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How to cash in on climate change

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Experts says it's time for retail investors to consider how global warming affects stocks, bonds and other investments alongside more traditional indicators like earnings estimates and growth projections.

"It's not only completely possible for investors to include these factors in their decision-making and their portfolios or in their manager selection, but I don't know why you wouldn't given that it helps you identify a better business," said Bruno Bertocci, who leads UBS Global Asset Management's sustainability business strategy.

The metrics vary by industry. Some companies disclose climate change as a risk in their annual regulatory filings. Or they report greenhouse gas emissions and efforts to clean up their supply chains. Others may not report the specific risk, but savvy investors can anticipate trends that are likely to hurt or help the broader industry. In short, it's time to pick global warming's winners and losers.

The immediate effect of climate change on some industries is more obvious, thanks to government action.

Take coal companies, for example. On Monday, the Environmental Protection Agency announced new regulations requiring power companies to cut carbon dioxide emissions 30 percent by 2030.

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Those and other potential carbon-related regulations on fossil fuel companies could make their operations much more costly as consumers switch to natural gas and other alternatives. Oil companies could ultimately lose much of the resource reserves that have driven their company's high valuations, the so-called "stranded assets" problem.

Governments also appear likely to continue subsidies for clean energy companies. That could make wind, solar and other alternative power businesses attractive for long-term investment despite short-term valuation volatility. Tax breaks could also help automakers increase electric vehicle production, for example, or companies switch their trucking fleets to natural gas.

"As governments take action to curb greenhouse gas emissions and as consumers give preference to energy-efficient products, investors will see related risks and opportunities in their portfolios," said Meg Voorhes, director of research at the Forum for Sustainable and Responsible Investment. "Carbon-intensive companies will likely operate at a disadvantage to their less carbon-intensive peers by sector, and companies that offer energy efficiency and other climate solutions will have new business opportunities."

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Companies that help reduce energy consumption also stand to profit—a potential boon for investors.

Home builders, for example could gain from new construction standards in heating and lighting. Or technology companies that control energy usage could profit from increasing consumer desire to cut utility costs. Tech firms that make energy-saving batteries or semiconductors could also gain in value.

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A major theme for investors will be the growing volatility of weather, a symptom of global warming. The increase of floods, hurricanes and other powerful storms could decrease the value of coastal real estate, for example.

Faster swings between hot and cold temperatures are also likely to affect agriculture and drive up the cost of food. Investing in those commodities has both the potential for profit and to protect against losses in businesses that could suffer, like restaurants or packaged food makers.

"Investors are increasingly thinking about how climate volatility will impact what's already in their portfolios. The price of water, commodities and other basic assets are likely to increase as they become more scarce, making them a good hedge against other businesses that could be hurt by higher supply chain costs," said Christopher Wolfe, chief investment officer for the private banking and investment group at Merrill Lynch Wealth Management.

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The hard part, of course, is correctly picking the winners and losers.

Like many nascent industries, there are many more players now than there will be following consolidation of market share by future top players. Bets on emerging companies like Tesla Motors or SolarCity can be volatile even if they ultimately prove to be great long-term investments.

"Some of these companies will succeed but figuring out which ones, that won't be easy," said UBS' Bertocci. "Investing in something that's a little bit more immediate makes sense to me."

Instead, Bertocci recommends established companies with growing energy efficiency plays, like non-U.S. carmarkers and home builders and insulation businesses.

Bertocci's views on broadening investments beyond speculative clean-tech bets echo work done by Deutsche Bank's Climate Change Advisors unit.

"In effect, investing in more diversified companies with either a multi-sector approach to climate change or a mixed exposure to climate change (vs. other industries) can ... help lower risk and give access to a broader range of opportunities," Mark Fulton, global head of climate change investment research, said in a 2012 report. "It is certainly not just about pure-play wind and solar public equities!"

For most retail investors, the main way to translate climate-change views into portfolios is buying or selling stocks. Bonds can go through a similar analysis, and a small group is specifically designed to be green.

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Climate-change strategies only open to wealthy investors and institutions, can be esoteric and long term. They include buying up farm or timberland, investing in start-up clean tech companies as a venture capital backer or buying rights to water via private equity funds.

It's also possible to outsource some of the decision-making to mutual fund managers. Companies like Parnassus Investments, Calvert Investments, Neuberger Berman and Pax World offer funds that invest only in companies that they deem to respect the environment, while potentially screening out those that hurt it.

Regardless of how investors do it, climate change investing has evolved from just avoiding some stocks and pushing other companies to go green with shareholder resolutions.

"There's a broad trend—people are interested in these kinds of companies, and the information to make better investment decisions is coming to the forefront," Betocci said of picking investments with the help of an environmental lens. "There are actually some investment opportunities in terms of companies that are good at these things."

—By CNBC's Lawrence Delevingne

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