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Beating The TSX

Global Warming And Your Portfolio

David Stanley

Science and politics are often at odds. The bestcurrent example is the global warming debate. Un-deniably, our planet is getting warmer and this islikely to continue. An overwhelming majority of 

the world’s scientists agree that human activity is responsi-ble, but politicians in many countries continue to ditherabout how to contain this huge problem. The object of thiscolumn is not to enter the debate but to examine invest-ment opportunities emerging from the global warmingevent.

To review, global warming is the current and ongoingincrease in the earth’s surface (air and water) temperature.Its cause is almost undoubtedly the proliferation of green-house gases (carbon dioxide, methane, and other gases) dueto, among others, industrial pollution. These gases form alayer around the earth that traps some of the heat from thesun, thus warming the planet and also causing more ex-

treme weather variations. While scientists embrace this view,politicians have been slow to agree and even slower to takesteps necessary to abate greenhouse gas emissions.

  Just as an exercise for myself, I downloaded (http:// www.almanac.com/weatherhistory/locations/index.php)some historical weather information for the site closest tome (Waterloo-Wellington Airport) that had weather records.

Unfortunately, these only exist since 1976, but mean, maxi-mum, and minimum temperatures were available, if only in °F. I picked two days, April 9 (spring) and October 9(fall), and eight dates over the period from 1976-2008. Iaveraged the two days and looked at the mean temperatureand the difference between the minimum and maximumtemperatures (Figure 1). The slopes of both lines are up-

 ward, indicating an increase in these data, but, of course,there are too few data to draw a statistically meaningfulconclusion. Readers may wish to gather data for their loca-tions and draw their own conclusions.

However, if we consult Environment Canada (http:// www.msc-smc.ec.gc.ca/ccrm/bulletin/national_e.cfm), wesee that winter temperatures have generally been increasingnationally with a warming trend of 2.3°C over the last 61years (Figure 2 shown on the next page).

 World data also show a distinct warming trend. Figure

3 (shown on the next page) gives results for three climateparameters. From these and other data, the IPCC predictstemperature rises of 1.1-6.4°C by 2100.

The warming of our planet will have significant effectson the human population as well as all living species andthe natural environment in which we exist. Economistspredict reduced GDP levels, and, in particular, agriculture

 will face many difficulties. Some of these are grain short-ages, increased food prices, more soil erosion, and loss of soil fertility. The effects of global warming will not be feltequally around the globe and Southern Africa is thought tobe the most at risk. In the last several years 15 food riotshave occurred, 10 of them in Africa. We need to rememberthat modern agricultural practices, including fossil fuel us-age, massive deforestation and burning, and increased live-stock production also contributes significantly to greenhousegas emissions.

Global warming is not only an environmental issue,but also a financial and economic one. Scientists andengineers, leaving politicians to argue over such subjectsas the Kyoto Protocol and trading of carbon emissions,are engaged in worldwide research aimed at reducing theimpact of greenhouse gases, whether by developing

Figure 1 - Weather data for the Waterloo-Wellington Airport, ON, from

1976-2008.

8/7/2019 Canadian Asset Management - UBS Global Warming Index - May 07

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Figure 3 - Changes in (a) global average surface temperature; (b) global average

sea level rise from tide gauge (blue) and satellite (red) data and (c) northern

hemisphere snow cover for March-April. All changes are relative to corresponding

averages for the period from 1961-1990. Source: 2007 Intergovernmental Panel on

Climate Change (IPCC) Fourth Assessment Report

Figure 2 - Canadian winter national temperatures from 1948-2008. Source: Environment Canada.

alternate energy sources or reducing pollution. Reconstructing the

 world’s energy infrastructure away from fossil fuels will be a humanactivity for many years and there isa universal call for more researchand development. Undoubtedly,numerous investment opportunities

 will arise from this work. Let’s look 

at some ways the individual investorcan participate.First, let me say that the mention

of any particular investment doesnot constitute an endorsement onmy part. As always, you need to doyour own due diligence. Severalasset classes are open to investors:

• Futures trading - While this isnot appropriate for either theamateurs or the faint of heart, I was

surprised at the number of possi-bilities. The weather derivatives

market, traded on the Chicago MercantileExchange (CME), is larger than I thought. Lastyear a new index appeared, the UBS Global

 Warming Index (UBS-GWI), composed cur-rently of weather futures contracts of 15 U.S.cities, although cities from Europe and Asia areexpected to join the index. The price of thisindex depends on the difference between theaverage daily temperatures and the given base

temperatures. There are also specific Canadianfutures, one being the Canadian Monthly  Weather Heating Degree Day (HDD) index thatis geared to how much below 18°C the tempera-ture averages in a given city in Canada in a givenmonth.

