Kahn of SICM notes that companies across all industry sectors are improving their environmental, social and governance commitments, often in excess of what’s required by local regulations, because better ESG performance reduces their cost of capital and is good for business.
Mohan Tatikonda, a professor of operations management at Indiana University’s Kelley School of Business, says corporate executives have begun to recognize that their environmental practices affect their customer and employee relationships, reputations, revenues, operations and competitiveness. “It can be expensive to not be environmental,” he says.
Regardless of what the present administration does, companies will move forward in significant ways in the environmental improvement of their products, services and delivery, says Tatikonda, who focuses on corporate strategies.
Even if the administration loosens environmental standards, companies that have invested in new processes and technology “can’t just hit a switch and turn it off,” he says, because it may require maintenance or be highly entwined with other systems. Scaling back environmental efforts can also alienate some consumers and hurt employee morale and future hiring and retention efforts, he says.
“We will always have the innovators in our society regardless of executive statements or regulatory changes,” he says. He points to Telsa and engine maker Cummins, which he says has been an exemplary leader in undertaking environmental-oriented projects to improve and sustain its customer relationships.
Investment Opportunities
Don’t start searching for coal plays. Bringing back coal “is a complete pipe dream,” says Pernick. “The economics are stacked completely against any type of resurgence in coal in the United States.”
Kahn says the largely unregulated “fracking revolution” (which has kept natural gas prices low) has been the predominant disruptor of the coal industry in recent years. Even if a rollback in regulations were to stimulate the use of coal, adds Richardson, power companies are unlikely to make a 30-year investment on a four-year administration.
As for renewable energy, Richardson says Chinese manufacturers’ appetite for market share (which has created a glut of solar panels and intense pricing pressures) is making it difficult to find many investment opportunities with strong near-term prospects. However, he says, “We think the long-term prospects around renewables are inescapable.”
Over the next five years, wind and solar will account for about 70% of new power generation capacity in Europe and more than 50% in the U.S., he says, referencing data from the International Energy Agency and Bloomberg New Energy Finance.
Energy efficiency is where Impax Asset Management currently sees the best opportunities in energy and where it has parked about 25% of its $7 billion of assets under management. Capital investments in energy efficiency, which are rising as global economies recover, can offer corporations some of the fastest returns, says Richardson. Impax invests in industrial companies that make energy-efficient motors, fans and generators.
But what really excites Impax is water, says Richardson. The firm has allocated close to 50% of its assets to water investments—its all-time largest position here, he says.
Government policy is trying to mitigate the environmental challenges of polluted water, and even President Trump has expressed concern about the problems in Flint, Mich. U.S. cities and towns, many plagued with leaky pipes or pollutants, will be able to invest more in water infrastructure as their balance sheets continue to recover, says Richardson.
Finally, “you can’t have economic growth without availability of clean water,” he says. China’s 13th Five-Year Plan has a significant commitment to improving clean water quality and wastewater treatment, he notes. Impax invests in the manufacturers of pumps, pipes, valves and filters used in water infrastructure projects.
Kahn, like Richardson, declined to discuss specific investments but said SICM thinks in terms of sustainability themes. The nexus of energy, water availability and agribusiness (the production, processing and distribution of food) has been of particular interest, he says, given the increased focus on climate disruption and the United Nations’ sustainable development goal of ending hunger and achieving food security.
“You have to be pretty diversified in order to capture the various opportunities around these themes of being more energy efficient, being more water efficient [and] doing more with less,” Kahn says. This includes growing more food on less land, with less water and fewer inputs.
SICM looks for leaders in different sectors and geographic regions that are well positioned to deal with sustainability challenges, grow revenues and reduce costs, says Kahn. When looking at investments, the firm thinks it’s important to consider such metrics as a company’s return on equity, its dividend growth, the stability of its cash flow and its weighted average cost of capital. “I’m very mindful of the cost of capital,” says Kahn, especially where interest rates may rise.
Pernick of Clean Edge expects to see opportunities in areas where there are holes in infrastructure—water, the electric grid and energy storage—and notes that infrastructure has strong bipartisan support.
The NASDAQ Clean Edge Green Energy Index (CELS) and the NASDAQ OMX Clean Edge Smart Grid Infrastructure Index (QGRD) track individual companies, REITs and yieldcos (which provide direct exposure to actual energy-generation assets and tend to offer dividends). The First Trust Nasdaq Clean Edge Green Energy Index Fund and the First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index Fund are ETFs based on these indexes. Mutual funds are another way to invest in clean tech, he says.
Lee of MSCI says that while the names of many environmental funds sound the same, they may have exposure to different types of technology. To get a better look at what’s underneath the hood when selecting funds, more advisors are using tools that report ESG data, she says.
Investors can catch a much larger set of companies that offer opportunities for some exposure to the “environmental upside,” says Lee, by decreasing the revenue threshold that a company must derive from its environmental-related businesses (something tracked by the MSCI ACWI Investable Market Index). Many companies earn some of their revenues in the environmental space, even if they’re not the most obvious players.
It’s not necessary to think, she says, “that you have to cherry-pick a handful of the Teslas of the world.”