The Paris Agreement is the first comprehensive climate change agreement in the world with nearly 200 countries signing on. The U.S. first withdrew from, then later rejoined, the agreement. It could yield many options for investors across renewable sectors.
You may want to give some thought to exposure to these asset classes to improve your long-term risk-adjusted returns.
- The Paris Agreement is the world’s first comprehensive climate agreement between nearly 200 countries.
- It was meant to reduce greenhouse gas emissions.
- It could ramp up the decline in traditional energy, and increase the use of alternative energies.
- Investors may want to think about increasing their exposure to renewable energies, given the prospects of greater demand.
What Is the Paris Agreement?
The Paris Agreement is the world’s first comprehensive climate agreement between nearly 200 countries. It was 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, or less than 1.5 degrees Celsius above pre-industrial levels while addressing and financing the global warming issue.
Each country sets its plans and reports its own efforts to address global warming. There's no built-in way to force a country to set targets other than diplomatic pressure.
Critics of the Paris Agreement contend that the lack of consequences makes it pointless, but supporters insist that the framework is a needed first step.
President Donald Trump withdrew the U.S. from the Paris Agreement in 2017, drawing widespread criticism from the European Union and China. President Joe Biden rejoined the Paris Agreement on his first day in office in January 2021.
Who Stands to Benefit?
The Paris Agreement does not punish non-compliance, but most see it as a step toward divesting from hydrocarbon assets and investing in renewable assets, which could set the stage for an increase in renewable investments. It could prompt a decrease in hydrocarbon investment, and it could speed up the decline in traditional energy and the use of alternative energies.
This shift will require much investment in research and development. These upfront costs fuel critics and skeptics of the Paris Climate Agreement, who argue that renewable energy is expensive. It's unrealistic compared to the use of fossil fuels.
Proponents of the Paris Climate Agreement argue that the costs of renewable energy should be compared to the costs of climate change. Wildfires and hurricanes reduce gross domestic product (GDP). Climate change makes those events worse.
The National Oceanic and Atmospheric Association (NOAA) recorded 290 extreme weather events in the U.S. from 1980 through 2021. They caused more than $1 trillion in damages. They numbered roughly seven events per year, but the rate of these events has risen sharply in the millennium. The average doubled to more than 16 events per year from 2016 through 2020. In 2020 alone, 22 extreme weather events in the U.S. caused more than $1 billion in damages.
Supporters hope that investment in renewable energy sources can slow the effects of climate change. It could reverse the trend of more and more common extreme weather events.
You may want to think about increasing your exposure to renewable energies, given the prospects of greater demand. Exchange-traded funds (ETFs) provide an easy way to purchase these investments. They provide an instantly diversified portfolio.
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), and VanEck Vectors Low Carbon Energy ETF (SMOG).
You may also want to think about investing in countries that are committed to renewable energy goals. They could see an influx of investments that could drive better-than-expected GDP growth. They could also benefit over the long run with lower energy costs relative to hydrocarbons, along with decreased political risks stemming from their source.
The Bottom Line
The Paris Agreement marks the first global agreement among nearly 200 countries to limit and track greenhouse gas emissions and to keep them below acceptable levels. The agreement has sparked some criticism, but the move could help increase investment in renewable energies. It could create options for those who want to invest. You may want to keep an eye on renewable ETFs and related country ETFs.