Climate change has the potential to affect the environment and the stock market. Although climate change’s influence hasn’t strongly materialized yet, it will impact the GDP sooner or later.
As climate policies and technology shift toward sustainability, markets will likely shift to favor new assets over environmentally harmful assets.
Climate Change, News Coverage, and Market Trends
Some influence is already visible. Environmentally friendly or “green” stocks have grown in performance. Although they represent a significant portion of managed assets, large returns aren’t usually expected.
Research shows that spikes in news coverage about climate concerns drive up green stock prices. And the greener the stock, the higher the return. Without climate-concerned news, green stock prices had negative returns but maintained high performance.
Shifts Toward a Lower Emissions Stock Market
Investors should anticipate stricter sustainability regulations imposed on firms, favoring green assets over brown (unsustainable) assets. These policies will filter down to the financial markets.
Certain industries may have to adopt greener policies to gain access to international markets. Although this makes them more sustainable, they’ll join other green stocks and likely give lower returns for higher prices.
Industries That May Suffer
Technology and policy changes will trickle into the market. In combination with shifting investor preferences, some industries will likely be hurt.
For instance, coal and gas assets become less valuable as they’re faced with stricter regulations and energy preferences shift toward electricity.
These changes will also lead to write-downs and devaluing of other brown assets, affecting industries like automotive, industrial agriculture, and oil.
Which Assets Can Benefit?
Technologies like electric vehicles are cost-competitive to fossil fuel assets. Markets expect continued growth over time with already established preferences, meaning that large returns for such technologies might be in the past.
Other technologies may continue to grow, such as those that aren’t cost-effective yet or are still speculative concepts. These technologies will provide solutions for mass travel and cargo transportation or work to offset existing environmental impacts.
As policies and technologies advance toward a greener world, the stock market will reflect these changes. Investors might already see a premium (“greenium”) price for green stocks but lower returns, with this potentially increasing in the future.
However, early technologies may still offer larger returns. If policies impose regulations forcing industries to go green, investors will inevitably need to strategically choose from green stocks.