When one purchases a new issue of a green bond or stock, one is investing in new green capital. As the investment is realized, carbon emissions should be reduced annually for the life of the investment. Instead, when one purchases an existing stock or bond, one is taking a longer-term approach and investing in the enterprise and its future economic performance. Through success, the enterprise will gradually increase its activity and investments, which involve the reduction of carbon emissions. In all cases, the investor can hope for an economic gain due to price increases, the dividends of the stock, or the interest payments of the bonds.

Key trends of the energy transition

Some of the most critical trends in the energy transition are the breakout in sales of photovoltaic systems, wind turbines, heat pumps, and EVs. As a result, we have more utility companies that are becoming green. The circular economy is approaching, and concerns about water are increasing. Many of these developments are illustrated in my previous article (Mebane, 2023). I recommend investing in these significant energy transition trends. Each sector is briefly discussed with examples of investment in stocks or corporate bonds of leading firms in that industry. The examples are a stimulus for further investigation.

Disinvest in fossil fuels

Walk and bicycle more. Use public transport. Use electric vehicles. Heat your home with heat pumps. Do energy savings in the home and office. Sell your fossil fuel stocks and bonds. The primary cause of climate warming is the combustion of fossil fuels. These companies have been misinforming the public since the 1970s. They have accumulated overwhelming economic and political power with the help of superPACs, delaying and blocking efforts for climate improvements (mitigation and adaptation). Greenhouse gas emissions remain high, and we are headed toward climate havoc: even greater flooding, heat spells, drought, and climate migration.

Photovoltaics

This significant increase in the use of photovoltaic panels is possible today because of the extraordinary cost reductions over the last decade. The global market, estimated at 97 billion USD in 2023, is expected to grow 10 percent annually over the next five years. The market comprises three components: the photovoltaic panel, the inverter, and the balance of system (BOS). The panel production has been dominated by Chinese firms, such as JinkoSolar, JA Solar, Trina Solar, and LONGI, because of the large infrastructure programs there. With an alternative technology, there is the American photovoltaic firm First Solar, symbol FSLR. The stock is very volatile but enjoys a consensus of four stars, or outperform, with the rating services. Q Cells, founded in Germany and now Hanwha Solutions Corporation of South Korea (009830.KS), has opened factories in the US. They sell primarily to the residential market, and their shares could outperform as its solar business stands to gain from rising panel-installation demand, especially in the US. Inverters and BOS for photovoltaic systems are not analyzed here.

Heat pumps

Asian producers dominate the sector. The major players are Samsung (South Korea), Denso (Japan), Midea Group (China), Panasonic (Japan), and Mitsubishi (Japan). My favourite is the Mitsubishi Electric ADR (MIELY). The company has recently announced that it will issue green bonds for the first time to raise funds for constructing a silicon carbide (SiC) power semiconductor plant and enhancing related production facilities that handle products capable of contributing to decarbonisation. MIELY’s green bond is attractive.

Electric vehicles

Tesla's early success story is well known. Now, they have offered a third, lower-cost model. Despite several near-term challenges, some analysts expect Tesla to remain the market leader in electric vehicles despite increased competition from Chinese OEMs. US EV sales continue to grow faster than overall auto sales. In addition, Tesla is also expected to benefit from tax credits for EV purchases under last year's Inflation Reduction Act and improved driver-assistance technology. The company is also appealing because of its investment in EV batteries. Instead, Byd Company Limited is a leading Chinese EV automaker that is profitable and pays a small dividend. It trades on the US over-the-counter exchange. Warren Buffet was an early investor.

The circular economy

The three R’s (reduce, reuse, and recycle) already exist for some firms. I particularly like Advanced Drainage Systems (symbol WMS), which purchases recycled plastic as its primary material input and produces plastic pipe. WMS has a buy rating based on an average of eight analysts' evaluations. We need more information concerning the circular economy that the EU is trying to provide (Purva et al., 2021).

Scarcity of water supply

Measuring water consumption and saving becomes essential. For example, Badger Meter Inc. (BMI) manufactures and markets flow measurement, quality control, and communication solutions in the United States, Asia, Canada, Europe, Mexico, and the Middle East. It offers water meters and related services to municipal water utilities. Water-related ETFs and mutual funds exist, but specific investments are more satisfying.

Wind turbines

The four major Western producers (GE Renewable Energy, Nordex, Siemens Gamesa, and Vestas) are experiencing a tailspin in profits due to falling prices, ever-larger capacities that may be more difficult to maintain, lower demand, and a long waiting period between signing a contract and actual turbine construction. During this three-to-five-year period, supply chain disruptions such as lack of raw materials or components, higher interest rates, or inflation can occur. Only Vestas had a modest profit. Wait until the sector shows signs of a recovery in profits.

Green electric utilities

The choice is easy here, as only one US company stands out as the leading green electric utility, NextEra Energy (NEE). The company has slowed down from its torpid 15 percent pace of EPS growth but is still projected to gain eight percent per year, which is outstanding for a utility.

Green funds and ETFs

This takes all the fun out of selecting and following an individual stock or bond. Perhaps you are pressed for time. How have they performed? The historical analysis is unfavourable in that studies show no significant gain in US environmental funds over their non-environmental counterparts. However, these studies are based on rather old data. The industrial trends that I highlight have occurred in the last five years. Energy transition funds are a relatively recent variety of green funds without much performance analysis. The three green infrastructure ETFs I found, EFRA, RNEW, and INFRA, were all created in 2022 with little performance data.

ESG ratings

I am not fond of the ESG rating because of its subjective nature of reporting, and I do not use it for investing. My reading of the literature shows that ESG ratings produce insignificant results on stock returns.

US Municipal green bonds

Due to the complexity of the municipal bond market and the multiple references for green, I suggest using your broker to find and analyze suitable green municipal bonds for your situation. Helpful sites and references include EMMA, the EPA toolkit, and the DOE resource summary. Green bond mutual funds and ETFs also exist, containing municipal and corporate bonds. Again, your broker is recommended. With the increase in interest rates, these bond funds have underperformed over the last two years.

International green bonds

The Climate Bonds Initiative provides the only global certification scheme for sustainable debt under the Climate Bonds Standard. The value of green bonds issued worldwide increased from $37 billion in 2014 to a peak of $582 billion in 2021 and decreased slightly in 2022. The Luxembourg Green Exchange (LGX) is attempting to become the home of sustainable finance. It lists 1750 international bonds and 3750 securities. LGX is the world's first and leading platform dedicated exclusively to sustainable finance, which now includes a full suite of sustainability-orientated products and services. For example, the listings include quasi-sovereign bonds from Southern Africa, sovereign bonds from the Central Bank of Tunisia, the Republics of Pakistan, and Turkey. A selection of bonds for developing countries is possible, always with the advice of your broker or consultant. The London Stock Exchange's dedicated Sustainable Bond Market (SBM) champions innovative issuers in sustainable finance and transparency for the investors. The expanded SBM offers a comprehensive platform for sustainable debt financing. As with municipal bonds, mutual funds and ETFs exist for international green bonds.

In conclusion

There are ample opportunities to improve your local and personal climate investments. There is also the possibility of helping someone farther away or more exposed.

References

1 Mebane, 2023, Global climate progress and challenges: A bleak reality and glimmers of hope, MEER, 10 November.
2 Purva Mhatre, Rohit Panchal, Anju Singh, Shyam Bibyan, 2021. A systematic literature review on the circular economy initiatives in the European Union, Sustainable Production and Consumption, Volume 26, Pages 187-202, ISSN 2352-5509.