Small and mid-cap stocks have been particularly hard hit during the turbulence of the past year as investors flee for the relative safety of large-caps. ‘Green’ firms tend to be small- or mid-caps as they tend to be in the earlier stages of development. But the rise of green legislation means that they may represent a good buying opportunity for long-term investors in the downturn.
Three pillars of growth underpin firms developing green products, services and technologies: government legislation and support, the commitment of business to go green, and consumer trends. At government level, the rise in climate-change legislation is shoring up the earnings streams of ‘green’ companies. Europe has some of the world’s most rigid targets for carbon reduction, aiming to source 20% of all energy from renewables by 2020. Emerging legislation in America and China is also driving growth. China alone is expected to invest $264bn, with the aim of generating 15% of its electricity from renewables by 2020.
At the corporate level, Marks & Spencer, Tesco and BT are just a few of the firms to adopt more environmentally friendly practices in the past two years – and at no small cost. BT plans to invest £250m in a wind farm to cut its total emissions by 80%. Meanwhile, faced with rising fuel prices, extreme weather and concerns over food quality, consumers have become more discerning, spending $40bn globally on organic foods in 2006 alone.
We’ve split the green sector into six key themes: clean energy, water management, waste management, sustainable living, environmental services, and green transport. There are high-growth firms and mature businesses across a range of industries to be found in these areas.
Wind is the most advanced and currently most affordable source of zero-emission power. Spending on wind power is forecast to grow from $30.1bn in 2007 to $83.4bn in 2017, according to research group Clean Edge. Denmark-based Vestas Wind Systems (CPH:VWS) is the world’s largest wind turbine manufacturer. Its market share is predicted to rise from 28% in 2006 to 35% by 2008, driven by its strong position in megawatt turbines, supported by substantial investment in new capacity and productivity gains of more than 50% in a number of its factories.
FirstGroup (LSE:FGP) is a leading operator of public transport, providing bus and train services in the UK, and school-bus and municipal transit in America. On average, a bus carries the same number of people as 30 cars in one-tenth of the road space. The group is currently taking part in an EU-funded trial of fuel-cell buses.
UK-listed Shanks Group (LSE:SKS) is one of Europe’s largest independent waste groups. Its operations cover waste collection, recycling and composting, as well as industrial cleaning. Shanks has pioneered the use of a ‘Mechanical Biological Treatment’ process, developed by Ecodeco in Italy, to increase levels of recycling. This is part of the company’s strategy to develop partnerships with local authorities and gain market share in waste development plans.
The green energy stocks Charlie Thomas likes
Stock, 12mth high, 12mth low, Now
Vestas Wind Systems, DKK585, DKK285, DKK571
FirstGroup, 824.5p, 493p, 602.5p
Shanks Group, 281.5p, 185.3p, 259p