPowerEU initiative is also a “highly attractive” stimulus package, says Benedek.
With government sentiment behind renewables, established companies already have a leg up on their less experienced competitors.
Among those well-established companies is NextEra Energy Inc. (NEE), the world’s largest renewable energy company. Its regulated utility segment engages primarily in the generation, transmission, distribution and sale of electric energy in Florida. Another segment produces electricity from clean and renewable sources, including wind and solar.
The iShares Global Clean Energy ETF (ICLN) is the biggest clean energy ETF. Investors can also consider the Invesco WilderHill Clean Energy ETF (PBW).
“Demand for renewable energy and low-carbon alternatives will continue to skyrocket for decades to come,” says Sam Adams, CEO at Vert Asset Management, which runs the Vert Global Sustainable Real Estate Fund (VGSRX). “The transition to a low-carbon economy is a massive undertaking, and so the opportunities here are almost limitless.”
READ: 10 Best Energy Stocks to Buy in 2023
Carbon Capture
The world is focusing on limiting the impact of climate change by transitioning from coal, oil and natural gas to renewable energy generation, as well as the electrification of the transportation sector.
But there is an emerging technology to help reduce the amount of planet-warming greenhouse gases in the meantime, and even after the globe transitions to a low-carbon economy.
That technology is called carbon capture, utilization and storage, which is the process of trapping greenhouse gases and sequestering them in ways that won’t affect the atmosphere, or reusing them in industrial processes.
“The advances in carbon capture technology can limit the greenhouse gas emissions which are contributing to climate change, as it will take time to complete much of the transition to cleaner forms of fuel and power across the energy industry,” says Neil Suslak, managing partner at Braemar Energy Ventures, a climate tech venture capital firm.
Oil companies with deep pockets, such as Exxon Mobil Corp. (XOM), are working on direct air capture technology. While they stand to benefit from the trend, they’re hardly carbon capture pure plays.
On the other end are penny stocks that trade well below $5 per share and can be volatile and hard to trade.
One of those that investors may want to consider is Aker Carbon Capture ASA (AKCCF). In addition to its over-the-counter listing, Aker is also listed on the Oslo Stock Exchange.
The company has a relatively long track record in the carbon capture space. It started developing its carbon capture technology in 2005 and launched it commercially in 2009.
“In the next five to 10 years there will be many more companies that are providing returns based particularly on their technologies that reduce greenhouse gas emissions, capture carbon from the air and provide food security,” Brosnan says. “Many of these are still at an early stage, but within the next three to four years leaders will emerge that will go on to be the big companies in these areas.”
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Megatrends: Climate Change and Resource Scarcity originally appeared on usnews.com
