Public Equity Investing in Renewable Energy and Energy Efficiency by Paul Hilton - Trillium

Public Equity Investing in Renewable Energy and Energy Efficiency

By Paul Hilton, Trillium Asset Management

Trillium’s Sustainable Opportunities thematic public equity strategy aims to address global sustainability challenges in three core areas: climate solutions, economic inclusion, and healthy living. While many of Trillium’s equity strategies have exposure to renewable energy, the Sustainable Opportunities strategy has a more specific, thematic focus, and generally a greater level of exposure to companies benefiting from the shift to a more sustainable economy. Within climate solutions, a primary focus is renewable energy and energy conservation, particularly exposure to companies involved in:

• Electrification and Grid Modernization, including storage
• Energy Efficiency
• Geothermal
• Renewable Energy Financing
• Solar Energy
• Wind Energy

In our view, climate change is the top existential issue facing the planet. Long-term impacts from climate change are well documented by the IPCC, and include more extreme weather events including heatwaves, droughts, and floods. These impacts will lead to food and water insecurity as well as public health and biodiversity threats. According to the World Health Organization between 2030 and 2050 climate change is expected to cause approximately 250,000 additional deaths per year, including from malnutrition, malaria, diarrhea, and heat stress.1

But we believe climate change also represents an investment opportunity, given the level of investment required to meet global goals such as the 1.5 degree C global warming target of the Paris Agreement in 2015. For example, the International Renewable Energy Agency estimates that meeting global energy transformation goals will require an additional $47 trillion in cumulative investment from 2023-2050, plus roughly $1 trillion in annual investment in fossil fuel technologies redirected towards energy transition solutions. This would result in annual investments in energy transition technologies more than quadrupling from current levels to meet the 1.5 degree C pathway.2

In addition, we are seeing greater public policy support for energy alternatives, including the Inflation Reduction Act in the U.S. which will provide $370 billion for climate technologies and clean energy through a mix of tax credits, grants, loans, and rebates. Further support from the U.S. CHIPS Act of 2022 and Infrastructure Investment and Jobs Act of 2021 will also provide incentives for the transition, in areas such as EV chips and EV charging infrastructure respectively. Similar policy initiatives in China, the EU, the UK, and Australia, among other parts of the world, are also helping to support the transition to a clean energy future. The response to the Russia invasion of Ukraine, for example, has accelerated the shift to fossil fuel alternatives in Europe through immediate and robust policy efforts.

Despite this investment and policy backdrop, the last two years have been problematic for the performance of many renewable energy stocks. Concerns about rising interest rates globally have put pressure on smaller cap, growth-oriented stocks, particularly those that are pre-profit. Some clean-tech focused companies had a boost in share price with the announcement of the Inflation Reduction Act, but most are significantly lower than just a few years ago. While many of these companies may have strong long-term prospects, there is no doubt that the short-term may be volatile. Our belief is that the recent pull-back is an excellent buying opportunity, and that investors with a longer-term time horizon will be rewarded. That said, we look to identify companies with well-developed business strategies, proven management, strong balance sheets, and enough scale to compete and ultimately take share.

This article does not attempt to touch on the incredible work on climate change in other asset classes beyond public equities. For a helpful discussion of total portfolio activation as it relates to community-oriented climate solutions, see the following paper from Croatan Institute: Climate-Related Investment for Resilient Communities – Croatan Institute

Advocacy

Some public equity strategies will also engage companies through shareholder advocacy to push them on a variety of issues related to climate change and renewable energy. Trillium has long sought to invest in companies proactively addressing climate change, and also to advocate with companies through dialogue and shareholder proposals to encourage them to reduce their climate impact. Mitigating the devastating potential effects of climate change on people and planet depends on companies setting and meeting robust, independently verified, science-aligned greenhouse gas emissions reduction targets – and a crucial component of reduction goals for many companies is the purchase of renewable energy.

