Beating The TSX
Global Warming And
Your Portfolio
David Stanley
S
cience and politics are often at odds. The best
current example is the global warming debate. Un-
deniably, our planet is getting warmer and this is
likely to continue. An overwhelming majority of
the world’s scientists agree that human activity is responsi-
ble, but politicians in many countries continue to dither
about how to contain this huge problem. The object of this
column is not to enter the debate but to examine invest-
ment opportunities emerging from the global warming
event.
To review, global warming is the current and ongoing
increase 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) due
to, among others, industrial pollution. These gases form a
layer around the earth that traps some of the heat from the
sun, 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 take
steps 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 to
me (Waterloo-Wellington Airport) that had weather records.
Figure 1 - Weather data for the Waterloo-Wellington Airport, ON, from
1976-2008.
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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. I
averaged the two days and looked at the mean temperature
and the difference between the minimum and maximum
temperatures (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 meaningful
conclusion. 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), we
see that winter temperatures have generally been increasing
nationally with a warming trend of 2.3°C over the last 61
years (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 climate
parameters. From these and other data, the IPCC predicts
temperature rises of 1.1-6.4°C by 2100.
The warming of our planet will have significant effects
on the human population as well as all living species and
the natural environment in which we exist. Economists
predict 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 felt
equally around the globe and Southern Africa is thought to
be the most at risk. In the last several years 15 food riots
have occurred, 10 of them in Africa. We need to remember
that modern agricultural practices, including fossil fuel us-
age, massive deforestation and burning, and increased live-
stock production also contributes significantly to greenhouse
gas emissions.
Global warming is not only an environmental issue,
but also a financial and economic one. Scientists and
engineers, leaving politicians to argue over such subjects
as the Kyoto Protocol and trading of carbon emissions,
are engaged in worldwide research aimed at reducing the
impact of greenhouse gases, whether by developing
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Figure 2 - Canadian winter national temperatures from 1948-2008. Source: Environment Canada.
alternate energy sources or reducing pollution. Reconstructing the
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
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world’s energy infrastructure away
from fossil fuels will be a human
activity for many years and there is
a universal call for more research
and development. Undoubtedly,
numerous investment opportunities
will arise from this work. Let’s look
at some ways the individual investor
can participate.
First, let me say that the mention
of any particular investment does
not constitute an endorsement on
my part. As always, you need to do
your own due diligence. Several
asset classes are open to investors:
• Futures trading - While this is
not appropriate for either the
amateurs or the faint of heart, I was
surprised at the number of possi-
bilities. The weather derivatives
market, traded on the Chicago Mercantile
Exchange (CME), is larger than I thought. Last
year 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 are
expected to join the index. The price of this
index depends on the difference between the
average daily temperatures and the given base
temperatures. There are also specific Canadian
futures, one being the Canadian Monthly
Weather Heating Degree Day (HDD) index that
is geared to how much below 18°C the tempera-
ture averages in a given city in Canada in a given
month.
• 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 most
closely 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 containing
companies specializing in fertilizers and agricul-
tural chemicals (57%), farm machinery (22%),
packaged food and meats (12%), and agricultural
products (9%). The top 4 holdings in the ETF are
Deere, Monsanto, Potash, and Syngenta, totalling
36%. The U.S. and Canada are the two top coun-
try weightings. This fund (COW on the TSX) has
a management fee of 0.65%. COW began trading
• http://www.canadianmoneysaver.ca • JUNE 2008
late in 2007 at a price of
TABLE 1 - SOME POSSIBLE CONSTITUENTS OF A LARGE-CAP GLOBAL WARMING PORTFOLIO.
$20.00 (CAD) and as of
April 18, 2008 had ad- Company Ticker Business Price ($) Yield (%) P/E
vanced to $25.75 (CAD) General Electric GE (US) Electrical engineering, water purification 66.44 2.60 20.5
with a dividend yield of Johnson Controls JCI (US) Automotive control, energy management 35.05 1.50 15.5
0.84%. Waste Management WMI (US) Waste management, recycling 35.76 3.10 16.9
Another ETF operating Alcoa AA (US) Aluminum, automobile parts 36.26 1.90 13.9
in the global warming area Caterpillar CAT (US) Earth moving equipment 85.28 1.70 16.0
is the Claymore Global So- DuPont DD (US) Chemical, agriculture, biotechnology 52.02 3.20 15.9
lar Energy Fund (TAN on FPL Group FPL (US) Electric utility, fiber optic network 66.44 2.60 20.5
the NYSE Arca Options) Archer Daniels ADM (US) Agricultural processing, ethanol 46.47 1.10 18.3
that attempts to match the John Deere DE (US) Agricultural equipment 92.68 1.10 20.8
results of a global solar en- Siemens A G SI (ADR) Industrial automation, building tech 113.95 2.10 11.0
ergy index. The top three 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
country weightings are
Dow Chemical DOW (US) Chemical, plastic, agricultural products 39.98 4.30 10.5
China, Germany, and the
Honeywell Intl. HON (US) Diversified tech. and manufacturing 60.99 1.90 18.2
U.S. This ETF just began
Trinity Industries TRN (US) Rail services, highway construction 27.10 1.10 7.0
trading on April 15, 2008
Source: Alt Energy Stocks (http://www.altenergystocks.com)
and as of April 18, 2008
was priced at $26.60 (U. S.)
with a management fee of 0.65%. Most observers are of a definite U.S. slant. Some Canadian stocks that might be
the opinion that while the solar industry does have a viable considered for a large-cap portfolio of sustainable environ-
business model, many of the small companies in this space mental development include Suncor (SU), TransCanada
have gotten ahead of themselves considering that they have Corp (TRP) and Petrobank (PBG), among others.
yet to turn a profit. Solar energy is very early in its growth
phase and shareholders should exhibit patience, realizing • SRI (Socially Responsible Investing) - Last, but certainly
that this is a long-term investment. not least, is the concept of investing in SRI funds that are
Finally, a third Claymore offering focuses on water-re- dedicated to filtering out heavy polluters or those compa-
lated businesses. The Claymore S&P Global Water ETF nies with a sub-par environmental record. Some Canadian
(CWW on the TSX) is composed mainly of water utilities funds that use this approach include Acuity Funds, Ethical
and water equipment companies. It has a management fee Funds, and Meritas. Further information can be found at
of 0.60% and pays a yield of 1.52%. This ETF has been http://www.socialinvestment.ca/mutualfunds.htm. SRI
trading since early in 2007 and has declined from about funds not only do not invest in bad corporate citizens, but
$20.00 (CAD) to a current price of $18.33 (CAD) as of also use their leverage to encourage companies to under-
April 18, 2008. The top three country weightings are the take environmental reform.
U.S., France, and the U.K.
These are just three examples of sector ETFs that are As always, I hope this column will generate discussion
related to global warming. Other funds are available and and I will attempt to answer your questions.
may be more or less suited to individual investor’s needs.
David Stanley, PhD, Rockwood, ON, DavidS5209@aol.com
• Individual stocks - If, upon inspection, the above ETFs
seem 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 the
effort to curb global warming. Conveniently, the folks over
at 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 which
is 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

Canadian MoneySaver • PO Box 370, Bath, ON K0H 1G0 • (613) 352-7448 • http://www.canadianmoneysaver.ca • JUNE 2008