It’s been called “a lot of sizzle, no steak.” “Great marketing.” “Overhyped and oversold.”
The ESG label — short for environmental, social and governance — has been slapped on a lot of financial products, and money is pouring into funds that describe themselves as aligned with sustainable ESG practices. Wading through it all can be tricky.
Investors focused on the “E” in ESG can look to companies poised for growth that are working on actual solutions to mitigating and adapting to climate change now. Here’s how three money managers, deploying more than $1 billion dollars in total, say they analyze investments that help combat climate change. Along the way, they give us some of their top stock picks.
Garvin Jabusch, chief investment officer, Green Alpha Advisors
Jabusch likes to build his portfolios by focusing on companies with their own intellectual property, or IP, to “make sure they own the ideas helping the world fix itself.” That leads Jabusch into traditional — and very untraditional — climate change plays. On the traditional side: Vestas Wind Systems A/S, which is the world leader in onshore wind turbine manufacturing, owns a lot of patents and has offshore wind operations.
On top of the fact that Vestas produces clean energy at a competitive price, Jabusch likes the service contracts it has with rival wind farms—“revenue that grows every year as turbines proliferate.” Vestas has been “getting beat up because of supply chain problems, and related expense increases that are hurting their margins, and is a good value,” he said.
Jabusch’s non-traditional plays are biotech companies Crispr Therapeutics AG and Caribou Biosciences Inc. While the companies are known for their technology’s potential to transform medicine with genome editing, Jabusch sees the ability to modify genetic characteristics for the better as something able to impact every sector of the economy.
“There are potentially huge consequences for agriculture in food that can grow anywhere, that may need less water or could grow on seawater,” Jabusch said. “Or what about parts of the economy where electrification won’t work, like long-haul transportation? What about a gene-hacked biofuel that is carbon-negative because it is so efficient?”
Crispr and Caribou, which trade around $88 and $21, respectively, don’t have much revenue now. “I say just look at the IP, and where the revenues could be in five years,” Jabusch said.
A company relatively new to the public market that Green Alpha’s Jabusch labels “extremely speculative” is Volkswagen AG-backed QuantumScape Corp. The secretive company is working on next-gen battery technology that can be deployed at scale to replace today’s lithium-ion batteries with a more durable, reliable solid-state alternative.
The issue isn’t whether their technology will work, Jabusch said, but whether they can scale up in a cost-effective way. “If they can, they could wind up selling to all the electric vehicle makers in the world, all the stationary storage providers,” he said. “They are in the early stages and are in production hell, but it has enough potential that I’d feel a small bit of exposure would be appropriate.” The stock trades around $34.
Lucas White, portfolio manager, GMO Climate Change Fund
Biofuels already in existence are among climate solutions that Lucas White, of the GMO Climate Change Fund, invests in. “With a lot of clean energy solutions, this massive buildup needs to occur to enable those technologies to have greater penetration,” White said. “Biofuels can make an impact today, and their emissions profiles are 80% to 90% less than those of fossil fuel-based alternatives.”
To make biofuels, companies process “feedstock” such as used cooking oil, animal fat, and grease. Darling Ingredients Inc., which trades around $78, has a competitive advantage over peers, White said, because it can leverage its own waste collection business in the production of biofuels, as well as animal feed.
White views Darling as trading at a relatively cheap level, “with earnings potential and profitability potential much higher than what they’re generating now because they’re dramatically expanding production.”
A more speculative play in biofuels is Finnish company, White said. It’s an oil refining company, but White sees most of the value in its biofuel business.
“It’s a big, early mover in sustainable aviation fuel and renewable diesel, and it has the biggest research and development budget,” White said. Neste is working on next-gen feedstocks including algae and used plastics, White said. The GMO Climate Change fund has a small position in the stock, which trades around 47 euros ($55) on the Helsinki Stock Exchange.
A technology that can also have a big impact targets the steel manufacturing industry. “Traditional steel manufacturing, using blast furnaces, is a very carbon-intensive, nasty process,” White said. “It’s been one of the niches of the global economy where clean solutions have been very hard to come by.”
That’s why White’s invested heavily in GrafTech International Ltd. The company produces ultra-high-power graphite electrodes used in a type of furnace—an electric arc furnace. Those furnaces have about a 90% reduction in carbon emissions compared to blast furnaces and “all of the growth in steel-making over the next 20 to 30 years is expected to be in electric arc furnaces,” White said.
The $12.50 stock, which trades around six times forward earnings, “is an exciting opportunity,” White said. Potential risks could stem from China, both in the electric arc furnace area in general, if government crackdowns on certain industries spread through the economy, and if the electrodes China produces, which White said are now inferior, catch up to GrafTech.
Mark Bruinooge, chief investment officer, 2040 Fund
Bruinooge says he positions his portfolio to benefit from the constructive and destructive forces behind climate change. One of his favorite plays is consulting and engineering company Tetra Tech, Inc.
“They are the tip of the spear, responding to natural disasters in remediating and in building more resilient infrastructure after extreme weather events,” Bruinooge said. The increased intensity of storms and precipitation add to the company’s potential upside, something that hasn’t gone unnoticed: The stock, now around $176, is up almost 55% in 2021.
Bruinooge also likes Xylem, Inc., which is pushing new advanced water metering, water management and leak detection. But it’s the smart use of saltwater that’s at the heart of another company Bruinooge has invested in, salmon farmer Atlantic Sapphire ASA.
Global warming has hurt ocean-based salmon, and it’s very carbon-intensive to fly in fish from Scandanavia or Chile to North America. What Atlantic Sapphire does in its U.S. plant is tap into saltwater aquifers in southern Florida to create a large tank-based facility for salmon. “You put the fish closer to the market and grow it in a more efficient way,” Bruinooge said.
The company, which went public on the Oslo Stock Exchange in mid-2020, “is a very transformational business,” Bruinooge said. But the stock, which trades at about $5, has been volatile. The company has had operational issues, including a shortage in the supply of liquid nitrogen for its Florida facility that meant the fish didn’t grow as much as projected.
Nothing in this article should be construed to be individual investment, tax, or other personalized financial advice. All statements made about any company or security are simply statements of beliefs or points of view held by Green Alpha. At the time this article was printed, November 12, 2021, Green Alpha held Vestas Wind Systems (ticker VWDRY), Crispr Therapeutics (ticker CRSP), Caribou Biosciences (ticker CRBU), and Quantumscape (ticker QS) in some client accounts. These holdings do not represent all of the securities purchased, sold, or recommended for clients. Past performance does not guarantee future results. Please see additional important disclosures here: https://greenalphaadvisors.com/about-us/legal-disclaimers/