Who Will Benefit the Most From the Paris Agreement?
What the Paris Agreement Means for Investors
The Paris Agreement represents the first comprehensive climate change agreement in the world with nearly 200 countries signing onboard. While the United States famously withdrew support, the agreement could yield many opportunities for international investors across renewable sectors and countries setting the strongest emission goals. Investors may want to consider exposure to these asset classes to improve their long-term risk-adjusted returns.
In this article, we will look at the Paris Agreement, how it’s likely to impact investors, and some investment opportunities to capitalize on the resulting moves.
What Is the Paris Agreement?
The Paris Agreement is the world’s first comprehensive climate agreement between nearly 200 countries designed to mitigate greenhouse gas emissions. The agreement’s stated goal is to hold the increase in global average temperatures to well below 2 degrees Celsius above pre-industrial levels and limit temperature increases to 1.5 degrees Celsius above pre-industrial levels while pursuing policies to address and finance the global warming issue.
Under the agreement, each country determines plans and reports its own efforts to mitigate global warming. There is no mechanism to force a country to set specific targets, but each target should go beyond any previously set targets. The only penalty for non-compliance is a so-called “name and shame”—or “name and encourage”—a system whereby countries that fall out of compliance are called out and encouraged to improve.
Critics of the Paris Agreement argue that the lack of consequences makes the agreement pointless, but supporters insist that the framework is a necessary first step. In 2017, President Donald Trump withdrew the United States from the Paris Agreement, which drew widespread criticism from the European Union and China. But, many states have since stepped in and agreed to implement their own target and progress in lieu of federal laws.
Who Stands to Benefit?
The Paris Agreement may not have any significant consequences for non-compliance, but most analysts see it as a step toward divesting from hydrocarbon assets and investing in renewable assets. For investors, this means that the agreement could set the stage for an increase in renewable investments and a decrease in hydrocarbon investment, which could accelerate the decline in traditional energy and accelerate the adoption of alternative energies.
On a country level, researchers have found that renewable energy tends to create a positive short to medium term relationship with the gross domestic product (GDP). Renewables don’t have a significant impact on trade balances or an import substitution effect, but they do have a significant positive influence on capital formation. In other words, countries embracing renewables tend to draw a lot of investment capital that supports GDP growth.
The long-term impact on renewable energy development is a little less certain, but in theory, the cost of hydrocarbons will increase as the limited supply decreases. Renewable energies, by comparison, have a theoretically unlimited source of energy from the sun, wind, heat, or water sources, which would imply that energy prices would decrease for end users. Lower costs should result in increased profitability and efficiency for end-users.
International investors may want to consider increasing their exposure to renewable energies given the prospects of greater demand. Exchange-traded funds (ETFs) represent the easiest way to purchase these investments since they provide investors with an instantly diversified portfolio.
The most popular global renewable ETFs include:
- Guggenheim Solar ETF (TAN)
- Invesco Cleantech Portfolio ETF (PZD)
- Invesco WilderHill Clean Energy Portfolio ETF (PBW)
- First Trust ISE Global Wind Energy Index Fund (FAN)
- iShares Global Clean Energy ETF (ICLN)
- Van Eck Vectors Global Alternative Energy ETF (GEX)
*Data from ETFdb.com.
Investors may also want to consider investing in countries that are committed to renewable energy goals. After all, these countries could experience an influx of investments that could drive better-than-expected GDP growth. These countries could also benefit over the long-run with lower energy costs relative to hydrocarbons, along with, potentially, decreased political risks stemming from the source of those hydrocarbons.
The Bottom Line
The Paris Agreement marks the first global agreement between nearly 200 countries to establish limits and track greenhouse gas emissions to keep them below acceptable levels. While the agreement has sparked some criticism, the move could help accelerate investment into renewable energies and create opportunities for investors. International investors may want to keep an eye on renewable ETFs and related country ETFs.