What are green stocks and what do investors need to know? Milford Portfolio Manager and Head of Sustainable Investment, Frances Sweetman, talks with Ryan Bridge about the risks and potential opportunities.
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Bridge talks Business: 24 September 2024
Episode Transcript
Ryan Bridge
Kia ora, I’m Ryan Bridge and welcome to episode 7 of Bridge Talks Business with Milford. If you haven’t already, please go and like, follow and subscribe us.
You might have noticed a lot of anti-green rhetoric spilling out of the mouths of politicians recently – from Europe where a Greta Thunberg-inspired plane travel tax is being ditched – to the United States, where even the Democratic candidate, Kamala Harris, is pro-fracking and courting big oil. This, all despite what scientists say is an existential threat to the planet’s climate change. We’re about to ask what that means for green stocks. Could now be the right time to start buying them? Before all of that though, let’s take a look at the top five business bits from the past week.
- A jumbo rate cut from the Fed. The half a percent chop surprised many, but was tempered by its commentary. More cuts likely but no promises on speed or magnitude.
- Global markets rallied in response, although the NZX had a tough week falling 2.8% as larger company shares fell.
- Fletcher Building’s fishing for capital raising $700 million in the week. That’s to shore up its balance sheet through the trough of the cycle.
- Aotearoa’s second quarter GDP confirmed a recession over the past year, though it wasn’t quite as bad as feared. Consumption appears to be holding up pretty well.
- This week we are all watching the Reserve Bank of Australia alongside some more US inflation data. Meanwhile, the US election continues to loom large over markets.
Which brings us to this week’s feature interview. How sustainable long term are sustainable stocks? Green stocks. They’ve taken a bit of a hammering lately thanks in part to some pretty harsh political rhetoric. Now, remember, this segment is informational only and should not be considered financial advice. I am delighted to have here on the podcast, Frances Sweetman from Milford. Frances, welcome.
Frances Sweetman
Thank you.
Ryan Bridge
So good to see you. Now, in the interest of saving carbon, your job title is quite long. Can you explain what it is, please?
Frances Sweetman
So, it’s Head of Sustainable Investment at Milford, which means that I’m responsible for all of our sustainable considerations when we’re investing in our funds.
Ryan Bridge
Let’s start with a green stock. What exactly is it? Are we talking renewable energy companies here? What are they?
Frances Sweetman
Yeah, great question. The obvious ones are renewable energy companies, solar, wind, even battery scale, storage, and you could consider nuclear. But there are a whole wealth of other companies that are less obvious. So, cardboard packaging, even plastic recycling, water treatment, really efficient air conditioning companies – all the different contributors we need to get the emissions that we create in our everyday lives down.
Ryan Bridge
There’s been a lot of talk, and it doesn’t matter where you look – whether it’s Europe, whether it’s America – from politicians about what some construe as anti-green or anti-the-environment policies that they’re coming out with at the moment, because their economies are in trouble, right? The priorities shift. How has that affected green stocks?
Frances Sweetman
Not well. Share prices have been very, very poor performers compared to the rest of the market. And exactly to your point, we’re in a tough economic environment. There’s a whole heap of anti-green rhetoric. And some of these industries are very, very dependent on regulation to drive them forward, plus tax breaks and subsidies, because they are expensive. And if those go away, or they maybe even go away for a small time, then investors just run away scared because we don’t know what this rollout is going to look like.
Ryan Bridge
That doesn’t necessarily mean that their long-term prospects are shot, though, does it? It’s more, as you say, a transition phase. We are going to need these technologies, these companies eventually, aren’t we?
Frances Sweetman
Well, this is what’s really interesting. We’re getting more and more evidence that climate change is happening around us. We’ve got better evidence of how the world and the seas are warming. We’re seeing more of the physical effects of climate change, the floods we had in New Zealand last year, Australia. We’ve seen wildfires in California and Hawaii. If anything, you would think that with all of that happening, that people would be more invested in decarbonising, but instead it’s the opposite. I think politics is really responding to that on-the-ground feeling. That’s what I find really, really interesting. I think a big part of it is that it is so expensive. It does cost a lot of money. It is incredibly inconvenient. We’re going to have to change our energy systems, buy expensive EVs that we might not like, change the way that we eat, and all to solve what feels like at the moment tomorrow’s problem. There’s a whole heap of climate science which is complex and a bit nuanced and actually not quite that certain. All of that put together is making a really difficult environment for these companies.
Ryan Bridge
Maybe now’s a good time to buy the stocks?
Frances Sweetman
Yeah, well, it’s a great point because the world, as I say, is still warming. We do still need these investments. Markets are changing. Consumer demand over the long term is changing. Energy systems are going to change. These are future markets. The other thing that’s really helpful is that interest rates are starting to come down. These are very, very long duration rollouts. The present value of those future cash flows is lower when interest rates are higher. We can put them in really good term deposits and get a good return on our money, whereas when interest rates are lower, those future cash flows become more attractive. Perhaps that perfect storm that’s been really bad for these renewable stocks is now starting to turn.
