The challenges of climate change come with investment opportunities. Just ask Galvanize Global Equities.
Climate change may be the defining challenge of our time. But all challenges come with opportunities, some potentially massive. “We believe this crisis in climate constitutes a huge tailwind for us as investors to outperform both from a purely financial standpoint and also a societal one,” Steyer said to Morningstar in a statement.
Morningstar recently caught up with Seth Kirkham, CIO of Galvanize Global Equities, the public equities arm of Galvanize Climate Solutions, a climate-focused investment firm.. “The transition is the most significant driver of corporate capital allocation for the coming years if not decades,” Kirkham says. It is now “pervasive” across all economic sectors.
One big driver is the U.S. Inflation Reduction Act. The “trillions being put to abating carbon in our economy is the biggest growth opportunity in the market,” Kirkham says. Among other things, he notes, the act is also a key part of the deglobalization of the economy, which presents new challenges and opportunities for automotive and other companies.
A 26-year-veteran of investing with a long and successful career in hedge funds, Kirkham looks for strong earnings and cash flows to drive stock prices. In particular, he seeks companies that are already outspoken advocates for the carbon transition and leading on issues like setting targets for reducing scope 3 emissions. Kirkham’s team is also engaging with companies about opportunities to help accelerate the transition, which will eventually translate into stock price strength. Here are three examples.
“GFL, Stellantis, and Zoetis are three investments with whom we have meaningful engagements going, and over time, we believe they will evidence a faster rate of change in terms of scope 3 carbon abatement,” says Kirkham.
Zoetis ZTS
About two thirds of Zoetis’ sales come from the pet business, which has doubled over the past four years. Galvanize Global Equities thinks sales and returns on capital will keep growing, as Zoetis capitalizes on its scale. That could help Zoetis beat earnings projections from its existing lines of business. The rest of Zoetis’ sales comes from its livestock-related business. About a fourth of greenhouse gas emissions come from agriculture, so boosting the efficiency of food production will be critical. Zoetis’ leadership in livestock medicines reduces livestock mortality. Meanwhile, Zoetis is still “in the early stages of its climate journey,” and is making progress, says Kirkham.
Stellantis STLA
Stellantis is one of the world’s top five automakers, with brands like Chrysler, Peugeot, Jeep, Maserati, and Alfa Romeo. Stellantis is the product of the 2021 merger of Fiat Chrysler and Peugeot. You can read more about its efforts to catch up in the electric vehicle market here. Kirkham relates that Stellantis has set ambitious climate targets, with a target of net-zero emissions by 2038. To meet these goals, Stellantis plans to spend EUR 30 billion on infrastructure and technology between 2021 and 2025. At the same time, Galvanize Global Equities thinks Stellantis’ profitability can “well” exceed what the market expects, even with the company’s big investments. The stock trades at 1 times earnings, according to Galvanize, creating “a compelling entry point” as the auto industry evolves for the low-emissions era.
GFL Environmental GFL
This Canadian waste management company services residential, commercial, municipal, industrial, and institutional customers. It is North America’s fourth-largest environmental services company, but in a spot of unfortunate timing, it went public in March 2020, the same month that the COVID-19 epidemic disrupted global business. That led “to an underappreciation of its track record of operational excellence and effective capital allocation,” says Kirkham. He sees GFL reducing its carbon footprint and creating new revenue and profit opportunities as it does so. Landfills alone account for as much greenhouse gas emissions as the entire aviation industry, Kirkham observes. Recently, GFL announced a series of efforts to boost the capital it will commit to clean technologies and plans to align its executive compensation with climate targets.
Source: Morningstar
