The political support for the protection of the climate and the environment was a driver for green stocks in the last years. The Russian invasion of Ukraine has now even accelerated this trend. Rising commodity prices and the pressure to make the energy mix less dependent on Russian fossil fuels are making decarbonization plans more urgent. The emergency plan “REPowerEU”, presented by the European Commission on 8 March, aims to diversify gas supplies and reduce the dependence on fossil fuels. Currently the EU imports around 90% of its annual gas consumption, 45% from Russia. So, the recent events are a clear wake-up call for the EU and the goal is now to cut dependency on Russian natural gas by two-thirds.
The necessary energy transformation opens growth prospects in areas as clean energy and energy efficiency. But as a quality investor we must be discerning. A lot of “green” stocks with high valuations and low pricing power currently are not attractive for our investment approach. Other technologies that could help reduce gas dependency seem less attractive to us in the short and medium term. Liquefied Natural Gas (LNG) and hydrogen for instance are unlikely to compete in the short to mid-term in Europe. The first being relatively inefficient and carbon intensive, the second being heavily dependent on green energy and lacking economic competitiveness now. But other segments of the energy transformation topic still provide interesting investment opportunities according to our analysis.
In this context we think that groups that could profit from the REPowerEU plan could be the ones with 1) strong pricing power and 2) a high exposure to Europe.
Schneider Electric is one of those groups. Schneider is among the world's largest providers of products, systems and software aimed at improving the use of electrical energy and increasing production efficiency. The group's offering supports increased adoption of renewables, enhanced efficiency of electrical energy, and safety through a combination of control and optimization products for low- and medium-voltage applications and secure power products. The group has an exposure to Europe at around 30% of its total sales and should in an inflationary environment manage to preserve its margin despite China’s lockdown and inflation of raw materials like copper.
Another beneficiary from this plan should be Siemens . The group's Digital Industries unit targets improved production efficiency and productivity with all products, systems and software tied to the fourth industrial revolution theme. The Smart Infrastructure business is focused on enhancing energy efficiency and safety in low- and medium-voltage applications. Siemen’s products managed concretely to reduce GHG emissions by around 90 million tons since in operation.
The acquisition last year of the energy business of its Spanish competitor ACS , for €4.9 bn should allow the French construction company Vinci to expand into the renewable energy market. Being more selective than its competitors the group will focus on margins (IRR between 8-15%) over volumes and is expected to grow its renewable business by at least +10% per annum until 2030.
Recently we took our first positions in one of the key enablers for the reduction of European dependency on Russian oil and gas: Equinor. Equinor is an oil and gas company based in Norway. Much of its production takes place in the North Sea reducing geographical and political risks. It is split approximately evenly between oil and gas which allows the company to be 60% less carbon intensive than its peers. Equinor has the best ESG credentials in its sector with a AAA ESG-Rating and a clear and detailed transition plan in place (Net Zero in 2050). Concretely, in the Norwegian North Sea, Equinor is currently building the world's largest floating offshore wind farm. It was never engaged in any major environmental scandal.
