The Paris Agreement represents the first comprehensive climate change agreement in the world with nearly 200 countries signing onboard. The United States famously withdrew from—and then later rejoined—the agreement, but it could yield many opportunities for international investors across renewable sectors despite the inconsistency from the U.S. 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—preferably less than 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. Like its predecessors in international climate efforts, there is no mechanism to force a country to set specific targets beyond diplomatic pressure.
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. However, President Joe Biden rejoined the Paris Agreement on his first day in office in January 2021.
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. In other words, it could accelerate the ongoing decline in traditional energy and accelerate the adoption of alternative energies.
This shift to renewable energy will require significant investments in research and development. These upfront costs fuel critics and skeptics of the Paris Climate Agreement. They argue that, compared to the use of fossil fuels, renewable energy is expensive and unrealistic.
However, proponents of the Paris Climate Agreement argue that it's more accurate to compare the costs of renewable energy to the costs of climate change. Natural disasters like wildfires and hurricanes reduce gross domestic product (GDP), and climate change intensifies these disasters.
From 1980 through 2021, the National Oceanic and Atmospheric Association recorded 291 extreme weather events in the U.S. that caused in total more than $1 trillion in damages—averaging roughly seven events per year. However, the rate of these events has risen sharply in recent years. From 2016 through 2020, that average doubles to more than 16 events per year. In 2020 alone, 22 extreme weather events in the U.S. caused more than $1 billion in damages.
Supporters of the Paris Climate Agreement hope that ambitious investment in renewable energy sources can slow the effects of climate change and reverse the trend of increasingly common extreme weather events.
International investors may want to consider increasing their exposure to renewable energies given the prospects of greater demand. Exchange-traded funds (ETFs) are perhaps the easiest way for average investors to purchase these investments since they provide an instantly diversified portfolio.
Some popular global renewable energy ETFs include:
- Invesco Solar ETF (TAN)
- Invesco MSCI Sustainable Future ETF (ERTH)
- Invesco WilderHill Clean Energy Portfolio ETF (PBW)
- First Trust Global Wind Energy ETF (FAN)
- iShares Global Clean Energy ETF (ICLN)
- VanEck Vectors Low Carbon Energy ETF (SMOG)
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.
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