Andrew Miller column

Economics entered global warming at the end of last year, with the government's Stern Report on climate change - the first major publication by an economist, rather than an environmental scientist.

Economics entered global warming at the end of last year, with the government's Stern Report on climate change - the first major publication by an economist, rather than an environmental scientist.

It painted a bleak picture, warning that rising sea levels, falling crop yields and extreme weather could shrink the global economy by 5% to 20%.

Investors are now trying to predict how climate change - or climate chaos, as some call it - might change the face of the economy. We think there are three major areas of interest: alternative energy stocks, water companies, and agricultural commodities.

Alternative energy is the most obvious area for change. Traditional fuels such as oil, gas and coal all increase the carbon in the atmosphere. Yet the world's overall energy consumption shows no signs of slowing. Technologies such as wind, solar, tidal and hydrogen power will be much in demand.

Alternative energies vary wildly. Some are well-established, like hydroelectric power, which is among the cheapest. Others are still highly speculative, like tidal power. Many are limited to certain geographical locations or weather conditions. Nevertheless, alternative energy has huge potential to grow, and many investors are looking to get in early.

Another problem is water supply. This is already an issue for many developing countries, likely to be worsened.

At the moment, the UN estimates that one-third of the world's population has inadequate water supplies and the UK Met Office predicts that if climate change advances at the current rate, the area of the Earth affected by drought will double from 25% to 50% by 2100.

Eastern Australia, South Africa and the Mediterranean are all at risk. Water supplies are already running low in the US mid-West.

A lot of investment will be needed to make up the shortfall. Water and infrastructure companies around the world will need to spend to unlock new supplies and improve existing systems.

Finally, farmers are at risk, and the cost of many agricultural commodities could rise. The Stern Report estimated that crop yields in Southern Europe could fall by a fifth if temperatures rise by just two degrees. Falling yields will increase the price of many crops.

The rise of biofuels - fuels derived from plants, such as ethanol - has already driven up the cost of corn.

As with any economic change, there are opportunities for investors.

But this is a difficult area to predict. With no obvious winners or losers, investors should diversify, picking a range of stocks in the areas that look most interesting.

Andrew Miller is regional head of Gerrard Investment Management, part of Barclays Wealth.

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