Investing in the Environment After the Paris Climate Accords
Late last year at a summit in Paris, more than 190 nations hammered out a climate deal committing them to cut carbon emissions.
Good for the planet. But what about investors? After all, huge chunks of the U.S. economy -- including electricity generation, transportation and the industrial sector -- are responsible for most of the country's emissions.
At the 21st Conference of Parties to the United Nations Framework Convention on Climate Change, or COP 21, the U.S. said it would target greenhouse gas emission reductions of 26 percent to 28 percent from 2005 levels by 2025.
The meeting's outcome points to most countries' desire for decarbonization and makes solar, wind and energy-efficiency investments more attractive, says Harris Roen of the Roen Financial Report, which tracks alternative energy mutual funds and exchange-traded funds.
The agreement, as well as the domestic Clean Power Plan, means coal will lose out as power plants switch to cleaner-burning natural gas and renewable energy sources, such as wind and solar generation, creating a new energy landscape that will benefit some companies more than others.
The switch to natural gas -- which has been ongoing in the U.S. as hydraulic fracturing and horizontal drilling increased the supply and decreased the price of the commodity -- will require new infrastructure.
It's not all doom and gloom for utilities. Utilities in parts of the nation where regulators do a good job at balancing the need for investment with low rates for customers stand to benefit, says Charles Fishman, an equity analyst for Morningstar, the Chicago-based analysis and data firm.
Regulators in states including Georgia, Mississippi, North Carolina and Indiana have historically been fair to investors in utilities that have made environmental investments, Fishman says. That should benefit Duke Energy Corp. (DUK) and Southern Co. (SO), which operate in those states.
However, deregulated utilities still using a lot of coal in states such as Illinois, Ohio and Pennsylvania will face more challenges, Fishman says. Companies in these areas won't get paid for closing coal plants and building ones fueled by natural gas, he says.
Facing these headwinds, shares of Dynegy (DYN), Talen Energy Corp. (TLN) and FirstEnergy Corp. (FE) have been pressured, he says. A Canadian company, TransAlta Corp. (TAC), which has unregulated coal-fired assets in Alberta, recently cut its dividend by 78 percent, he says.
One bright spot in the non-regulated utilities space is Calpine Corp. (CPN), because it already specializes in natural gas and owns many of the efficient combined cycle natural gas turbines, Fishman says.
While the utilities sector is a bit of a mixed bag, one area that will benefit from the move away from coal is the infrastructure sector, which will be building pipelines to move natural gas and voltage transmission lines to get electricity from newly built gas or wind plants, Fishman says. Two companies to consider are Dominion Resources (D) on the pipeline side and ITC Holdings Corp. (ITC) on the transmission side.
Hybrid electric vehicles will also benefit from decarbonization. While it's difficult to find a pure-play electric vehicle company besides Tesla Motors (TSLA), traditional car companies will also benefit, Roen says.
In addition to federal standards on corporate average fuel economy and renewable fuel mixes, electric and hybrid vehicles will also have to play a part in needed carbon reductions in the transportation sector if the U.S. is to hit its goal by 2025, says Colleen Regan, a senior analyst with Bloomberg New Energy Finance.
The alternative energy sector remains in early stages and has seen a good bit of volatility, especially in solar, as investors alternately dive in and then get nervous and exit their positions, Roen says.
Given the volatility of the renewable energy sector, investors are typically better off going into mutual funds and exchange-traded funds than trying to pick individual stocks, Roen says.
Solar and wind funds took a hit in September, but they rebounded 7 percent on average in the fourth quarter of 2015, according to a Roen report. The Brown Advisory Sustainable Growth Fund Investor Shares (BIAWX) was the best-performing green mutual fund last year.
The fund does cast a wide net, as it included companies considered environmentally sustainable, such as Visa (V), Facebook (FB), Amazon.com (AMZN), Starbucks Corp. (SBUX) and Nike (NKE). The fund has an expense ratio of 0.90 percent, or $90 annually for each $10,000 invested, and the initial minimum contribution is $5,000.
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