Code red for humanity could be green light for these climate change stocks

Equities
Investments

As the UN’s latest climate change report suggests we’re reaching the point of no return on climate change, Wall Street has been eyeing up eco-friendly stocks trying to hold back the tide.

Climate change stocks

UN’s damning climate report

The UN published a climate report on Monday that suggests the planet is at a crossroads.

According to the latest figures, limiting global warming to 1.5-2°C above pre-industrial levels will be “beyond reach” in the next two decades unless immediate action is taken to limit worldwide greenhouse gas emissions.

The world now has to move towards a fossil fuel-free state, according to the UN’s report, before heat extremes become too much for health and agriculture to thrive. That means a dramatic cut down on coal and gas-fired power stations, internal combustion powered vehicles of all sizes, and a mass shift towards renewable energy.

“The alarm bells are deafening, and the evidence is irrefutable: greenhouse gas emissions from fossil fuel burning and deforestation are choking our planet and putting billions of people at immediate risk,” UN Secretary-General Antonio Guterres said on the report’s publishing.

The Paris Agreement signed in 2015 was meant to instil a sense of urgency amongst the nations of the world. There, nearly every sovereign state on Earth pledge to keep global warming levels at 1.5°C.

But there are problems with this. The US recently called upon OPEC to pump more oil, despite green energy being a cornerstone of the Biden administration’s term ambitions. China too needs to do more to remove coal-fired power stations from its infrastructure and adopt more eco-friendly means.

With some 100 companies responsible for over 71% of all the world’s harmful emissions, there has to be more government oversight, coupled with personal responsibility on the part of consumers if the planet is to remain hospitable for humanity.

Greenwashing, the idea that companies say they’re doing their best to lower emissions without taking any action, will be intensely scrutinised from here on out.

But in any case, a new wave of climate-consciousness could spur on renewable energy stocks, as well as shares in companies that are doing their best to limit their carbon and ecological impacts.

Which climate change-tackling stocks are on Wall Street’s radar?

In a research note published after the UN’s climate report, Alliance Bernstein created a list of equities it believes could offer investors good returns based on their climate credentials.

When putting its list together, Bernstein focussed on stocks that could help investors with “separating climate leadership from greenwashing for your net-zero portfolio.” The bank selected companies with science-based targets that align with the 2015 Paris Agreement.

Bernstein also looked at firms which offer employees climate incentives, i.e., financial or other bonuses given to employees and company members based around meeting climate and emissions targets.

The final list is actually a mixed bag. If you were anticipating pure renewables energy plays, guess again. According to Bernstein, companies that offer such incentives tend to stick to their emission reduction goals, although it didn’t specify what form those incentives take.

So, who are Bernstein’s “leaders in climate actions?”. Climate change stocks that make the list are:

  • AstraZeneca
  • Pfizer
  • Walmart
  • Inditex
  • Sainsbury’s
  • AT&T
  • Vodafone
  • Yum Brands
  • WSP
  • Equinix
  • Mastercard
  • Adobe
  • Microsoft

Investing in North American energy

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Investments

The US stands at an energy crossroads. While it has long thrived on oil & gas, the world’s largest economy looks to be switching to clean sources for its power needs. With that in mind, we’re examining what both conventional and renewable energy in the US can potentially offer investors. 

Traditional & renewable energy in the US – a worthy investment? 

The wider North American energy picture 

The US needs an energy overhaul. Those are the signals coming from the Biden administration. The 46th President of the United States has made it clear his White House will be doing all it can to overhaul his predecessor’s less-than-enthusiastic attitude to climate change. For a start, Biden has realigned the United States with the historic Paris Climate Change agreements signed in 2016. 

Significant investment in clean power and renewable energy in the US is likely on its way throughout the next four years. At least. $380bn has been apportioned to the sector as part of a wider $2 trillion infrastructure plan. As such, investors are looking to some of the top US renewable energy companies for long term portfolio bolsters.  

But that is not to forget traditional energy sources. Shale oil and gas has turned the US from a net importer to a net exporter. 2021 however, has battered oil & gas markets – mainly oil – but demand recovery is predicted to surge throughout the rest of the year with economies worldwide opening up post-lockdown. 