Trillium has asked companies to consider purchasing renewable energy since as early as 2003, and since then has secured commitments to set renewable energy goals from companies including Home Depot, Akamai, and 3M, among others. In recent years, we have focused on overall emissions reduction goals that include scope 2 emissions, withdrawing proposals at a variety of companies, including Darling Ingredients and SBA Communications, following their commitments to set targets via the Science-Based Targets Initiative (SBTi), a non-profit which verifies company goals to ensure alignment with 1.5 C degrees of warming, in-line with our own Net Zero commitment. A proposal asking UPS to do the same received 20.4% of the shareholder vote this year.

Overview of GHG Protocol scopes and emissions across the value chain-EPA
Infographic of the Greenhouse Gas Protocol (GHG) scopes and emissions across the value chain – from the Corporate Value Chain (Scope 3) Accounting and Reporting Standard 

Renewable Energy Company Examples:

(not all companies are held in the Sustainable Opportunities strategy) 

Chargepoint – Founded in 2007, ChargePoint is one of the largest independently owned EV charging networks in the world, serving commercial, residential, and fleet clients. ChargePoint uses an asset light model that allows it to scale quickly through sales to partners, including schools, companies, municipalities, and building owners.  

EDPR – The renewable subsidiary of utility company Energias de Portugal, the company is a global leader in renewable energy development and production, with a portfolio including onshore and offshore wind, solar, energy storage and hydrogen production, operating in North and South America, Europe, and Asia. 

First Solar – First Solar is the leading domestic U.S. solar photovoltaic panel manufacturer. The company’s thin film technology provides cost and thermal benefits to utility-scale solar projects. First Solar is expanding production in the U.S. to take advantage of IRA program tax incentives.

HASI – Formerly known as Hannon Armstrong, renewable energy financing company HASI provides financing to enable projects that deliver positive environmental impacts through providing clean energy, developing sustainable infrastructure, and increasing energy efficiency. 

Ormat – Ormat is a global leader in building and operating large scale geothermal energy plants, with proprietary binary technology that is more efficient and sustainable, reinjecting 100% of the geothermal fluid.

Ultimately, many companies providing the solutions to the climate crises will be beneficiaries of the shift away from fossil fuels and towards renewable energy, electrification, and efficiency focused technologies 

 

Article by Paul Hilton, CFA, Portfolio Manager and Research Analyst at Trillium Asset Management, covering the Consumer Discretionary sector and is the lead Manager for the Sustainable Opportunities strategy. He is also a member of the portfolio management team for the Green Century Balanced Fund, for which Trillium serves as a sub-advisor. Prior to joining Trillium in 2011, he was Vice President of Sustainable Investment Business Strategy at Calvert Investments and also previously held senior positions within Calvert’s Equities and Marketing Departments.

Paul also served as Portfolio Manager for Socially Responsible Investing at The Dreyfus Corporation, then a division of Mellon Bank, and as a Research Analyst in the Social Awareness Investment (SAI) program at Smith Barney Asset Management, then a division of Citigroup. Paul started his career as an Analyst with the Council on Economic Priorities, a non-profit known for an influential consumer guidebook called “Shopping for a Better World.” 

Paul is former Board Chair of US SIF, former Treasurer of the United Nations Environment Programme Finance Initiative (UNEP-FI), and founder of the Social Investment Research Analysts Network (SIRAN), the first U.S. network of sustainability analysts. He is a member of CFA Society Boston and a Chartered Financial Analyst, and holds Master’s degrees in Anthropology from New York University and Education from Roberts Wesleyan College. Paul is a frequent speaker on topics related to approaches to SRI/ESG investing and the growing market for products in this space.

Important Disclosure Information

This is not a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. The specific securities were selected on an objective basis and do not represent all the securities purchased, sold, or recommended for advisory clients. Information and opinions expressed are those of the author and may not reflect the opinions of other investment teams within Trillium Asset Management. Information is current as of the date appearing in this material only and subject to change without notice. This material may include estimates, outlooks, projections, and other forward-looking statements. There is no assurance that impact or investment objectives will be achieved. Due to a variety of factors, actual events may differ significantly from those presented.

Footnotes:

  1. IPCC_AR6_WGII_SummaryForPolicymakers.pdf
  2. World Energy Transitions Outlook 2023: 1.5°C Pathway; Preview (azureedge.net)

Energy & Climate, Featured Articles, Impact Investing, Sustainable Business

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