This content is from: Portfolio

Going Green May Hurt at First — But Fighting Climate Change Will Boost the S&P 500

Here’s where stocks will benefit most from climate change policies under President Biden, according to Bank of America.

Battling climate change will cost the U.S. as it moves toward a green economy — but the transition is crucial and will pay off for stocks and long-term growth, according to Bank of America Corp. 

Climate change policies are mostly positive for the S&P 500 index, particularly in the long-run, Bank of America economists and equity and quantitative strategists said in a research report dated February 11. Corporate profits should rise as U.S. public and private sectors catch up to Europe in the fight against rising global temperatures, they predicted, benefiting the stock market.

Transitioning to a green economy will bring about innovation while addressing financial stability concerns linked to extreme weather events — such as droughts, wildfire, hurricanes, and coastal flooding — caused by a warming planet, according to the report. And while climate policies may weaken near-term growth, Bank of America expects the policies will ultimately lead to “significant positive” developments.

“A sharp tightening of carbon emission policies through taxes and regulations can come with a cost to the economy,” the bank’s economists and strategists said. “But it will also likely come with greater investment in green infrastructure, which is a net positive, all else equal.”

President Joe Biden is calling for a $2 trillion infrastructure bill to modernize and repair the U.S. transportation system, with a focus on clean and renewable energy to fight climate change, according to the report. The industrials and materials sectors are poised to benefit the most from an infrastructure bill, Bank of America said, along with the stocks of small U.S. companies whose sales are highly correlated to capital expenditure cycles — particularly “picks and shovels” capex growth.

“‘Picks and shovels’ capex has been contained by a tepid economy,” the bank’s economists and strategist said. “A shift from pure tech capex to more traditional capex could mark a significant change in market leadership.”

[II Deep Dive: Natural Catastrophes Are Heading for Investors’ Portfolios]

The U.S. has been “a notable laggard among developed market governments” in addressing vulnerabilities tied to climate-related events, according to a Fitch Ratings report Friday.

But “under the new administration, U.S. policy trajectory may more closely follow that of global regulatory leaders in this area, such as the Bank of England and the European Central Bank,” Fitch said. “Treasury Secretary appointee and long-time climate policy advocate, Janet Yellen, will likely raise the profile of climate risk among both financial regulators and the general public in her role as chair of the Financial Stability Oversight Council.”

Bank of America’s research found that growth in U.S. gross domestic product is bound to fall without efforts to combat climate change. The bank’s economists and strategists wrote in their report that “climate change should be thought of as an ‘exogenous’ shock to the economy, creating disruptions to the productive side of the economy (supply side shock) and to consumption through wealth shocks (demand side shock).”

They said a one degree increase in the daily average temperature above 15 degrees Celsius (59 degrees Fahrenheit) reduces productivity by 1.7 percent. The current path of rising temperatures may slash global GDP by as much as 25 percent by 2100, according to Bank of America’s research, which cited work done by consultants at the Group of Thirty.  

“Extreme heat and adverse weather events can reduce labor supply due to difficult working conditions,” Bank of America said. “The research clearly shows that climate change is a hindrance to potential growth.”

Meanwhile, the Biden administration is aiming for net zero carbon emissions by 2050, according to the Bank of America report. “The immediate policies will focus on discouraging ‘bad’ behavior through measures such as tougher environmental regulations, higher fuel standards, and limited expansion of ‘dirty’ energy,” the bank said.

While climate-related events have not yet led to “material losses” for U.S. banks, Fitch said that “more extreme weather-related physical risks, as well as uncertain transition risks from future policy decisions, can pose complex risks and vulnerabilities to abrupt repricing events.”

Democrats in Congress may try to revive the Climate Change Financial Risk Act, requiring the Federal Reserve to create climate-change risk scenarios for its bank stress tests, according to Fitch. A shift in U.S. policy may result in global cooperation on climate risk capital requirements, according to its report. 

“U.S. financial regulators will expand early-stage efforts to incorporate climate change into macroprudential regulation, given the increased prioritization and stated goals of the new administration,” said Fitch.

Related Content