Ryan Bridge
Yeah. It makes sense though, doesn’t it? You fight the fire that’s right in front of you. For most governments around the world, that’s been inflation. These, as you say, are expensive. How is the transition talk feeding into it? Because here in New Zealand, we’ve had the issue with our power over winter. We’ve had the energy crunch. Have we gone too far the solar way and ignored the oil and gas? How is that debate playing into the performance of some of these companies?
Frances Sweetman
It’s a great question because this energy transition is so complicated. What we’re seeing for the first time in a long time, is actually electricity demand. Electricity demand globally has been flat for about 10 years. Populations grow, but we’re getting more energy efficient. They’ve effectively offset each other. Now with the growth of AI and then also this electrification where we’re trying to shift away from fossil fuel power to electric power across a whole heap of different industries and uses, like EVs and creating steel, we’re actually starting to see electricity growth. We don’t have enough electricity generation to meet that.
Ryan Bridge
That’s ironic.
Frances Sweetman
Renewables take time. They take a really long time to roll out. We’ve also got this intermittency problem that needs batteries, but they can only provide storage for ideally seven to 10 hours. How do we get reliable base load energy to replace what coal and gas is providing at the moment? We’ll get there, but it’s going to take time and it’s going to be really complicated. At the moment, it’s a more of everything solution. That’s just awkward and complicated. There’s long-term growth from this electrification and growth in electricity theme to happen over the next 20 years.
Ryan Bridge
Do you have confidence? You obviously study the minutia, the detail about these companies. Do you have confidence that the ones that are the big players in the market at the moment, will be there when we are supposedly net zero by 2050 – the United Nations goal?
Frances Sweetman
It depends, is the answer. This is so complicated and nuanced, which is part of the problem. Solar and wind are now the cheapest forms of electricity generation. Depending on where you are geographically, those two are the cheapest. It’s cheaper than building a new fossil fuel plant now, which is great. There are solutions for storage, like grid scale battery. I’m really confident that those companies will be there. In fact, traditional energy companies are pivoting to more of those solutions. Ones that are less certain are things like biofuels and hydrogen, which are so expensive compared to traditional alternatives. They will have to play a part, but the question is how big will that part be, and will there be other technologies that come in? Because there’s so much new technology happening in this space. This is another one of the issues with these companies. Yes, fantastic long-term tailwinds, future winners of how our industry is changing, but massive technology risk.
Ryan Bridge
Interesting, you talk about the solar and the wind. Obviously, it’s not always windy or sunny – today notwithstanding – but, it is that battery thing, isn’t it? Are there lots of opportunities for businesses popping up to fill those gaps as well, the storage issue?
Frances Sweetman
Yes, but again, probably scale wins. If you can produce these things at scale and make them cheaper, then that’s going to really, really help you – because what we need more than anything is this new technology to become affordable. That’s how we really, really get there. I think that’s going to be key.
Ryan Bridge
I was reading a story the other day in the Wall Street Journal about a company called 12, which is looking to create carbon zero aviation fuel. One day we’ll all be flying, in theory I suppose, all be flying on planes that emit no carbon, which sounds incredible. I think it’s now valued at about a billion dollars. They did a huge capital raise and stuff like that. There must be some pretty fascinating examples that you come across of things that conventionally you think are bad, given what you know about climate change, that maybe in the future you could do guilt-free, so to speak.
Frances Sweetman
That will be the best solution, that we don’t have to compromise our lives too much and new technology will fill the gap. Air travel is a perfect example, because there’s so many different kinds of computing technology. For example, short haul we can have electric planes, long haul there’s biofuels, hydrogen. We’re not quite sure which one is going to win, but again, I think it’s going to be an all-of-all solution to these problems.
Ryan Bridge
Are they risky investments?
Frances Sweetman
With technology risk, definitely. With regulatory risk, absolutely. And then cost risk, even more so. So yes, yes and yes.
Ryan Bridge
I’m just never going to buy a green stock Frances!
Frances Sweetman
It does sound that way, doesn’t it? It does sound that way. But these are just such fantastic long-term opportunities. If we’re going to keep global warming under control and not see more of these physical risks of climate change get materially worse, we’re going to have to transition. And the cost of that is estimated to be anywhere up to three trillion a year up to 2050. I mean, that money is going to get spent on these companies solving these solutions. You know, that is a huge investment tailwind. We just need to acknowledge there’s going to be some volatility on the way. But we can definitely deliver fantastic investment returns from these stocks over a 20-year horizon.
Ryan Bridge
All right. So, I guess saving the world was never going to be easy, was it Frances?
Frances Sweetman
That’s right.
Ryan Bridge
At least we’ve tried today. Thank you very much for being on the podcast. Really appreciate your time.
Frances Sweetman
Thanks, Ryan.
Ryan Bridge
That’s Milford’s Frances Sweetman – job title too long and complicated for me to explain. But she is an absolute gun when it comes to green stocks. I’ll be back next week looking at another issue that affects you in the world of business and the economy. Thank you so much for watching and for listening. Don’t forget to like and subscribe. Bridge talks Business with Milford. See you next week.
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