Interest in sustainable companies is rising. Awareness of environmental responsibility is uncovering opportunities in certain corners of the market.
There’s plenty of opportunities from shifting to a low carbon world. We look at three themes and explore some companies that could be well placed to benefit.
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Energy
We’ve seen sharp rises in clean energy technology, from electric cars to wind and solar. The shift to renewables is still happening and the global energy system will probably look very different by the end of the decade. We think there’s three key aspects to the green energy shift.
Getting to net zero – energy is key to a lower carbon future. Fossil fuels will eventually run out, but energy like wind and solar is renewable.
Making it affordable – advancing technology and declining costs have improved solar, wind and battery markets. Clean energy is getting cheaper, boosting demand and potential profits for renewable energy companies.
Government support – governments are trying to cut carbon with incentives like subsidies, tax breaks and regulation. The Inflation Reduction Act in the US for example has allocated $369bn to energy and climate related programmes.
NextEra Energy
NextEra Energy, one of the world's biggest wind and solar energy producers, offers exposure to the cleaning up of the grid in our view. The US based company is made up of two businesses, Florida Power & Light Company (FPL) and NextEra Energy resources (NEER).
FPL is an electric utility, the biggest in America, providing power to over 12mn people in Florida.
They operate enough solar panels to give emission free power to 900,000 homes a year. And Florida’s regulatory environment lets FPL set its own prices and build and operate its distribution networks without as much scrutiny as companies operating in the UK, helping generate healthier margins.
NEER is the world’s biggest producer of wind and solar energy, making up 18% of NextEra Energy’s total revenues. Unlike the retail-focused FPL, NEER serves wholesale clients. By covering two ends of the market, NextEra Energy has better protection from demand changes.
The shares currently trade at around 17 times expected earnings and we don’t think that fully reflects the group’s strengths.
But as ever, this does come with risk. FPL has been through a series of political and campaign-finance scandals. The head of FPL, appointed just last year, will have the important task of steering the company away from any more bad headlines.
Batteries
Batteries are essential when it comes to scaling up reliance on renewable energy. A regulatory shift is underway worldwide and the expected result is an annual growth of 27% in li-ion batteries to 2030. Electric cars will make up most of this demand.
Tesla
Tesla is still an attention-grabbing leader in this space. The company continued dominating in 2023, responsible for 51% of battery electric vehicles in the fourth quarter. Though, that’s down 8% from the same time in 2022.
Competition is a real challenge for Elon Musk’s company, with the EV market becoming more and more crowded.
A race to the bottom has hurt profitability across the sector, but Tesla’s stronger starting position has let them retain gross margins of 17.2% (excluding the beneficial impact of regulatory credits). These are the regulatory credits Tesla gets from the government for avoiding carbon emissions, which can be sold on to heavier polluting companies.
In the third quarter of 2023, this contributed $554mn to revenues.
When looking at battery producers, strong policies and commitments to responsible mining are important. The Democratic Republic of the Congo (DRC) is a key resource nation, notoriously home to unethical mines.
Tesla’s 2022 impact report outlines improvements it’s made to its operations, including ending 12 supplier relationships over ethical concerns. Tesla’s been sued over the deaths of child labourers in the DRC before, but the case’s dismissal and subsequent action hopefully puts a stop to this.
One of the biggest risks for Tesla investors is still the stock’s valuation. Shares trade for 54.7 times next year’s expected profits. That means expectations are very high.
Agriculture
Food and water are daily essentials but feeding ourselves sustainably is a growing problem. As the population grows, so do energy needs. Research suggests we need to increase food production between 24% and 70% by 2050 to meet demand.
Food production hits the environment in three ways. Freshwater usage, greenhouse gas emissions and land use. Climate change, urban sprawl and soil degradation will cut the amount of quality farmland available. The need to do more with less creates a growing market for precision agricultural firms specialising in increasing agricultural productivity sustainably.
Deere & Company
Deere & Co, or John Deere, is the world’s biggest agriculture equipment maker and a leader in precision agriculture. Precision agriculture, the science of improving farming through technology, can help cut fuel consumption and inputs like fertiliser and harmful chemicals. The company has four sections, but production and precision agriculture has generated the most revenue.
John Deere has led the way in the agricultural equipment sector. The focus isn’t on who can make the biggest and most powerful machines anymore. Cutting-edge sensors and automated data insights are what give farmers the edge now.
John Deere’s scale, dealer relationships and vertical integration gives them the expertise and data to help produce industry leading products. Deere has grown revenues by 56% over the past five years. It’s expecting its 35% market share in precision agriculture to remain, with scope to gain share if things go their way. Although of course there are no guarantees.
With higher margins in precision agriculture, growth here would benefit overall profitability. With a peer topping 28.7% cash profit (EBITDA) margin and strong growth potential, their low teens price-to-earnings ratio looks attractive to us.
The big risk for John Deere is its reliance on North America. The agricultural market was strong last year, but a poor outlook for North American farmers, who made up 61% of revenues in 2023 would spell trouble.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views might have changed since then. Unless otherwise stated, estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates aren’t a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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