CLIMATE CHANGE IS UNDER THREAT: from public opinion

HANOI: it seems climate change may be under threat from fickle public opinion. While this is not a contra-CC article, it verges on it, taking a market-based approach - "if the market isnt fixing it, it aint broke"! "Notwithstanding the positive contributions (and potentially healthy financial performances) of the companies included in the Climate Change-Global Warming indices, the unavoidable truth is that their fortunes in the stock markets are ultimately linked to people's belief in global warming and its degree of severity."

It reads:

In the past few months, there has been a flurry of activity in the "green investments" arena. In August, Credit Suisse (NYSE:CSR) unveiled its Global Warming Index, with HSBC throwing its hat into the ring just weeks later with its Climate Change Index. Both innovative devices allow investors direct plays on the stocks of companies that should, in principle, benefit from the altered climatic conditions that seem to surround us these days. While Credit Suisse has chosen to select a basket of 40 firms, HSBC has opted for a larger selection of 300 names, with both indices focusing on renewable and alternative energies.

Should investors pay heed and punt on those companies bent on making millions out of the new weather realities? The easy answer would seem to be yes, definitely. Few would nowadays doubt that climate change is not only a reality, but a severe problem that needs to be tackled with the utmost urgency, thus significantly enhancing future demand for things like ethanol or wind turbines. And there is the ethical kicker to boot. By betting on the health of green companies, you would not only be destined to reap millions but also contribute to the clean-up of the planet. Who could resist that?

And yet, it seems difficult not to detect some potential risks associated with such investment strategy. It is not so much that the products and services offered by the names included in vehicles like the new indices may not end up being heavily sought-after. Rather, the key risk lies in the fact that climate change is such an emotional issue, almost entirely driven by thinly informed perceptions. Semi-religious for many, these perceptions are prone to dramatic shifts in sentiment for the most irrational of reasons. If chaotic, wild-swinging human decision-making processes are a concern for every investor, the semi-fanaticism that surrounds the global warming debate makes green investments particularly exposed.

Notwithstanding the positive contributions (and potentially healthy financial performances) of the companies included in the Climate Change-Global Warming indices, the unavoidable truth is that their fortunes in the stock markets are ultimately linked to people's belief in global warming and its degree of severity. If the outside world overwhelmingly believes that global warming and climate change are both real and can have severe consequences, green companies can benefit in the markets. But if, for whatever reason (perhaps new scientific evidence, perhaps a bout of cold weather, perhaps a tiredness about Al Gore's relentless preaching) the perceptions begin to change and people stop viewing climate change as that big a problem, green stocks could suffer indiscriminately.

The inner complexities of the issue are quite possibly alien to many of those faithfuls who bow at the global warming altar. After all, how many of today's anti-climate changers have really examined the scientific evidence, or even listened to all the relevant points of view? How many became converted simply because that seemed the appropriate, trendy thing to do? Such disinformed, passionate, animal-spirited decision-making tends to bode ill for any market, as any indication that the fad may be built on shaky foundations could trigger a devastating and sudden abandonment of investment faith.

In essence, the global warming debate seems mostly dominated by flimsy perceptions and borrowed wisdom, not fundamental analysis. When so many opinions are determined by emotions and voluntary submission to faddish popular conventional wisdom, they become extremely vulnerable to a drastic shift on very short notice.

Paradoxically, such a shift could take place in the green investments arena even if global warming turns out to be as nasty as originally predicted. All that matters is whether people stop believing in climate change, not whether climate change does actually take place.

Several recent events (including historical snowfalls in Argentina and South Africa, sceptical comments by NASA's chief, and a court resolution in the UK citing the bias of Al Gore's film) provide examples of the kind of ammunition that could cause a change in perceptions. Were global warming to start being seen as less severe or less threatening, the stocks of green companies could be indiscriminately thrown down the toilet, independently of the financial health of the company or the soundness of its strategy.
Climate may change in public opinion By Pablo Triana. From the FT.
Pablo Triana directs the Centre for Advanced Finance at Instituto de Empresa business school, Madrid