Investors are now taking climate action into account when picking ASX shares to add to their portfolios.
However, most are thinking in terms of how ethically the companies behave. They are not considering that some ASX-listed businesses will directly and financially benefit from changing climate and weather patterns.
Tyndall Asset Management portfolio manager Jason Kim this week named two such examples from the S&P/ASX 200 Index (ASX: XJO) in the insurance sector.
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Global warming, La Nina and El Nino all have impacts on ASX shares
Firstly, Kim examined the question of what climate change means for the insurance industry.
"Global warming has resulted in climate change, and is an increasing challenge for insurers," Kim said on the Tyndall blog.
However, he feels that the pricing power of ASX insurance companies could offset this headwind.
"Insurers can ultimately price for this underlying trend via higher insurance premiums over time."
In the near term, the larger weather impact is from the exit of La Nina and the likely arrival of El Nino.
In Australia, this generally means the weather will transition from excessive rain to drier-than-usual conditions.
"Bureau of Meterology's El Niño Southern Oscillation (ENSO) outlook has recently shifted from 'watch' to 'alert' for an El Niño," said Kim.
"This means that there is roughly a 70% chance of an El Niño forming in 2023."
Already, according to Kim, the forecast for rain over July to September is at or below the historical median for most of Australia.
Forecast is bright for insurance stocks
As long as this El Nino doesn't become too extreme, this is also a boost for insurance companies as they face fewer claims to pay out.
"Wet weather tends to be more detrimental from an insurance perspective than bushfires since the latter is typically localised in certain areas," said Kim.
"On balance, it looks like we are in for a more favourable year for insurers, especially compared to the last three years."
So which ASX 200 stocks is the Tyndall team backing in this environment?
It's a pair of dividend shares, which are currently in vogue.
"Given this improved outlook for insurers, Tyndall has an overweight position in QBE Insurance Group Ltd (ASX: QBE), which has a global focus, as well as a domestically focussed insurer, Suncorp Group Limited (ASX: SUN)," Kim said.
"We expect these companies to outperform in the medium to long term given this positive backdrop, which, in our view, the share market has not priced in properly."
The QBE share price has already risen 19.2% year to date, while Suncorp has rocketed 12.7%.
Suncorp is paying out an admirable 6% dividend yield that's fully franked, while QBE produces a more modest 2.5%.
