There has been a persistent but largely uneventful conversation about climate change over the last several years. But in 2019, we may finally be seeing the beginning of real action.
Democrats in the U.S. House of Representatives introduced a “Green New Deal” last spring. While it was voted down, all of the Democratic candidates for president in 2020 have made climate change a key campaign issue. We saw a global climate strike in September that featured mass walkouts across the U.S., and the testimony of Greta Thurnburg about the need for urgent action instead of excuses has gone viral around the world.
Moreover, three out of four Americans now agree that climate change is real and man-made, and more than half call the situation a "crisis." As a result, governments and businesses will surely face even more pressure to address this issue in serious and urgent ways.
This is just in the U.S., which has been dragging its feet compared to other developed nations that have already formally embraced policies to combat climate change, including a $60 billion carbon plan just passed by Germany last week.
We have yet to see a truly transformational shift in the global economy or capital markets, but the movement appears to be just over the horizon. So if you want to position your portfolio to profit from this transition, it's time to start looking at these direct plays on the fight to control climate change (spoiler: none of them have to do with electric cars).
1. Wind energy
America's renewable energy capacity surpassed that of coal power earlier this year. In fact, wind turbines alone account for more than 8% of total capacity — neck-and-neck with both nuclear capacity and hydroelectric capacity, and far better than the roughly 3% of capacity allocated to solar. Wind is growing strong in 2019, too, with record development this year, according to the American Wind Energy Association.
To ride this wind revolution, General Electric GE, -1.42% is a great choice. GE's wind turbine business was already dominant before its roughly $13 billion acquisition of related operations from Alstom SA ALSMY, -2.95% and the smaller acquisition of LM Wind Power for $1.7 billion in 2016. While past acquisitions created an admittedly bloated conglomerate, the "new GE" is committed to three key areas: aviation; healthcare, and power that includes wind turbines. So if you can stomach some of the justified negativity that has driven GE shares down more than 60% in three years, you may want to consider a bargain-buy into what is emerging to be a dominant wind energy player.
Read more on GE: As Larry Culp tries to turn around GE, this is the next phase to watch
Another option is Denmark's Vestas Wind Systems A/S VWDRY, -0.31% that trades over-the-counter but is a major player with a $16 billion market value and more than $8 billion in annual revenue. Though troubles related to tariffs and Brexit continue to cause uncertainty, the company has a bright future, with a more than 30% increase in its backlog of wind turbine orders.
One exchange-traded fund to consider is the diversified First Trust Global Wind Energy ETF FAN, -0.19% , which currently holds shares of both Vestas and GE along with other related wind-energy stocks.
2. Specialized building materials
One way the global economy is sure to transition is via the power supply. A more aggressive push for energy efficiency to limit demand will also help reduce carbon emissions. The American Council for an Energy Efficient Economy estimates that efficiency efforts could cut greenhouse gas emissions in half by 2050.
Owens Corning OC, +1.58% and Germany's BASF BASFY, +0.00% are the leaders in thermal insulation materials. You might think that this boring specialty market isn't worth watching, but research and advisory firm Grandview Research estimated a roughly 6% annual growth rate from 2019 through 2025 as insulation grows to $77 billion market.
Another important element of energy efficiency is the HVAC system used in a given building, and leading manufacturers are cashing in by providing these systems to new structures as well as retrofitting older and less-efficient buildings. Johnson Controls International JCI, -0.23% and its HVAC systems sold under the York and Hitachi names is a good play on this trend, as is Japan's Daikin Industries Ltd. DKILY, +0.65% , which serves Western markets as well as faster-growing economies in Asia.
Some modern buildings are being built to standards that exceed existing codes, and environmental groups have created ambitious benchmarks including net zero energy (NZE) standards. These are voluntary for now, but building codes are shifting in a way that will boost demand for efficiency products in structures going forward.
3. Water
One climate-related issue that is increasingly in focus is the need for reliable water sources. However, a new study in 2019 has shown that man-made activity has been creating droughts and other water issues for more than a century. That means providing safe, potable water is a persistent challenge — and one that surely won't be remedied easily or quickly.
