by Timothy P. Vick, Director of Research, Sanibel Captiva Trust Company
When I first entered this industry, environmental investing began grabbing headlines; but in retrospect, the movement was acutely over-promoted and underdelivered. Companies that operated landfills, processed recyclables, or incinerated waste were deemed environmentally friendly by the standards of the time (not so today). Later, solar power and ethanol companies attracted capital, but those industries’ tough economics and ongoing losses deterred all but the most loyal and idealistic investors. Nuclear power went through the same cycles, as did wind power, desalination, and hydroelectric. Past financial results of this high-growth industry, unfortunately, did not keep up with bread-and-butter stock indices, and sometimes couldn’t keep pace with its common nemesis – the oil industry.
The election of President Biden has thrust the Green Energy platform front and center again, this time giving strong political backing to an industry that on its own was on the cusp of providing appealing economics. Funds and ETFs tracking clean energy companies generally surged after the November election, and remain well ahead of the S&P 500 on the heels of the Administration’s proposals to direct $2 trillion in investment and tax credits toward the industry and to push the U.S. to be “carbon neutral” (no more net emissions within our borders) within 30 years.
The lofty goals notwithstanding, the size and potential growth of the alternative energy field warrant serious attention by portfolio managers today. Industry economics have vastly improved (input costs have fallen; thus, more winners and fewer losers), capital is plentiful, Washington clearly sides with the industry, and the public desires to see favorable results. With or without political instigation, green energy is rapidly gaining market share. The International Energy Association (IEA) estimates that through 2025, 95% of all new power generating capacity brought online across the world will use renewable sources.
The pressures on non-green companies to become carbon-free, “net-zero” firms are likewise accelerating, which will force executives to respond. Activist shareholders want to see quantifiable proof of each company’s progress – though many of their demands have failed in proxy voting. And regulators and accounting boards are debating how public companies can quantify the long-term effects of environmental costs and climate change on their balance sheets.
Today’s green energy offerings span such a gamut that we believe there will be strong opportunities for investors who can absorb the risks and yet want to avoid the most capital intensive, highly cyclical sectors. In addition to traditional alternative industries such as solar, wind or hydroelectric, investors can explore a number of nascent industries that fit the goal of helping reduce carbon consumption on the margin, such as electric vehicles and fleets, auto electronics, battery and fuel cell manufacturing, organic groceries, biomass (generating electricity from plant material), data storage, recycled building materials, rare earth metals mining, “smart building” systems, and “smart grid” infrastructure. These “picks and shovels” sectors seem most promising to us, and several Trust Company portfolio holdings already have acquired promising niche businesses in these fields. Several other companies already are on our radar screen for potential future investment.
Our view of the Green Energy industry has been more practical and “wait-and-see” than passionate, a tested strategy that has saved us from committing unforced errors in emerging fields like this. Eliminating costs and wastes from business processes should come naturally to executives of publicly traded companies – they should strive to improve efficiency as if they were breathing air. Seen in that context, “going green” and being carbon-neutral is just an extension of decades-old attempts to reduce both input costs (in this case, energy) and waste by-products thrown off by their facilities. With the costs of green energy rapidly falling in recent years, the managements we follow should naturally be more open to upgrading facilities and putting in place energy-saving systems to boost long-term cash flows. The economic benefits of such efforts will produce, of course, political, and social benefits to companies too.
The Sanibel Captiva Trust Company is an independent trust company with $3 billion in assets under management that provides family office and wealth management services, including investment management, trust administration and financial counsel to high-net-worth individuals, families, businesses, foundations and endowments. Founded in 2001 as a state-chartered independent trust company, the firm is focused on wealth management services that are absolute-return oriented and performance driven. Each portfolio is separately managed and customized specifically to the client’s yield and cash-flow requirements. The Naples Trust Company and The Tampa Bay Trust Company are divisions of The Sanibel Captiva Trust Company. Offices in Sanibel-Captiva, Naples, Marco Island, Tampa, Belleair Bluffs-Clearwater and Tarpon Springs. www.sancaptrustco.com