Climate change is the envelope within which all human commerce and civilization take place; human-induced warming will change both profoundly. Already, storms have become more severe; insurers are forecasting a doubling-to-tripling in losses from floods as a consequence. In 2006, we saw record heat in the South, a spate of early-season tornado activity, devastating fires in the West, flooding in New England—dramatic weather that is exactly what we would expect as a consequence of climate change.

For investors, climate change poses risks and presents opportunities whose incidence and magnitude varies greatly by sector and industry, and over time. Most of the attention in the scientific, advocacy, and investment worlds has focused on the downside of climate change. But the drivers of risk often are also the incubators of opportunity, and investors need to be aware of both.

Climate risk can enter portfolios through several doors. The most prominent, for the past several years, has been the risk of litigation or regulation, which primarily affects companies that emit greenhouse gases (GHG) in significant quantities. Since the Kyoto Protocol’s entry into force, markets to trade emission permits—so-called carbon markets—have developed quickly, primarily in Europe, establishing a price for emissions reduction that helps businesses in all Kyoto ratifying nations to quantify the monetary impact of regulation, and begin to manage the risks of noncompliance. It has also helped financial analysts to understand the investment implications: now that emissions have a price and reduction has value in most of the world’s developed markets, financial analysis can make determinations on which companies are best and least well-positioned to compete in the new, carbon-constrained world.

Julie Fox Gorte is vice president and chief social investment strategist for Calvert.