Years before stepping into scientific laboratories and researching climate change, I mimicked my dad by trading stocks and managing an investment portfolio. My dad lives the proverbial individual investor dream: While making ends meet and supporting a family as a freelance writer, he somehow saved enough money to buy a few contrarian stocks during the 1990s (including a small fruit-inspired computer company). My parents were able to retire because of their stock purchases.
During college, my interest in the stock market became complemented by a fascination with Earth’s climate. I wasn’t alone; oddly, Geology departments carry something of a tradition of on-the-side stock market obsession. I was once told (and I fully agree) that publishing a new scientific idea generates the same euphoric feeling as picking a winning stock, except with none of the financial reward.
There are other interactions between the stock market and climate change. In particular, climate change seems to spell bad news for investors. Human-caused climate change is projected to increase both the intensity and occurrence of extreme weather events, effectively increasing the odds of low-probability, high-risk events. Stock markets tend to react poorly when low-probability, high-risk events come to pass (for instance, mortgage defaults in 2008). Trying to emulate my parents and retire off my portfolio seems downright silly when considering climate change over that timescale. While it may not occur in my lifetime, I don’t particularly look forward to the day when the West Antarctic Ice Sheet disintegrates, and I don’t expect to find comfort in my portfolio’s performance that day, either.
Given the immense risks of climate change, shouldn’t there be some sort of contrarian play, a “big short” that hedges against the climate risk while generating attractive returns? For the last decade, the prevailing wisdom has been that the clean tech industry was such a hedge. The rationale goes like this: Climate change will require decarbonizing the economy, which will make big winners of carbon-free alternative energy sources such as wind and solar. It’s an attractive philosophy, and one that motivated a few of my investment decisions. The only problem? It hasn’t worked.
Last week, NRG Energy, Inc., a publicly traded integrated power company, ditched its plans for renewable energy, instead turning back the clock to favor of returning to coal and natural gas-powered electricity generation. Wall Street cheered, sending the stock up 43% by the end of the week. This wasn’t a once-off, either. NRG shares lost 60% of their value between late 2013 and 2015, before CEO David Crane—who championed NRG’s renewables focus—was fired:
NRG is an old-school power company that owns electricity production and distribution assets. This is a carbon-intensive business model; if NRG were a country, its carbon emissions would rival Greece. To see NRG rewarded for reverting to an old-school, high emissions model is disheartening to any investor who grasps the seriousness of climate change. And NRG isn’t just a sour grape. Alternative energy ETFs, which should be less susceptible to the vagaries of individual companies, have grossly underperformed the market over the past decade (see below). The MIT Energy Initiative estimates that venture capital firms lost over half of their $25 billion investments in clean tech between 2006 and 2011.
Investors know there are two keys to returns: thesis and timing. If you had bought stock in the above fruit-inspired computer company in January 1987, and sold after 15 years, you would have returned a modest 132%. But if you had bought the same stock in January 2002, and sold after 15 years, you would have returned a life-changing 6700%. So perhaps pro-climate stocks do have a future, and the timing is not yet right. But the response of markets to the NRG saga gives a chilling pause to climate-based investments. As former NRG CEO David Crane noted, “As a shareholder, I will reap the financial benefit of [NRG]’s new plan, and that is good for me. But deep inside, I suspect it will gnaw at me; knowing that the Earth will be in just a bit more perilous state than it otherwise would have been.” Will the interests of stockholders and citizens concerned about climate change ever align? And if not, is there hope for avoiding the serious impacts of unmitigated climate change without wrecking the global economy?