How Climate Change Can Impact Investment Portfolios

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If the recently released U.N. climate report is any indication, it might be prudent for investors to start preparing their portfolios for the widespread impact of climate change.

The report of the Intergovernmental Panel on Climate Change (IPCC) found that rising global temperatures can largely be attributed to human-generated greenhouse gases and that world leaders must take action now to slow the impacts or face dire consequences.

While climate change can certainly have an impact on our day-to-day lives, it’s also crucial to consider how it will affect the investing landscape over the next few years. Investors should try to stay ahead of the curve in understanding how climate change can impact their portfolios, particularly because managing risk is one of the keys to generating long-term alpha.

There were 22 separate billion-dollar weather and climate disasters across the United States in 2020, beating the previous annual record of 16 events that occurred in both 2017 and 2011. From the winter storm blackout in Texas earlier this year to the current onslaught of hurricanes, climate change continues to cause serious issues for home insurance providers, automakers, retailers, chipmakers and transports.

The homeowners’ insurance industry is built on risk models that help companies decide which homes to insure and which ones to walk away from. Forecasting how much they might pay in claims allows insurers to cover those costs. Unfortunately, climate-related risks such as rising seas and worsening wildfires have made old forecasting models nearly obsolete. These uncertainties often result in insurance companies leaving areas most exposed to climate-related risks.

Unlike many legacy insurance companies that have been unable to navigate the increased volatility of climate change, Kin Insurance (NYSE: OCA) uses huge troves of reliable, objective data and weather simulations to assess and price risk appropriately to the benefit of homeowners — keeping them properly and fairly insured. This includes the government, satellite images, and real estate archives. Once the data is collected, Kin uses advanced technology to analyze it thoroughly. This ensures more accurate readings of how much money a home should be paying for insurance – even in regions that are repeatedly bombarded by hostile weather. The end result is affordable home insurance for more people, which makes it a highly appealing business model for investors.

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By integrating weather modeling into its tech infrastructure, Kin is able to obtain ultra-granular exposure measurement that enables the company to serve high-exposure markets. In other words, the company looks at a lot more quality data so homeowners in places like California, Florida, and Louisiana pay less for essential coverage. Most recently, Kin also upgraded its reinsurance program to enhance its disaster protection, reflecting its commitment to helping homeowners most affected by climate change.

Investors that are actively seeking companies that offer clean energy products and services, or design their business models around climate change, could stand to profit greatly from the impacts of climate change. Beyond Kin Insurance, Stocks like Tesla (NASDAQ: TSLA), NextEra Energy (NYSE: NEE) and Enphase Energy (NASDAQ: ENPH) are other examples of businesses that are helping to combat climate change with innovative solutions.

Adding exposure to the areas of the market that are enabling sustainable innovation and protecting the earth could be a very lucrative decision. There are both positive and negative impacts of climate change that investors should consider when managing their portfolios.

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