There's a big business opportunity for firms addressing these concerns, including "water hygiene" specialist Ecolab ECL, +0.58%, which helps businesses with sanitation needs while conserving water. Ecolab’s service helps the bottom line of companies including foods giant Archer Daniels Midland ADM, +0.96% which has contracted with Ecolab on project that reduced water use by 2.3 billion gallons.
Publicly traded water utilities are also interesting options for investors, including California Water Service Group CWT, -0.13% , a stock that’s up roughly 30% in the last year as it helps address the constant water shortages in hard-hit regions of California and New Mexico. Or internationally, Brazilian utility SABESP -- formally Companhia de Saneamento Básico do Estado de São SBS, +0.43% , which serves some 25 million customers in this emerging market. The stock has roughly doubled in the last year thanks to a recovering Brazilian economy but also due to a steady increase in demand for water across this Equatorial nation.
For a more diversified play on the general trend of water, Invesco Water Resources ETF PHO, -0.33% can spread your investment across 35 water-related holdings, and with $1 billion in total assets, it is a legitimate offering.
4. Waste and recycling
While greenhouse gases may seem a thing apart from physical trash, methane and other gasses emitted from landfills are a major contributor to man-made climate change. Additionally, major waste management firms that help with recycling efforts can help ensure plastics and other materials are reused in environmentally responsible ways with smaller carbon footprints.
As the largest publicly traded waste manager, aptly named Waste Management Inc. WM, +1.04% is a key player in this space valued at close to $50 billion. It operates about 250 landfills and 300 waste transfer stations. Waste and recycling player Republic Services Inc. RSG, +0.86% is no slouch either, valued at almost $30 billion and operating about 200 landfills and 200 transfer stations.
But wouldn't an effort to reduce waste actually hurt stocks like these? Well, not necessarily. Both Waste Management and Republic Services are investing ambitiously in waste-to-energy and landfill gas-to-energy facilities as a way to turn today's trash into tomorrow's treasure. Those businesses are currently small in comparison with other operations at these waste companies, but alongside continued growth into recycling-related operations these firms have a key role to play in the future.
Read: Metals billionaire Andrew Forrest is making a $300 million bet on the next big commodity — plastic
Similarly, engineering and industrial giant Emerson Electric’s. EMR, -0.42% food-waste recycling unit has potential. Its partnership with Grind2Energy is a perfect example of the next generation of waste management services. With 28 million tons of food waste sent to landfills each year in the U.S., accounting for 23% of all methane emissions from the nation, the addressable market is huge — both for home and commercial use alike.
5. A meat-free future
Livestock contribute to global warming in a big way, with up to 18% of man-made greenhouse gas emissions coming from agricultural efforts. As a result, any move away from meat is key to fighting climate change.
After the IPO success of Beyond Meat BYND, +11.58% , which has been admittedly a volatile stock lately but is still up more than 100% from its first print in May, proves that there is big demand for meat-free alternatives as source of protein. Vegan and vegetarian diets are on the rise, and roughly one-third of Americans label themselves as “flexitarian” — meaning they only eat meat occasionally.
Beyond Meat shares are sure to remain volatile, since the stock is so recently minted, but this investment has great long-term potential as one of the leading names in the space. After all, plant-based burgers are seeing double-digit growth in 2019 — and some 95% of those orders are going to people who aren't strict vegetarians.
A less-direct but more established play would be Kellogg K, +0.20% , which was way ahead of the curve when it acquired MorningStar Farms in 1999. The company now sells 90 million pounds of meat-free proteins, and its big brands like Morningstar, Gardenburger, and health-food nameplate Kashi should keep this company at the top of the shopping list for meat-free households for many years.
If you're weight-conscious, meatless proteins certainly aren't the answer. As many nutrition experts have noted, a Beyond Meat burger may not be better for your waistline. But these alternatives certainly have a lower carbon footprint — and if and when a market-based system begins to account for the environmental impact of products, many consumers may find veggie burgers increasingly easier on their wallets in the years to come.
More: Major cities including New York and Tokyo tagged for climate distress: Goldman Sachs