Liquid natural gas (LNG) could also be a significant money-spinner for US energy firms. Rising import numbers from Asian markets are propping up the market currently. Feed gas volumes at Texan LNG terminals are nearing record levels at roughly 11 billion cubic feet per month. 

Midstream: a key component in North America’s energy system 

Midstream energy firms, i.e. those involved in the transportation, storage and processing of hydrocarbon products, make ideal investment vehicles. They are essential to the current fossil fuel-led global economy. This sector includes pumping stations, pipelines, storage facilities, tanker ships, tank trucks, and rail tank cars. 

Even in 2020, a torrid year for oil, yields from such investments could have been as high as 10%, as midstream firms typically operate on long, multi-year contracts with set fees. That gives them more dependable free cash flow compared with upstream (getting oil & gas out of the ground) firms, who struggled immensely due to the multi-billion-dollar cost of their activities. While midstream is expensive to set up, tax breaks ensure companies remain profitable by swallowing some of the cost. 

Looking at the Alerian Midstream Energy Index, an index tracking performance of midstream energy firms, we can see it gave a 10.4% yield in November 2020, and a 6.7% yield by March 2021. For context, the S&P 500 index’s yield for March 2021 was 1.5%.  

The case for US renewable energy for investors 

Moving back to renewable energy, there is a long term case for renewables. We spoke earlier about the Biden White House’s major spending plans. The current administration is targeting carbon-free nationwide electricity generation by 2035. That will require sustained capital injections across the solar, wind and other forms of clean power generation over the coming decade. A ten-year extension to the US’ current renewables tax credit scheme worth $400bn has been proposed too. 

Companies in the midstream oil & gas sector are looking to slash emissions. Natural gas pipeline company Williams Companies (WMB) is investing $400 million in solar installations to power its facilities and is targeting net-zero emissions by 2050. 

For investors looking to beef up their portfolios for companies with solid green credentials, or are just supplying clean energy and infrastructure, renewables companies could generate solid returns. 

This will take looking at the top renewable energy firms in the US, such as NextEra Energy. The Florida-based utility company is one of the nation’s clean power pioneers. It is currently in the midst of significantly boosting its green energy capacity, aiming to construct 30 GW of new power generation infrastructure by 2030. 

NextEra projects sales growth of 12% throughout 2021 too, although conservative estimates say a steady 6-8% rise per year until 2023 is more likely. Utility firms like NextEra work on fixed-rate power supply deals. That means firms like NextEra can count on steady cash flow generation. Factor in 5.5m Floridian homes already powered by NextEra, and its ambitious growth targets, long term ideals are there. 

Marketbeat recently upped NextEra’s target price to $75.00, with the stock currently trading at around $74, as of May 20th 2021. 

US renewable energy investment & risk 

When investing in North American renewable or conventional energy, risks must be taken into consideration. In 2020, for example, the pandemic caused the oil market to crash. It’s only now starting to claw its way back up but is nowhere near pre-pandemic levels of capital expenditure by oil companies, or product demand. Personal positions on oil as a commodity or on oil company stocks are likely to have shed considerable value across 2020. 

Renewable energy stocks are subject to volatility too. Turning back to 2020, we’ve seen utility firm share prices drop as they fail to get new projects off the ground owing to tougher working conditions or supply chains snags caused by Covid-19. Likewise, some equipment manufacturers have struggled to fulfil orders for the same reason, leading to their own share prices dropping. 

With any investment, be sure you can afford to ride out market volatility. Only do so if are comfortable taking any losses. 

Thematic investing: renewable energy stocks

Equities
Investments

The world is starting to invest in renewable energy. You can too. From wind energy stocks to utility firms, we take a look at some of the key clean power stocks that could perform well in the short and long term.

How you can invest in renewable energy

The case for green power

Global governments have committed to slashing their carbon emissions. The UK and US are both gunning for net-zero CO2 emissions by 2050, while the EU has pledged to cut its own greenhouse gas output in half by 2030.

