These are the ESG sectors investors should watch to make money in 2022
Electric vehicles face a pivotal year, while solar, wind and other renewables face political risk through the midterms.
SAN FRANCISCO (Callaway Climate Insights) — After a soaring year for environmental, social and governance investing in 2020, ESG stocks came down to earth in 2021, weighed upon by rising oil prices, inflation and a backlash against SPAC investments in the electric vehicle market. Not to mention greenwashing.
This coming year the market will try to fight off body blows from rising interest rates, continued inflation and supply chain issues, and what’s shaping up to be a horrible year for climate legislation on Capitol Hill as party politics and a hostile Supreme Court combine to stymie President Joe Biden’s efforts ahead of mid-term elections.
In short, the outlook is terrible. And probably wrong. In times like these, it pays for investors to take a sector approach, and look for individual opportunities while the macro-picture suffers. Climate investors did make money in certain sectors last year, such as natural resources, and several news events in coming weeks and months will dictate how other sectors perform as well.
Solar stocks face political risk
Starting with solar stocks, which have lost about a third of their value collectively since Thanksgiving. A big play on solar will develop before the end of this month, when the California Public Utilities Commission (CPUC) votes on the state’s net metering rules, which face a proposal to slash payments residential users get from selling excess solar energy back to the utilities.
The utilities and the CPUC argue the payments are too high, and that the entire net metering system favors wealthy homeowners over low-income neighborhoods, which pay extra for electricity as the utilities raise rates to compensate for the payments to the solar households.
Opponents of the plan say it will crush demand for new solar panels, extending the timeframe it will take homeowners to recoup their investments to 15 years from five years. A decision is expected as early as Jan. 27, and solar stocks will be volatile until then, such as SunPower (SPWR) and First Solar (FSLR). The biggest solar ETF, the Invesco Solar ETF (TAN), is down about 8.5% since Jan. 1.
California is expected to be the second-largest market for installations in 2022, behind Texas, but a decision the wrong way could dramatically impact that. Gov. Gavin Newsom and business luminaries such as Elon Musk have both come out against the plan, at least in its current form. A delay, which is possible, would benefit solar stocks, but only for a bit.
Electric vehicle stocks face production hurdles
After years of hype, electric vehicles will burst on the scene in earnest in 2022, with several new models competing with industry leader Tesla (TSLA). Tesla made huge strides in solving its production challenges in the past few years, and in 2021 sold almost one million vehicles. It’s on pace to sell almost 1.5 million in the coming year.
Upstarts such as Rivian (RIVN) and Fisker (FSR) will have models on the market this year though they are at the beginning of the production curve, while auto giants such as Ford (F) and (GM) will be building huge production plans for their electric pickup models. GM’s Silverado EV, announced last week, won’t be available until next year, while Ford’s F-150 Lightning is already on the market.
Ford shares almost tripled in the past year while GM shares were up almost 50%. Rivian’s IPO was closely watched last month but after an initial pop, its shares have fizzled — as did Fisker’s.
Investors who want to play the electric vehicle market through charging station companies have plenty of choices, including ChargePoint (CHPT), Blink (BLNK) and EVgo (EVGO) have been hit by political risk recently. Most sold off sharply last month after Biden’s Build Back Better plan went into limbo when Sen. Joe Manchin (D-WV) said he wouldn’t vote for it.
The stocks will benefit from Biden’s infrastructure plan, which was passed in November, and allocates about $7 billion toward building more charging stations across the country.
Natural resource stocks look for more gains
Another way to play the electric vehicle boom is by investing in minerals and commodities tied to an expected surge in demand for electric batteries. The natural resource plays were the best performers on the Callaway Climate Insights Index last year, occupying five of the top 10 spots.
In addition to Lithium Americas (LAC), up 168%, and Piedmont Lithium (PLL), up 120%, shares of Albemarle have gained 78%, while MP Materials (MP) and Livent (LTHM) round out the top five resource plays (Full disclosure: I have a small position in MP in one of my funds).
