This blog, by Mike Appleby, investment manager at Alliance Trust Investments, first appeared on Alliance Trust Investments website, entitled Tightening Emissions Regulations: Who Wins?
The earth’s climate is changing because of human activity. This will have negative impacts on our economy and the certainty of this is getting stronger1. The international response to combat the increasing average global temperatures appears to be gaining momentum. Significant progress is being made in the run up to change negotiations in Paris in November 20152. The two largest emitters; the US and China have set more stretching targets, which is an important step forward. The US has set a target of reducing Green House Gas (GHG) Emissions from 26-28% by 2025, versus 2005 levels. This is effectively a doubling of their existing policies. China are aiming to reduce GHG intensity3 60-65% by 2030 versus 2005 levels. The globally agreed goal is to limit the global average temperature rise to two degrees centigrade4. This rise is estimated to have a relatively benign impact on our ability to develop.
So what? We think this does have implications for investments. There are some obvious potential losers from these regulations (carbon intensive businesses) and some potential winners (low carbon alternatives and technologies that can be used to reduce our GHG emissions). This trend of increasing regulation to reduce GHG emissions is not new, we have been working on this theme since our funds were launched back in 2002.
Identifying potential winners and losers from a given trend is not in itself a reason to own a stock – but it is an important element. We also want companies that have good business fundamentals which mean they can be profitable; as well as undemanding valuations. It is when the sustainability (growth), business fundamentals (profitability) and valuation are all favourable, that we believe investments are most likely to generate the best investment returns.
We highlight five companies that we think are well placed to benefit from regulation to reduce Green House Gas (GHG) emissions. These companies are all beneficiaries of our Climate Change and Energy Efficiency investment theme.
Kingspan Group PLC (A2*)
Kingspan generates approximately 80% of its sales from insulation products and the rest from renewables and other building products. Insulation of buildings is one of the most cost effective energy efficiency strategies and is seeing strong take up, in part driven by increasingly stringent building standards worldwide. Kingspan has succeeded because of its investment in innovation and design, which has allowed them to grow strongly while helping their clients attain ‘outstanding’ BREEAM ratings (BREEAM, BRE Environmental Assessment Method, is the world’s foremost environmental assessment method and rating systems for buildings). Energy efficiency is an important way of reducing GHG emissions by reducing how much energy is wasted in heating buildings.
Sunpower Corp (A2*)
Sunpower Corp is a photovoltaic solar module manufacturer, installer and operator of solar energy projects. The company is listed in the US and has one of the most efficient solar modules which improves the amount of power generated and the investment returns. This gives them a competitive advantage over less efficient conversion rates from their competitors. The cost of solar modules has dropped dramatically and the economics of solar power have started to look very compelling. In many areas we are close to solar being competitive with little or no subsidies. Solar power is an obvious beneficiary of regulation to reduce how much carbon dioxide is emitted in generating electricity, as it emits far lower GHG as compared to generating power from fossil fuels.
Gamesa Corp Tecnologica (A2*)
Gamesa is a Spanish company that manufactures wind turbines for generating electricity as well as developing wind farms. They are an obvious winner of any attempt to reduce the carbon intensity of power generation, as their product produces electricity with significantly lower emissions than conventional fossil fuel power. We like their exposure to power markets that are growing and have good renewable (wind) resources such as Brasil, India and China.
Daikin Industries (C2*)
Daikin Industries is a Japanese company that is the world largest producer of air conditioners. Air conditioning does contribute to environmental damage (from GHG emissions in their operation) and damage to the ozone layer from refrigerant chemicals. Daikin’s products are all geared towards reducing overall energy consumption in a meaningful way, and their chemicals division produces chemical products which reduce the damage to the ozone layer, caused by chemicals used in air conditioners. We believe being the most efficient and proactively managed air conditioning company gives Daiken a significant competitive advantage. Their products will appeal to customers wishing to reduce the electricity bills for cooling buildings as well as the associated emissions, which in turn drives demand for their business.
Enel Green Power (A3*)
Enel Green Power is an Italian listed company involved in the development and operation of generating electricity from renewable sources. They generate electricity from a variety of renewable resources including wind, hydro, geothermal, biomass and solar. The company is an obvious beneficiary of regulation to reduce how much carbon dioxide is emitted in generating electricity, as it emits far lower GHG from its renewable assets as compared to fossil fuels which are more carbon intensive.
* Our comprehensive ‘Sustainability Matrix’ helps us to pinpoint how well a company responds to our sustainability criteria.
Examples of stocks are provided for general information only to demonstrate our investment philosophy. It is not a recommendation to buy or sell and the view of the Investment Manager may have changed.
1Climate change 2014: synthesis report: summary for policy makers (p2) “Human influence on the climate system is clear” and “Warming of the climate system is unequivocal” (p2)
2The Conference of Parties (COP21) in Paris due in Nov- 2015 gives us some confidence in progress being made on the policy response to climate change. This comes from more active collaboration and commitments to reduce GHG emissions prior to the negotiations (Intended National Determined Commitments [INDC’s] have already been lodged). And the two largest emitters, China and the US have become more proactive which is a significant change. For example China has committed to reduce carbon intensity of GDP by 60-65% by 2030 compared to 2005, and energy efficiency and curbing emissions targets are expected to be an important new part of China’s upcoming 13th 5-Year plan. The US have set a target of reducing GHG emissions by 26%-28% by 2025 versus 2005 which is an approximate doubling of current reduction per annum target. All positive moves in the right direction and presenting a meaningful strengthening in policy response to climate change.
3GHG emitted for each unit of Gross Domestic Product
4 2 degrees limit, Global Climate Fund, Adaptation framework, agreed in Cancun Climate Change Conference 2010, COP16 of UNFCCC, COP6 Kyoto Protocol