Renewable power stocks have been outperforming fossil fuels in US and European markets over the past ten years, according to recent research by Imperial College London in partnership with the International Energy Agency.
Some investors in the green markets were concerned the weak oil price would hit sustainability investments during the pandemic, but the stocks have held up well.
The cost of renewable energy projects, and the related electricity supply, continue to drop, while the biggest losers of market share in electricity supply have been fossil fuel firms.
According to Jon Forster, a fund manager at investment trust Impax Environmental Market PLC (LON:IEM), the crisis has reminded the world of the importance of sustainability.
“The current pandemic has served to highlight many of the existential issues that Impax has highlighted over the years, such as the breakdown in the food supply change and strain on digital/ technology,” he said.
“COVID-19 has provided us with real-life insight into the potential risks facing us as we transition to a more sustainable economy.”
However, the attention has now shifted almost entirely on the pandemic, with investors and policymakers leaving short-term environmental issues behind.
Bruce Jenkyn-Jones, co-head of listed equities and executive director at Impax, told Proactive that postponing the United Nations Climate Change Conference, initially scheduled for November, was a strong signal that the focus is now on COVID-19.
However, he noted that lockdowns worldwide have reduced pollution and driving, making many people appreciate the value of a cleaner environment.
Moreover, investors have realised that those theoretical risks mentioned in business strategies can and do actually occur and the impact can be devastating.
“What governments, policymakers, investment managers and companies will recognise coming out of this [crisis] is that climate change is potentially the next big risk that needs to be dealt with,” said Jenkyn-Jones.
Impax invests in ‘pure-play’ companies, which derive at least half of their revenue from environmental products or services in green markets.
Although sustainable and environmental, social and corporate governance (ESG) stocks have outperformed during the crisis, Impax was initially affected by its focus on small caps.
The FTSE 250-listed fund has outperformed its mid-cap peers during the crisis: while in mid-March Impax had dropped by 32% compared to January levels, the wider index was down 42%.
Now, Impax has recouped and is trading at a 5% discount in the year to date, while the FTSE 250 is still down 21%.
Impax Environmental, which has £750mln worth of assets for net asset value of 303.49p, has a dividend yield of 1%.
The current top two investees are software developer PTC and forestry investment trust Rayonier. It holds 2.8% shares in both.
During the crisis, Impax managers have been assessing the portfolio to understand whether its investees have enough resources to get through the crisis.
They noted that smaller companies, especially those with exposure in cyclical markets such as automotive and construction, have suffered from market disruption and uncertainty.
Essential services, renewables and business producing recurring revenues have instead done better.
The market volatility might offer opportunities to invest in new companies with interesting valuations.
Impax has been looking at opportunities at a stock-specific level, adding investments in water filtration and electric bicycle companies, and reducing its holding in a supplier to equipment to the metro and rail system in China.
“As we see stimulus programmes coming out around the world, many of them may well have a focus on the sort of markets we are interested in, particularly in the EU where they have already announced €500bn grants for the green market,” Jenkyn-Jones told Proactive.
“The combination of fiscal and monetary initiatives by the governments has drawn a line under the market… We feel it is well supported.”
What we will see
In the longer term, Impax expects food supply reorganisation to drive growth in sustainable food, agriculture and testing markets.
There will also be more attention on the importance of clean air, with growth in pollution control systems, as well as water treatment.
Workplace and travel changes are likely to favour digitalisation and electrification in transport, industry and construction, while public transportation and commercial property could be at risk.
Products that will help the world to adapt to climate change, such as power grids that are more resilient in extreme weather events, are also a favoured area for Impax.
“With the global economy under incredible strain, the world will look to those companies which emerge from the crisis in a strong position and the reasons why they have steered a course through,” Forster concluded.
Shares were trading at 312.17p on Tuesday at noon, for a market capitalisation of £744mln.