• Exchange-Traded Funds - ETFs have the advan-tages of providing the investor with a portfolio of stocks in a sector for a reasonable management fee.The three available sectors that match up mostclosely with global warming are agriculture, solar

energy, and water. Here is an example of each one.The Claymore Global Agriculture ETF at-

tempts to match an agricultural index containingcompanies specializing in fertilizers and agricul-tural chemicals (57%), farm machinery (22%),packaged food and meats (12%), and agriculturalproducts (9%). The top 4 holdings in the ETF areDeere, Monsanto, Potash, and Syngenta, totalling36%. The U.S. and Canada are the two top coun-try weightings. This fund (COW on the TSX) hasa management fee of 0.65%. COW began trading

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TABLE 1 - SOME POSSIBLE CONSTITUENTS OF A LARGE-CAP GLOBAL WARMING PORTFOLIO.

Company Ticker Business Price ($) Yield (%) P/E

General Electric GE (US) Electrical engineering, water purification 66.44 2.60 20.5

Johnson Controls JCI (US) Automotive control, energy management 35.05 1.50 15.5

Waste Management WMI (US) Waste management, recycling 35.76 3.10 16.9

Alcoa AA (US) Aluminum, automobile parts 36.26 1.90 13.9

Caterpillar CAT (US) Earth moving equipment 85.28 1.70 16.0

DuPont DD (US) Chemical, agriculture, biotechnology 52.02 3.20 15.9

FPL Group FPL (US) Electric utility, fiber optic network 66.44 2.60 20.5

Archer Daniels ADM (US) Agricultural processing, ethanol 46.47 1.10 18.3

John Deere DE (US) Agricultural equipment 92.68 1.10 20.8

Siemens A G SI (ADR) Industrial automation, building tech 113.95 2.10 11.0

Magna Intl. MG.A (CAN) Automotive systems 72.01 2.00 12.0

ITC Holdings Corp. ITC (US) Electricity transmission infrastructure 56.38 2.10 32.9

Dow Chemical DOW (US) Chemical, plastic, agricultural products 39.98 4.30 10.5

Honeywell Intl. HON (US) Diversified tech. and manufacturing 60.99 1.90 18.2

Trinity Industries TRN (US) Rail services, highway construction 27.10 1.10 7.0

Source: Alt Energy Stocks ( http://www.altenergystocks.com)

late in 2007 at a price of $20.00 (CAD) and as of 

  April 18, 2008 had ad-vanced to $25.75 (CAD)

 with a dividend yield of 0.84%.

 Another ETF operating

in the global warming areais the Claymore Global So-lar Energy Fund (TAN onthe NYSE Arca Options)that attempts to match theresults of a global solar en-ergy index. The top threecountry weightings areChina, Germany, and theU.S. This ETF just begantrading on April 15, 2008and as of April 18, 2008

 was priced at $26.60 (U. S.) with a management fee of 0.65%. Most observers are of the opinion that while the solar industry does have a viablebusiness model, many of the small companies in this spacehave gotten ahead of themselves considering that they haveyet to turn a profit. Solar energy is very early in its growthphase and shareholders should exhibit patience, realizingthat this is a long-term investment.

Finally, a third Claymore offering focuses on water-re-lated businesses. The Claymore S&P Global Water ETF(CWW on the TSX) is composed mainly of water utilities

and water equipment companies. It has a management feeof 0.60% and pays a yield of 1.52%. This ETF has beentrading since early in 2007 and has declined from about$20.00 (CAD) to a current price of $18.33 (CAD) as of 

 April 18, 2008. The top three country weightings are theU.S., France, and the U.K.

These are just three examples of sector ETFs that arerelated to global warming. Other funds are available andmay be more or less suited to individual investor’s needs.

• Individual stocks - If, upon inspection, the above ETFsseem a little too risky and volatile for your taste, you may 

  wish to consider formulating a portfolio of engineering,industrial and utilities companies composed of large-cap,blue-chip, dividend-paying stocks characterized by inter-national exposure and a likelihood of participating in theeffort to curb global warming. Conveniently, the folks overat Alt Energy Stocks (http://www.altenergystocks.com/ar-chives/2007/11/our_blue_chip_alternative_energy_stock _list.html) have composed such a portfolio, some of whichis shown in Table 1. While not all of these companies may appear on lists of “most eco-friendly”, they do stand to profit

 while working to help the environment. This portfolio has

a definite U.S. slant. Some Canadian stocks that might beconsidered for a large-cap portfolio of sustainable environ-mental development include Suncor (SU), TransCanadaCorp (TRP) and Petrobank (PBG), among others.

• SRI (Socially Responsible Investing) - Last, but certainly not least, is the concept of investing in SRI funds that arededicated to filtering out heavy polluters or those compa-nies with a sub-par environmental record. Some Canadianfunds that use this approach include Acuity Funds, EthicalFunds, and Meritas. Further information can be found athttp://www.socialinvestment.ca/mutualfunds.htm. SRIfunds not only do not invest in bad corporate citizens, butalso use their leverage to encourage companies to under-take environmental reform.

 As always, I hope this column will generate discussionand I will attempt to answer your questions.

David Stanley, PhD, Rockwood, ON, DavidS5209@aol.com