Recent legislation may help buoy green stocks and funds.
A focus on transitioning away from the use of fossil fuels to mitigate some of the worst effects of climate change has helped so-called environmental, social and governance, or ESG, investing criteria become more widespread. In addition to green companies, there has been a proliferation of funds that hold those stocks. “In 2018, the ESG fund marketplace had finally grown to offer the breadth of U.S. equity, non-U.S. equity and bond strategies that made it possible to cover every core and meaningfully diversifying asset class with an ESG strategy,” says Brian Huckstep, chief investment officer of Advyzon Investment Management. Now, California’s move to phase out new gasoline cars by 2035 and the Inflation Reduction Act’s support for renewable energy seems to be creating new momentum for environmental investing. “The Inflation Reduction Act sets up a multiyear growth opportunity across energy transition-affected businesses in the U.S.,” says Matt Breidert, senior portfolio manager with TortoiseEcofin. Here’s a look at some of the green funds and stocks to consider buying now.
First Solar Inc. (ticker: FSLR)
With a large manufacturing presence in the U.S., this solar panel builder will be among the biggest winners from the Inflation Reduction Act, Breidert says. Over the longer term, the company will be able to compete more with Chinese producers as it expands manufacturing internationally. First Solar also has an advantage because the solar cells it makes use cadmium-telluride technology, allowing it to skirt the major supply chain bottleneck plaguing manufacturers who use polysilicon. First Solar’s technology also means its manufacturing process has a smaller carbon footprint than those making panels from polysilicon.
Tesla Inc. (TSLA)
As the leading electric vehicle maker globally, Tesla’s products mean less emissions from the auto sector, even when factoring in the pollution caused by generating the electricity to charge their batteries. Plus, the company is a two-for-one green investment by making traditional solar panels as well as photovoltaic shingles. “With TSLA, you also get exposure to Solar City, which was acquired by Tesla in 2016,” says Doug Kinsey, chief investment officer with Artifex Financial Group. Another plus for Tesla is that it is a more established company with a longer track record than other green companies that may be considered more speculative investments, he says.
Fisker Inc. (FSR)
One of the major headwinds that Tesla will have to contend with is competition, not only from legacy automakers venturing into the electric vehicle world but from a host of smaller companies making only electric vehicles. Fisker is one. Resurrected out of the ashes of the bankruptcy of Fisker Automotive, this electric vehicle maker went public through a special purpose acquisition company, or SPAC, and now seems to have gotten all four wheels under itself. The company has nearly 60,000 reservations for its Ocean SUV and expects at least 80,000 by the end of the year. The company will start production in November at a carbon-neutral factory in Austria.
Stem Inc. (STEM)
This company’s software uses artificial intelligence and machine learning to help reduce emissions by automatically switching between battery power, grid power and onsite electricity generation. The company says it is the first pure-play smart energy storage company to go public in the U.S. As an industrial-scale battery storage player, it also stands to be among the biggest winners from the Inflation Reduction Act, says Breidert. “For customers deploying energy storage and solar, the most significant parts of the bill are tax credits for clean electricity investment and production,” Stem CEO John Carrington said in a statement after the act passed. “We anticipate that these incentives will increase investment certainty and make adoption more affordable in existing and new energy markets.”
NextEra Energy Inc. (NEE)
In addition to powering more electric cars, renewable energy providers will increasingly be asked to provide electricity to produce green hydrogen for industry, power storage for the grid and heavy transportation. Most hydrogen at the moment is made using fossil fuels, but a growing number of companies are making the element with renewably produced electricity. As the world’s largest renewable energy company, NextEra stands to benefit from that push as well as the Inflation Reduction Act; in June it announced a plan to help decarbonize more of the U.S. power sector through investments in renewable energy, including green hydrogen. “Existing renewable assets in the U.S. are likely to see significant new opportunities to supply a nascent green hydrogen industry that will be kicked off with this bill, as renewable electricity will be one of the largest pieces of cost in producing those green hydrogen molecules,” Breidert says.
Plug Power Inc. (PLUG)
Companies produce green hydrogen with renewably made electricity that is used to separate water into hydrogen and oxygen, with a tool called an electrolyzer. Later on, that stored hydrogen can be used to produce electricity via a fuel cell. As a maker of electrolyzers and hydrogen fuel cells, Plug Power seems to be well positioned to take advantage of growth in demand for hydrogen-powered vehicles, especially for fleet applications. In August, the company signed a deal to provide liquid green hydrogen to Amazon.com Inc. (AMZN). Earlier in the year, the company announced an agreement to supply green hydrogen for material-handling lift trucks at Walmart Inc. (WMT) distribution and fulfillment centers in the U.S.
iShares Global Clean Energy ETF (ICLN)
Even though there seems to be plenty of momentum behind green investing at the moment, there are still risks. For one, many startups fail, and the green energy space is not likely to be an exception. “Investors have to keep in mind that although the market environment is better for these types of companies under the Biden administration, it is still a sector in its infancy, so they tend to be volatile, with high P/E ratios and uncertain futures,” Kinsey says. To diversify and hopefully minimize some of that risk, investors can consider exchange traded funds, including iShares Global Clean Energy, which holds positions in dozens of equities, including stocks of companies involved in wind and solar electricity generation.
VanEck Low Carbon Energy ETF (SMOG)
This is another ETF that Kinsey says meets his ESG screening criteria. It’s designed to follow an index of renewable energy companies that can include those involved with wind, solar, hydro, hydrogen, biofuel or geothermal technology, lithium-ion batteries, electric vehicles, waste-to-energy production, smart grid technologies, or building or industrial materials that reduce carbon emissions or energy consumption. “The challenge to ESG investing now is that it has become much more in demand by the public, so a lot of money managers, mutual funds, ETFs, etc., have jumped into the space, and a fairly high portion of the new funds may not be suitable for specific goals or objectives,” Kinsey says. “In other words, there’s a lot of greenwashing going on, where investment firms slap an ESG label on a fund just to attract assets.”
First Trust Global Wind Energy ETF (FAN)
Kinsey also points to this exchange-traded fund, which tracks an index that measures the performance of companies active in the wind energy industry. While the U.S. has been a leader in onshore wind development, it has lagged Europe and Asia in building the massive offshore wind farms that can power millions of homes. But now the U.S. is a growth market for the offshore wind industry as the White House has set a goal for the nation to have 30 gigawatts installed by 2030. The nation has less than 1 gigawatt right now. That expansion is a boon for wind farm developers such as Vestas Wind Systems (VWDRY) and Orsted (DNNGY), which are among FAN’s top holdings.
9 green stocks and ETFs to ride the clean energy wave:
— First Solar Inc. (FSLR)
— Tesla Inc. (TSLA)
— Fisker Inc. (FSR)
— Stem Inc. (STEM)
— NextEra Energy Inc. (NEE)
— Plug Power Inc. (PLUG)
— iShares Global Clean Energy ETF (ICLN)
— VanEck Low Carbon Energy ETF (SMOG)
— First Trust Global Wind Energy ETF (FAN)
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Update 08/31/22: This piece was published at an earlier date and has been updated with new information.