Environmental Strategies

An attractive time to consider environmental investments
After the ‘green rally’ of 2020, it is unsurprising that markets have been more turbulent for environmentally-driven investments so far this year. The drivers behind this volatility have largely been the same as those disrupting the broader markets – notably, fears that higher inflation could prompt central banks to tighten monetary policy sooner than planned.

Our highly experienced Environmental Strategies Group expect to see a sharp recovery, believing that environmental-themed stocks can de-couple from the emerging rotation from growth to value as addressable environmental opportunities expand, earnings and guidance from providers remains solid, consumer demand continues to be strong for environment solutions and policy is increasingly supportive. In fact, their analysis suggests that the recent sell-off could present an attractive entry point for investors that have been waiting to allocate to the theme or those wishing to increase their exposure.

The Sun is Shining on Solar
The emphasis on investigation within BNPP Asset Management’s investment processes means our teams are well equipped to uncover exciting opportunities. The Environmental Strategies Group feel that the fundamentals for the US residential solar market are compelling, particularly from a demand perspective. In fact, residential solar installations in the US hit an all-time high in Q4 20201. And prospects for the industry have been further boosted by President Biden’s American Jobs Plan which has extended many of the federal incentives around solar for ten years.

A number of factors are driving demand currently, such as the declining cost of solar modules, rising retail power prices, federal tax incentives and attractive financing models. These forces have combined to create a situation where the US consumer can install solar panels and immediately start saving on their electricity bills without having to pay anything up front.

Even without financing, the payback periods for residential solar are now often less than eight years2, while the solar panels themselves should last for around 20-25 years, making this an increasingly attractive source of energy for homeowners. And with the rising uptake of electric vehicles adding to consumers’ electricity requirements, a solution which offers electricity at less than the retail price is especially compelling.

For US homeowners, the economic arguments for seeking an ‘off-grid’ energy source have been strengthened by a number of power outages across the nation, that are not only becoming more frequent but are also lasting longer. In February, severe winter weather sparked a power crisis in Texas, storms impacted power supplies in Florida during April and last summer’s heat storm in California led to rolling blackouts. Against this backdrop, it is unsurprising that more and more homeowners are looking for options to make them less reliant upon the grid, and solar, in combination with energy storage, can fulfil this requirement.

Exploring every angle
Our investment teams forensically consider the aspects of investment opportunities and hold daily dialogues with company management. Our dedicated Environmental Strategies Group have been investing thematically for 20 years and have cultivated a strong network across relevant businesses and industries. Their research suggests that demand for solar remains robust, even during the winter months when you would normally expect to see a decline in solar installations due to weather constraints. In fact, installations are expected to have grown 5-15% quarter on quarter and order books for the remainder of the year also look remarkably healthy.

A potential hurdle for the future roll-out of solar is the current global semiconductor shortage. Semiconductors are used in solar installations to convert solar energy from direct current (DC) form into alternating current (AC) for use by home appliances. While the market has been concerned that the semiconductor shortage could constrain growth in the near-term, our team’s close contact with the industry has assuaged those fears, with many of their preferred companies in the space choosing to draw down inventory stocks to meet ongoing demand.

Finding the best opportunities in challenging markets
With so many ongoing headwinds, market volatility is unlikely to go away in the near-term. However, the team believes that if one is able to look through these short-term dislocations, the long-term story for environmental solutions is hugely exciting, particularly in light of an increasingly supportive political climate.

Our Environment Strategies Group have spent their entire careers investing in environmental solutions and have developed a strong fundamental compass. For them, investing is not just about seeing opportunity in difficult markets, but also being able to react to this opportunity with conviction.

They see greater differentiation between structural winners in the environmental solutions market where fundamental research, due diligence on the technologies and a solid understanding of total addressable markets are key inputs to selecting ‘tomorrow’s winners today’.

Our Environmental Strategies capabilities focus on companies addressing climate change, biodiversity and ecosystems. Our concentrated portfolios are diversified across all market-capitalisations, which provides higher impact and a cushion to volatility. Given the recent market jitters, our portfolios have been repositioned towards value and cyclical stocks.

For more information about our Environmental Strategies, performance and a more detailed investment approach please visit our sustainable investing page on your local country site via bnpparibas-am.com.

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