Invest in climate change stocks

The renewable energy market is already valued at close to $1 trillion globally and is forecast to grow 8% per year over the next decade. Undoubtedly, the green transition is a big-money sector, and you might be wondering how you can “solar-charge” your portfolio to find the best climate change stocks on the market.

What are the best climate change stocks?

No one has a crystal ball, so it’s impossible to say for certain the best climate change stocks to invest in. So, to give you some starting inspiration, these climate-related stocks below are the top constituents in the S&P Global Clean Energy Index. It’s the industry benchmark used for tracking top climate change stocks from developed and emerging markets.

First Solar (FSLR)

Consolidated Edison (ED)

Enphase Energy (ENPH)

Vestas Wind Systems (VWS)

Iberdrola (BE)

SolarEdge Technologies (SEDG)

China Yangtze Power (600900)

Energias de Portugal (EDP)

Chubu Electric Power (9502)

Orsted (ORSTED)

How to invest in these climate change stocks

If you want a simple way to invest in all these top climate change stocks (plus plenty of others), one straightforward way is to invest in an exchange-traded fund (ETF) like the iShares Global Clean Energy UCITS ETF (for example), that aims to track this index.

Compare share dealing accounts to find the right platform for you. Make sure to use a platform with access to international markets or a large ETF selection if you want to invest in top global climate change stocks.

Why do people want to invest in climate change stocks?

First off, let’s consider the ethical angle. The International Panel on Climate Change (IPCC) 2023 report states that human activities are an unequivocal cause of global warming. Don’t want to guilt trip you, but the phrase “made our bed, time to lie in it” comes to mind.

Many investors want to have a positive impact. Understandable right? Buying shares of a renewable energy company won’t directly funnel money into the firm. But it does help create a financial climate where these firms are more likely to flourish like sunflowers in, well, the sun. Investing in climate change stocks can improve the world, and make you richer – well, that’s the idea anyway.

Importance of climate change investing

Demand for a company’s stock pushes up its price, which can indirectly benefit a climate firm in various ways. For instance, it can facilitate the issuance of new shares, make it easier to secure loans to drive growth, or attract valuable partnerships. These advantages can, in turn, provide the company with the resources it needs to innovate and expand its environmentally friendly technologies.

Then there’s the governmental tailwinds. Take the Inflation Reduction Act of 2022 in the US, for example. It’s pumping $500 billion into new spending and tax breaks, with a good chunk aimed at giving clean energy a leg up. Governments are essentially rolling out the green carpet, making it financially attractive to invest in eco-friendly initiatives.

Lastly, the sector is a hotbed of innovation and disruption. It’s still uncertain which technologies will take the lead. For example, will batteries continue to charge ahead, or will hydrogen fuel cells make them run out of juice? This uncertainty means there are potentially huge, albeit unpredictable, rewards for picking the right climate change stocks.

The risks of investing in climate change stocks

Investing in climate change stocks can be successful with favourable winds, but just like real life – it’s hard to forecast whether it will be clouds or blue skies in the stock market. Here are some of the major investing risks with positive, climate-related stocks:

• Politics. Although legislation like the Inflation Reduction Act offers a bright outlook for green technology sectors through generous subsidies, the forecast could turn stormy if political sentiments change. The UK just flipped and U-turned on plenty of policies.
• Monetary policy. The financial landscape can be unpredictable. Recent increases in interest rates from central banks have negatively impacted stocks in the renewable energy sector. Many of these companies have long-term contracts in place to sell their green energy at fixed rates.
• Debt. Climate stocks tend to rely heavily on debt for financing, which becomes a problem in the face of significant rate hikes. As a result, profit margins have been squished like a bald eagle trapped in a wind turbine.
• Inflation. Climate change stocks aren’t immune to the effects of inflation and rising prices either. Transport costs, materials, wages and other business expenses have been skyrocketing. So these stocks get twisted from 2 angles – higher borrowing costs and higher costs to run the businesses.

Despite the billions poured into green initiatives, the sector is not immune to market mood swings. So, before diving in, it’s good to be aware of these varying climate conditions that can impact your green investment.

Bottom line

No matter how you feel about activists in orange T-shirts glued to roads or those throwing Heinz soup at priceless paintings, climate change is happening. Investing in climate change stocks is like British summertime – sometimes sunny, sometimes soggy. On the bright side, you get the chance to make both a financial and ethical impact. Plus, the pace of innovation in this sector is electrifying.

However, the sector is not all sunshine and rainbows for investors. Keep in mind that many renewable energy firms rely heavily on debt to finance growth, which has become more costly with rising interest rates. Also, inflation means higher costs and companies depending on government support are always one election away from seeing that aid get pulled.

The potential for ethical and financial gains makes investing in climate change stocks worth considering for a well-diversified portfolio. Just make sure you’re not overexposed with your stocks blowing in the wind.

Frequently asked questions

• Are renewable energy stocks the only climate change play?

  There are plenty of other companies that could benefit from climate change. As the mercury rises, companies like Comfort Systems (FIX), which keep us cool with air-conditioning services, could see a business boom. And if droughts become more of an issue, companies like Veolia (VIE), experts in turning seawater into drinking water, could make a splash.

• Are environmental stocks a good investment?

  They can be, but it depends on the individual stock and the timeframe you’re looking at. Plenty of positive climate change stocks were flying a few years ago when interest rates and the rate of inflation was lower, but many have been hammered since.

• Could climate change hurt the stock market?

  It’s hard to predict how the stock market will be affected by climate change. According to a study by S&P Global, climate change could erode 4% of global annual economic output by 2050, hitting poorer regions especially hard. That could translate into less revenue and profits for publicly listed companies and as a result, lower stock prices.

  While some companies, particularly in the renewable energy and sustainability sectors, could benefit from a shift toward greener practices, others in industries like fossil fuels and agriculture could face significant losses. The impact is likely to be uneven but substantial, affecting investment portfolios in unpredictable ways.

• Can I invest in climate change stocks in emerging markets?

  Absolutely. While developing markets often focus on primary materials rather than high-value-added sectors like wind turbines or photovoltaic cells, there are exceptions. Take China Yangtze Power, for instance, which manages hydroelectric plants.

  Plus, don’t forget green metals like lithium, cobalt, and copper, often mined in emerging markets. These materials are crucial for renewable technologies. One notable example would be the world’s biggest lithium producer, Sociedad Química y Minera, based in Chile.

To make sure you get accurate and helpful information, this guide has been edited by George Sweeney, DipFA as part of our fact-checking process.