How to Protect Your Portfolio from Global Warming

Climate change remains an important issue for people worldwide, but it’s almost always brought up in a vacuum — dangerous for its own sake, but not typically connected to other global issues.

As we come off of the warmest year on record, research is starting to show that global warming could affect many aspects of life around the world, and the global economy is at the center of that conversation. Drought, temperature change and drastic weather events always impact the economies in which they occur, and a higher frequency of those factors has economists worried.

Read on to see how climate change is shaping up to be one of the biggest financial issues of the future, and what you can do to protect yourself. (For related reading, see: Preparing Your Portfolio for Climate Change.)

There are a variety of ways that climate change affects the economy, but one of the most common is natural disasters. Climate change is known to cause a higher frequency of severe weather events such as tornadoes, hurricanes and floods, which cause physical and economic damage.

When a hurricane destroys homes and businesses, people have to start over from scratch. Flooding and tornadoes can cause the same damage, and all these events can hurt infrastructure and cost taxpayers more money.

Sometimes, it’s the lack of weather events that become a problem. When a drought causes farms to produce fewer crops, the economy at large suffers along with local farmers and vendors.

But it’s not just major weather events that economists are worried about. Even the slightest temperature change can cost the world trillions of dollars. Rising temperatures influence humans in noticeable ways, and according to a study at Columbia University, humans are generally less effective and productive during hot weather. They found that those working in the auto industry were 8% less productive during extreme heat. This is known as thermal stress, a concept that can be applied across the board in professions that require employees to work outside or without air conditioning. (For related reading, see: How to Financially Prepare for a Hurricane.)

No matter where you live, climate change is affecting you. The most devastated countries are those already in tropical or warm climates. That’s partly because many of those countries already have worse economies than those in colder regions.

But it’s not just third-world countries that are struggling. Some researchers previously hypothesized that developed countries were immune to the economic downsides of climate change, but new research shows that global warming can even negatively impact countries like the U.S.

If you don’t live near the beach or the coast, it’s easy to assume you’re safe, but don’t hold your breath. It’s not just areas like Florida and the Gulf where disasters strike. Residents all over New York State were hit hard when Superstorm Sandy arrived in 2012, many of whom assumed they were safe from such events.

Just as it is globally, specific areas within the U.S. will feel these effects more strongly than others. Tropical countries are hit harder by global warming, and so are coastal states in the U.S. As typically hot countries are affected, so are southern states like Mississippi and Texas.

According to some researchers, enough of a temperature change could push the country back to a recession, or even to a bigger depression. So what's the solution? (For related reading, see: Does Weather Affect the Stock Market?)

Lawmakers can help encourage businesses to be greener by instituting carbon taxes. This way, manufacturers will have incentive to change production methods without willingly betraying their shareholders. You can call your representatives to share your views and shop for brands that support environmentally-friendly practices, as well.

One way to mitigate the damage to your own finances is to be prepared. Make sure your insurance policies can cover damage from floods, hurricanes, tornadoes and other natural disasters.

Keep an emergency fund with up to a year’s worth of expenses in case you’ll have to pay for your homeowner’s insurance deductible or a few nights at a hotel while your house is repaired. An emergency fund is a flexible tool and the best weapon you have against unexpected expenses.

You should also diversify your portfolio. Make sure your investments are held in various industries and/or asset classes so you won’t be hurt too badly if one sector is struggling. This is good advice in general, but even more appropriate in the event of global economic destabilization.

If you want to get involved in fighting climate change, there are many resources and organizations that want your help. But if you just want to prepare yourself for a possible economic downturn, shore up your finances and follow the advice above. (For related reading, see: 5 Investments You Should Think Twice About.)