Five Global Market Impacts of Climate Change

Jeffery Kleintop shares five possible impacts of climate change on the global market:

  1. Advantages for large-cap stocks over small-cap stocks. The marginal cost of adopting climate change initiatives for larger companies is lower than for small to medium-sized firms. The benefits of scale and global sourcing when implementing environmentally friendly packaging, fuels, raw materials, and processes are significant. Larger firms are better able to sustain start-up costs and leverage first-mover brand advantages.
  2. Upward pressure on agricultural commodity prices. While the impact of technology and innovation to spur increased production and high quality yields of crops, produce, and livestock should not be underestimated, food commodity prices may rise, given the added costs of environmentally friendly cultivation. Any changes in weather patterns, water supply issues, or availability of grazing land may also impact supply and lift prices. Rising food prices could have a more negative impact on emerging market economies where food makes up a larger proportion of consumer spending.
  3. Favorable influences for the industrial, information technology, and financial sectors. More stringent environmental standards work as a positive for companies that will be involved in producing more efficient and cleaner industrial equipment and technologies along with alternative energy solutions. Also, investment banks should benefit from new trading markets such as carbon emissions and weather futures.
  4. Negative influences for consumer staples and utilities sectors along with the automobile industry. Higher agricultural input costs for ingredients such as cocoa, almonds, and sugar may negatively affect costs for producers of consumer products. In addition, companies may have to increase spending for environmentally friendly equipment and vehicles. The emerging markets are a key source of growth for beverage companies, but challenges to access clean water supplies may continue to crop up. With the highest proportion of costs attributed to energy of any industry, utilities are the most exposed to changing regulations on greenhouse gases.  Automakers’ efforts to achieve higher standards for fuel efficiency come at a greater cost. In addition, the dominance of U.S. automakers in the larger, less fuel-efficient categories may act as a negative as they cede more market share to the generally smaller, more fuel-efficient vehicles of foreign automakers.
  5. Higher potential inflation. Inflation may result as indirect costs formerly borne by the environment become incorporated into the direct costs of goods and services. The magnitude of rising prices and the offsetting forces are difficult to gauge.  Rising global inflation pressures may be welcome at first, but, if sustained, may act as a negative for all financial assets. Rising inflation tends to be more negative for bonds, high-yielding global sectors of the stock market such as utilities and telecommunications services, and smaller caps.