We’ve also seen countries in areas like Central America go all in on renewables, adopting mass solar, wind and hydro power for their national grids. Billions is being pumped into large-scale solar farms throughout the Middle East too with Saudi Arabia, Dubai, and Abu Dhabi leading the way.

Pressure is mounting on China to cut the use of coal-fired power stations over the next decade to meet climate goals.

The historic 2016 Paris Climate agreement was a major step towards a greener future. Under its protocols, signed by 197 nations, the world essentially pledged to limit global temperatures no more than 2°C higher than pre-industrial levels. A lofty goal, to be sure, but one that could pay dividends for investors and traders.

The investment behind this worldwide initiative is nothing short of gargantuan. Joe Biden’s presidency alone is pushing through $2 trillion worth in clean energy projects and investments. Since 2019, over $54bn has been spent by the EU and UK on wind power development alone. China’s figure is over $100bn.

Climate change is one of the biggest challenges the planet faces. Countries are likely to continue to invest in renewable energy into the 21st century.

Using Britain as an example, the UK’s renewable market is expected to grow at a CAGR of other 9% from now until 2026, and that’s just one nation amongst many.

We can also see commitment to new green power generation infrastructure by looking at capacity installation. In total, 260 GW of renewable capacity was installed in 2020 – a 50% y-o-y increase.

As such, wind energy stocks, solar, and other green power sources could be poised to benefit greatly in the short and long term. See below for some renewables stocks that could be worth adding to the portfolio of the environmentally-conscious commodities investor.

Renewable & wind energy stocks to watch

Brookfield Renewable Partners

Brookfield Renewable Partners is one of the world’s largest publicly traded clean power suppliers. It has a multi-pronged approach to renewable energy, developing and supplying solar, hydro and wind power, as well as offering energy storage functions.

The bulk of Brookfield power is purchased under long-term, fixed rate deals, giving the firm steady cash flow. It also boasts a strong balance sheet and a BBB+ bond rating from S&P – one of the highest awarded to a renewables firm.

Currently, Brookfields believes it can pump around $800m-$1bn worth of liquidity into fresh projects from now until 2025. Estimates suggest annual cash flow growth per share of 11% to 16%, supporting yearly dividend increases between 5% to 9%, making it one to watch.

Vestas Wind Systems

One the key wind energy stocks is Vestas.

It’s a bit of a behemoth when it comes to wind power, being a cornerstone turbine supplier to on and offshore projects throughout the world, including three upcoming projects in Australia totalling 420 MW. The Danish firm is also mulling over expanding its footprint in the UK’s offshore sector.

In 2020, Vestas revenues grew by an impressive 22%, with its bottom line amount too €771m. Profitability did dropped by 25%, to €750m, caused by Covid-incurred costs. Deliveries, however, increased over 2020, with Vestas delivering 17.2 GW of capacity to project sites across the world – a 34% year-on-year rise.

Vestas’ €43bn project backlog is enough to inspire major confidence. It has increased dividend by over 5% in 2021, making the company one of the few renewable energy stocks with a pay-out (although its yield is less than 1%).

NextEra Energy

NextEra Energy powers 5.5m Florida homes with a combination of wind and solar and claims to be one of the world’s largest suppliers of wind and solar-generated power.

The company has been pumping cash into its renewables subsidiary over the past decade. Under its Florida Power & Light utility provider, the firm will be piloting something new for Florida: a “green hydrogen” plant, generating clean gas production via solar power, set to go live in 2023.

What’s more, NextEra has snapped up desirable acreage throughout the Sunshine State. It has plans to develop these key sites over the next 20 years.

In the short term, NexEra’s investments should power earnings growth of at least 6% to 8% per year through 2023. The firm could also increase its dividend by about 10% annually through at least 2022.

Want to invest in renewable energy? Remember the risks

While in the long term, the world is shifting towards a cleaner, greener future for energy generation, please be aware that all investing and trading is risky.

Whether you want to add wind energy stocks to your portfolio, or you’re looking at renewable utility suppliers or solar companies, bear in mind your investment can go up or down. You can lose more money than what you started with.

Only invest or trade if you are confident you can afford any losses.

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