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Investing in climate change: A 25-stock index

Just this past month, the American Meteorological Society came out with yet another report detailing that all the key climate indicators — greenhouse gases, sea levels and global temperatures — were on the rise in 2013. Scientists predict that, in the next few years, these measures will deteriorate further, bringing with them droughts and other severe weather events that could significantly harm human populations around the world.

Of primary concern is the amount of carbon dioxide in the air. Last month marked the first time that the average levels of gas were about 400 parts per million for three months in a row. In just a few years, those levels are likely to reach an average of 405 parts per million.

Climatologists are pushing for government action. They urge the support of clean energy industries like solar and wind, alongside technologies that can actively suck out the carbon dioxide from the atmosphere in hopes of stabilizing the amount of the greenhouse gas at 350 parts per million. Governments are responding, even if, to many, it seems that pace is excruciatingly slow.

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In the United States, there are plans to double renewable energy generation, increase fuel economy standards, provide loans for business to finance energy efficiency investments, set new energy efficiency standards for appliances and reduce carbon emissions at power plants. President Barack Obama's re-election has only sped up these efforts.

Meanwhile, the European Union has a target of achieving 80 percent smart metering within the region by 2020. Globally, the Kyoto Protocol set stricter emission targets for developed countries that began in 2013 and is in effect through 2020.

The fight against climate change creates two opportunities for investors. The first is to look at companies that help slow down carbon dioxide emissions such as those in the clean energy, energy efficiency and carbon capture business. Worldwide, clean energy investment reached $63.6 billion in the second quarter of 2014, up by 33 percent from the quarter before.

Hurricane whips palm trees
Getty Images
Hurricane whips palm trees

The second opportunity focuses on the actual adaptation to climate change — how do we survive in a world of drought-ridden agriculture, polluted waters and waste? We will require the services of companies involved in such activities like water treatment and drought-resistant seeds.

The Climate Change motif, a thematically-weighted index of 25 stocks, is designed to take advantage of both opportunities. This motif includes clean energy companies like Canada Solar(CSIQ) and JA Solar (JASO), as well as energy efficiency and management companies Echelon(ELON) and Roper Industries (ROP). It also includes companies like Monsanto (MON) because its high-yield seeds and genetically modified organisms help overcome low crop outputs andConsolidated Water (CWCO), which operates water distribution and seawater desalination systems.

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Although the Climate Change motif has underperformed the S&P 500 by 8 percent over the last year, it has outperformed by 5 percent since the president was re-elected. To be clear, this motif is designed as a long-term trend and not to serve as a quick trade.

Like any investment thesis, there are potential risks with this one as well. While governments have adopted certain climate change policies today, they may reverse course in the future as some of these policies are quite expensive. Also, today's most innovative technologies like carbon capture and sequestration may yield to more promising ones in the future.

When we conceived of this motif, one of our goals was to create an investable index that would track the state of climate change. What we learned along the way is that so much of the climate change is driven by government policy. Our motif in the end correlates more with the state of government policy than it does with the state of climate change.

No matter what the future of government policy holds, we know which way the wind is blowing on climate change. Climate change is an ill wind but you just might be able to make some good of it in your portfolio.

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Commentary by Hardeep Walia, who co-founded Motif Investing to create an intuitive way to invest conceptually. He spent more than six years at Microsoft, where he was general manager of the company's enterprise services business, and prior to that was a director of corporate development and strategy, helping to oversee Microsoft's investments and acquisitions. He started his career at The Boston Consulting Group. Follow him on Twitter @hardeepw.

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