This year will be an important year in minerals and materials investing, we believe. The seemingly insatiable demand will bring in more cash, but will also be quite volatile, particularly as investors become more aware of the environmental dangers of digging up a lot of these new minerals, and the political consequences in many of the resource-rich countries, such as the Congo.
Midterms and misbehaving
If 2021 was the year of unrealized expectations, 2022 is shaping up to be more of a battle over energy transition as some fossil fuel companies and utilities, and their political and financial supporters, dig in to stop the momentum.
Riding high on strong oil prices last year, and expectations from much of Wall Street that traditional energy stocks in general are due for a rebound year, big oil companies are sticking to their playbooks of disrupt and delay. Some, such as Royal Dutch Shell (RDS.A), Italian oil and electricity giant Enel SPA (ENIA) and Spain’s Iberdrola (IBDRY) are funneling profits from oil production last year into their renewable businesses.
Others, such as Chevron (CVX) and Exxon (XOM) in the U.S., are simply waiting for midterm elections.
With Biden’s ‘Build Back Better’ plan in limbo thanks to West Virginia Sen. Joe Manchin, almost the entire climate agenda that reinstated the U.S. into the global climate order is up for grabs. It’s hard to see infrastructure stocks tied to new offshore wind projects or solar farms or even utilities investing meaningfully when so much political risk remains ahead. To say nothing of the electric vehicle charger companies.
And yet, some of the biggest financial players have made moves just in the first few weeks of January, to put action behind the climate pledges they’ve made the past two years.
Blackstone (BX) said it would invest $3 billion in Invenergy Renewable, one of the largest private energy generation and storage companies. Goldman Sachs Group (GS) agreed to invest $250 million in Hydrostor in Canada, while Bill Gates’ Breakthrough Ventures said it is preparing to invest as much as $15 billion this year in energy storage and carbon removal systems in Europe and the U.S.
These companies are looking past the election headlines and toward what they see as a future in which fossil fuels are smaller and renewables dominate the U.S. and European grids.
Nuclear stocks have their day
One sector of renewable stocks that should get renewed scrutiny in coming months are the nuclear stocks, as Europe debates whether to include nuclear and natural gas in its taxonomy of sustainable energy sources. There is sharp debate about nuclear in particular, with countries such as Germany vigorously against it. Others, such as France, are huge proponents of nuclear energy, and argue it’s the only way smaller countries currently reliant on coal can transition away from fossil fuels without starting an energy crisis.
The debate will be closely watched in the U.S., as the European Union’s taxonomy decision — likely this summer — will influence how sustainable standards are measured around the world. Shares to watch include Lightbridge Corp. (LTBR), Entergy Corp. (ETR), which I have a small holding of, GSE Systems (GVP, and Centrus Energy (LEU), among others.
Shares have generally performed well in the sector since COP26, the annual climate summit, in Glasgow in October.
Carbon offsets are soaring
One final place for investors to start looking is the carbon markets. Carbon prices soared in Europe last year, more than tripling in value as international companies rushed to buy carbon offsets to hedge against their own pollution.
With new rules coming into place in Brussels this summer, the carbon offset market is leaping, not just on the exchanges such as the International Exchange, but in the natural carbon offset market, where companies buy tracts of forest and other natural land to offset their greenhouse gas emissions.
Several Wall Street companies are starting to make markets in carbon offsets or carbon derivatives, and the sector is increasingly attracting some of the attention previously reserved for cryptocurrencies.
A final word about sector switching
As you look at the various cleantech and ESG sectors to determine whether to invest, it’s often tempting to pick one of the worst performers, as in many years the worst become the best and the best flip to the worst, at least in the beginning of the year.
This is usually a short-term trading phenomenon as momentum investors swap last year’s momentum for what they think will work going forward. It can work, but it’s also subject to many influences, such as inflation, politics, even Covid.
Clean tech stocks often follow the tech stock pattern, and so when the entire market is down on tech weakness, they tend to fall, too. But a careful study of which ones are profitable, growing businesses vs. speculative, trend-driven fad stocks can often separate the wheat from the chaff and provide a number of good, solid businesses to choose from, no matter what the headlines of the moment.