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Investors Bet Europe’s Recovery Will Have Green Tint

Europe’s plan to kick-start its economy while shrinking its carbon footprint is throwing up new opportunities for investors.

Shares in renewable-energy companies and insulation providers have advanced this year, in contrast to the plunge in oil-and-gas companies’ stocks and a retreat in the broader market. Investors are betting these firms will benefit from the European Union’s ambitious proposal to stop damaging the environment by 2050, which the bloc aims to bake into its economic recovery plan.

EU leaders are meeting Monday to haggle over the bloc’s proposed EUR1.8 trillion ($2.06 trillion) coronavirus response package after they remained deadlocked in negotiations over the weekend. Authorities have suggested earmarking 30% of that funding for climate-related projects and stipulating that all spending must comply with its goal of net-zero greenhouse-gas emissions.

Objections from the Netherlands and other fiscally-conservative member nations could derail the package. Regardless, fund managers say the push to clean up Europe’s economy will lead to hundreds of billions of euros being invested in renewable fuels, energy infrastructure, transportation and construction over the next three decades.

“This isn’t about investing capital in a way about making you feel good, ” said Luke Barrs, head of fundamental equity client portfolios at Goldman Sachs Asset Management in Europe, the Middle East and Africa. “This is about saying there are secular demand tailwinds.”

Around 45% of the Global Environmental Impact Equity Portfolio fund that Mr. Barrs oversees is invested in European companies. “More of the innovations have come from Europe at this stage,” he said, citing government subsidies as a contributing factor.

The prospect of a burst in government-led investment has lifted shares in utilities that produce most of their electricity without fossil fuels.

Danish company Ørsted A/S, which aims to close its final remaining coal-fired plant by 2023, has climbed 27% in 2020, even as the pan-continental Stoxx Europe 600 gauge has lost 10%. Alongside supplying power in Denmark, the utility develops and operates wind farms internationally. It runs the Block Island Wind Farm off Rhode Island and has been awarded six more offshore projects in the U.S.

Shares in Spain’s Iberdrola SA, another big player in offshore-wind power, have advanced 21% this year. In contrast, shares in oil major BP PLC have dropped 35%.

“It’s clear: we are putting this in law, we are hitting net-zero by 2050 and we are prepared to put the money behind it,” said Meike Becker, a utilities analyst at AB Bernstein. “It has made investors more ready to price in the growth” in renewable-energy capacity over the next 10-20 years, she said.

Last December, the EU pledged to eliminate net greenhouse-gas emissions by 2050, the centerpiece of its so-called green deal. European lawmakers and ministers are currently considering proposed legislation that would make the target legally-binding and lay out steps for achieving it, including new emission-reduction goals for 2030.

The EU this month released strategies for two planks of its climate plan: knitting together energy systems used in transport, industry and buildings to reduce waste; and fast-tracking the adoption of hydrogen as a fuel.

Analysts at Goldman Sachs Group estimate that the green deal will require EUR7 trillion of public and private investment by 2050. They reckon EUR3 trillion will go to utilities, building out renewable-energy production, upgrading power networks and fitting gas plants with carbon-capture technology. This will boost earnings per share for European utilities by 7% a year through 2050, according to the U.S. bank’s calculations.

“Companies that are exposed to renewable energy clearly will have a lot of investment going into them,” said Andrea Carzana, a portfolio manager at Columbia Threadneedle Investments, pointing to Ørsted and Iberdrola. “We are looking at those stocks just because there is a lot of potential growth coming their way.”

The borrowing required to finance this level of spending could also create opportunities for fixed-income investors. The EU’s recovery plan could lead to the bloc selling EUR225 billion in so-called green bonds, according to S&P Global Ratings.

Companies that produce and service the equipment used in wind farms are a better bet than the utilities that run them, according to Barnaby Wilson, a portfolio manager at Lazard Asset Management. These include Spanish engineering firm Siemens Gamesa Renewable Energy SA and Denmark’s Vestas Wind Systems A/S, whose shares have each risen around 20% this year.

“A lot of players in their space will generate a lot of growth in terms of revenue,” said Mr. Wilson.

Jaime Ramos-Martin, a portfolio manager at Aviva Investors, said his Climate Transition Global Equity fund is investing in Italian cable-producer Prysmian Group. The company will benefit from the need to strengthen the power grid as renewables account for a greater share of energy generation, Mr. Ramos-Martin predicted.

The climate fund also owns shares in Infineon Technologies AG, which sells semiconductors to auto makers, in a bet on rising electric-vehicle sales.

Buildings — responsible for 36% of the bloc’s carbon-dioxide emissions, according to the European Commission — are another focus for the EU. The bloc has indicated that the green deal will involve renovating houses and offices to make them more fuel-efficient.

Higher demand for insulation will be a boon for Irish building-materials producer Kingspan Group PLC, said Ingrid Kukuljan, head of impact investing at fund manager Federated Hermes. Shares in Kingspan have gained 15% this year.
Source: Dow Jones

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