Wind turbines are seen in Norway in December. Sustainable investing is hugely popular, particularly among younger investors who want to align their investments with environmentally progressive ideals.JONATHAN NACKSTRAND/AFP/Getty Images
Sustainable investing has been struggling over the past year, as frothy valuations collide with the rising likelihood that U.S. interest rates will go up. With many green stocks down sharply from their recent highs, is now a good time to buy?
The green downturn is a lot worse than what’s happening in the broader market.
The iShares Global Clean Energy ETF, a basket of stocks that tracks names such as Enphase Energy Inc. ENPH-Q, Vestas Wind Systems A/S VWDRY and Plug Power Inc. PLUG-Q, has tumbled about 40 per cent over the past year, underperforming the S&P 500 by an amazing 62 percentage points.
The ugly performance raises the question of whether sustainable investing – a hugely popular theme, especially among younger investors who want to align their investments with environmentally progressive ideals – is losing its appeal.
But rather than shying away from sustainability, investors may want to take a closer look at the opportunity here: Stocks are cheaper and the long-term growth outlook remains strong, especially as governments become more active in combatting climate change.
The strategy requires some patience, though.
“I view some of the price appreciation that we saw into the beginning of 2021 as a high-water mark in the near term. It will take some time for these companies to get back to those levels,” Martin Grosskopf, manager of sustainable investing strategies at AGF Investments, said in an interview.
Indeed, the backdrop is challenging. Rate hike expectations have skewered the valuations of growth stocks, a universe that contains many sustainable names whose profits may not be realized for years.
What’s more, Mr. Grosskopf believes that companies promising a net-zero future – despite being heavy emitters of carbon dioxide today, in some cases – are attracting more attention than truly sustainable companies.
But Mr. Grosskopf is not dismayed.
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His AGF Global Sustainable Growth Equity Fund – AGF launched an exchange-traded fund version (AGSG-T) in 2020 – has been around for 30 years, during which sustainability has grown from a niche area with few stocks to a mainstream strategy. Now, global companies that tap into the theme draw from many sectors, from technology and industrials, to materials and consumer discretionary.
The broader choice appears to be working in the fund’s favour: While the narrower clean energy sector has stumbled over the past year, the AGF ETF is up about 3 per cent over the same period – partly because the fund is more diversified and has avoided stocks with particularly frothy valuations.
Mr. Grosskopf’s approach: Focus on opportunities within the broad themes of water, waste, energy and health.
Electric vehicles have a place here, but rather than jumping on the Tesla Inc. TSLA-Q bandwagon, Mr. Grosskopf believes there are better-priced opportunities among companies within the value chain. These include Abermarle Corp., a major lithium producer, and Samsung SDI Ltd., a car battery manufacturer.
Healthier food fits as well. Here, Mr. Grosskopf likes companies such as Koninklijke DSM NV and Kerry Group PLC, which sell wholesome ingredients to packaged food companies.
And in addition to companies that help mitigate climate change, such as Brookfield Renewable Corp., he is interested in companies that can help the planet adapt to the increasing severity of fires and floods that are occurring now.
Here, Canadian companies such as Stantec Inc. and WSP Global Inc. stand out. So does Omaha, Neb.-based Valmont Industries Inc., which allows farmers to use water more effectively, which is especially crucial during droughts.
“We have devised an approach that gets us through the turns in the market, and allows investors to maintain a longer-term focus on sustainability,” Mr. Grosskopf said.
He believes that the sustainability theme is still in its early stages, and is bound to gain momentum as the world turns its attention to all aspects of climate change, and capital follows.
“We’ve been at it a long time,” he said. “But this has just entered the mainstream lexicon over the past couple of years.”
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