Put your money to work: Investing in climate change mitigation


There are close to 600,000 self managed super funds in Australia with about 1.1 million members. And, according to the Australian Government figures, these funds had about $715 billion of assets, of which $220 billion were Australian listed  shares and about $7 billion of offshore shares

Figure 1 SMSF asset allocation March 2019. Source: Aust Govt

On top of that there are also a number of professional superannuation funds that have a particular focus on decarbonization.

Readers will have to do their own research on their Super Fund’s policy.

However, I simply want to single out Future Super. (Disclosure FutureSuper is an ITK client). Future Super specifically has a zero fossil fuels policy and some money funds new renewables. Net fund assets were around $450 million as at 30 June, 2019.

My focus in this note is to draw to the  attention of members of SMSFs that they generally will have discretion to manage their investment portfolios and could choose to invest some of that $235 billion of listed shares into areas that will benefit from or assist climate change mitigation and avoid putting money into fossil fuels.

If the 1 million managers of the SMSF all acted together it would have a powerful effect.

But what to invest in?

ITK does not have a financial advisor license so what follows is in no way to be considered advice or a recommendation.

Rather, they are shares that we think warrant further investigation. Also,  research has continually demonstrated that very few individuals can consistently beat the market after adjusting for risk.

In general by picking one sector (say renewables) and avoiding another (say coal or oil or gas companies) investors will be taking on “diversifiable” risk and so there is an increased probability of underperforming the overall market.

Of course, if the risk is well judged then after the fact you may outperform.

I personally expect coal, oil and gas to be long term underperformers in the stock market, but that’s on a 20 year view, lots of things can happen in the meantime.

Equally, we want to add three further caveats.

(1) Company performance is dynamic in the sense that businesses can do well at some times and worse at other times. It is truly said in share markets that the past is no or at least a very limited guide to the future.

(2) Just because you have a label renewable does not mean its going to be a successful investment. Far from it, there are many unsuccessful “renewable” energy companies. In general renewable energy is seeking to force new supply into an oversupplied market, and that is a difficult business. The highest return part of the business which may be the “behind the meter” installation market in Australia is generally the domain of unlisted companies and difficult to invest in.

(3) No company is 100% environmentally pure, solar panel production in China uses coal fired electricity, batteries have to be recycled, cobalt is a nasty material. Right now EV’s are largely recharged using coal fired electricity in Australia although that will change etc, etc. So we are certainly not looking for or likely to find perfection.

Equally, electricity transmission which is going to see investment growth to facilitate renewables supply,  is also difficult to invest in here in Australia although the listed SKI and SPN provide some opportunity

It also turns out that most companies are listed offshore. I’ll get on to the big tables in a second but here I just want to list a few companies that are the first ones that come to my mind when asked for investment ideas:

Orecobre (Australian listed, producer of lithium in Argentina, my super fund owns shares)

Nextera Energy (USA listed utility. A very successful utility that is the global leader in wind generation ownership backed up by solar and now battery).

Neoen (Paris listed wind and solar developer)

Infigen (Australian listed wind farm owner)

I’d also look at CWP if it was listed and for the record happily own debt in the Sapphire Wind Farm (pays 6% a year for five years) that I have previously mentioned on Reneweconomy when it was available as an investment.

An Australian company I plan to look at is Lynas, an Australian rare earths producer. This brings up the point that Australia’s traditional comparative advantage in the world is as a resource provider: i.e. a miner.

Most value adding to those resources is done somewhere else in the world.

Obviously, Australia also has a good wind and solar resource, one of the better, although far from the only good one, in the world.

However, Australia does not have good renewable firming resources. In particular we have a very limited hydro sector in comparison with say Europe or Canada or Russia or South America.

These kind of points show how quickly a discussion on investment merits can dive in many, many directions.

So back to the lists.

Using Factset, a professional investor data tool, and various other resources, ITK has compiled a list of 42 listed companies that have a business which will either benefit from efforts to mitigate climate change or provide the means to do so.

The list includes utilities, wind and solar component manufacturers, battery raw materials, principally lithium suppliers and auto companies that ITK presently believes are likely to bet the company on electric vehicles either now or shortly.

Figure 2 Clinate change investor focus. Source: Factest

The list is sorted in Market Cap.  I apologies for the small print. Even Factset has its limitations and I’ve had to dig up debt on some of the companies from other sources.

However, it’s my first run through the list and as time goes on, hopefully initial uncertainties about the validity of some of the numbers will get resolved.

A few initial points:

Tesla is nowhere near the most valuable motor company in the world yet. It is by market capitalization but that’s a space cadet way of looking at it. Any pro is going to look at the company’s debt as well and add the two together to get the enterprise value. To do otherwise is equivalent to saying a house is worth what your equity in it is rather than also taking account of the mortgage.

A stock that will go onto my “like toresearch” list is Orsted the 4th largest stock by market cap. Orsted is the Danish wind company that has pioneered or at least is doing very well from growth in the European offshore wind industry.

Some of the solar inverter companies are bigger than I might have thought. SolarEdge has a market cap of US$5 billion and even Enphase – which was virtually broke a couple of years ago – now has a market cap of US$3.8 billion. Both of these companies had excellent share price performance last year.

In total the market cap of the selected stocks is US$454 billion. Not that large as global sectors go but providing plenty of investment choices.

I could add in the battery manufacturers but that’s for another day.

We can slice and dice the list a couple of ways.

I’m not going to do it on the basis of share price performance because otherwise readers may focus on what happened in the past rather than looking to the future.

By country:Figure 3 Source: Factset

Note how well Denmark has done by focusing on its wind industry and developing a couple of national champions.

Germany is up the list because of Volkswagen which I personally think is the company most likely to challenge Tesla for the global EV crown over the next five years, given the massive investment its putting in.

And by industry (very crude)Figure 4 Source: Factset

So, to conclude in this run through, if I was to build a portfolio from the above stocks my starting candidates would include:

Nextera, Orsted, Solaredge, Tesla, Volkswagen, Orecobre, Lynas and Neoen.

These are stocks where I either own then already (Orecobore) or  think the management or assets make them worth looking at.

Notably, without intending it to be the case, my list has more wind than solar. It’s worth stressing again that for the most part the numbers in the table have been extracted using Factset and zero due diligence has been done on the fundamentals or investment merits of stocks on the list.

That remains for another a day but investment professionals will know its impossible to be a “hero” on more than a few stocks.

No one person can understand all the things you need to know about 50 different stocks.

Analysts can study a sector (Australian banks say) for years before being regarded as proficient in just that one sector on one exchange.

I would also like to look at Goldwind as its market cap seems low for its size of business.

In general its harder to have the confidence to invest in China oriented stocks even when they are listed in  Hong Kong as “H” shares.

We’ll start looking into some of these stocks more as time permits.

David Leitch is principal of ITK

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