The Paris Agreement: what does this mean for climate change and investors?
As last week's UN Climate Summit drew to a close, French president François Holland stated that "history is here". The resulting deal, known as the Paris Climate Agreement, is being heralded as the most ambitious treaty on climate change since the Kyoto Protocol in 1997. In theory, countries that have ratified the framework will have a net carbon output of zero by the second half of the 21st Century. This is great news for the environment, but what might the deal mean for investors?
The future of fossil fuels
The US Oil and Gas Index dropped by 0.5% just after the Paris Agreement went public, and several commentators have voiced fears that the deal could mark the beginning of the end for fossil fuels. While 0.5% doesn't sound like much, this knock to the energy industry couldn't have come at a worse time: the trade prices of oil and gas are at a seven-year low, and coal stocks are more unpredictable than ever.
While the future of fossil fuels seems less than rosy, don't rush to dump your fossil fuel investments just yet. The Paris Agreement isn't wholly legally binding, and major changes will only come into effect by 2020 if 55% of all states follow through (or if those countries responsible for at least 55% of global emissions commit). There are several bumps in the road ahead that introduce considerable uncertainty to this timeline: should the Republican Party come to power in the USA, for instance, a Paris U-turn may well be on the cards.
A fork in the road?
It's worth bearing in mind that one investor's uncertainty is another's opportunity. Plummeting prices could create perfect conditions to snag a great deal on fossil fuel stocks. On the other hand, now might be a good time to start looking into renewable energy. Unlike the US Oil and Gas Index, the Solar Energy Index has risen by nearly 2% since the Paris Agreement was broadcast, which could suggest industry insiders are moving in this direction.
What now for international money transfer?
Commodities, not least fossil fuels, can have a huge impact on both national economies and the entire global economic system. A drop in oil and mining shares brought the UK's stock market to a ten-week low in mid-December, and October's Biotech stock bubble demonstrated that one volatile sector can have an adverse effect on the whole foreign currency exchange market.
Many of the world's largest economies rely heavily on fossil fuels, so there's no doubt that any attempt to move away from these commodities could cause currency prices to shift. If you run an international business and are looking for the best way to transfer money internationally, you should consider protecting your investments by 'hedging'. Here at The Money Cloud, we use trustworthy brokers who can draw up 'forward contracts' that minimise the amount of cash you stand to lose if currency prices are thrown into flux.
Find out more about international money transfer and minimise your exposure to exchange rate risk with our international payments guide.