Green investing captures the next industrial revolution

As the impact of climate change becomes more pronounced, interest in “green investing” is rising. But you have to look beyond the surface to understand why investing in companies focused on environmentally friendly technology offers a once-in-a-generation opportunity.

That’s the message from John Cook, president of Toronto-based asset-management firm Greenchip Financial Corp., who believes a new industrial revolution is underway as we move away from fossil fuels to solar, wind and other sources of renewable energy.

“We are in the middle of a great transition,” he says. “All investors should have a small foot on the dock.”

Greenchip manages one fund, Greenchip Global Equity Fund, which launched in 2008. The fund has more than $101-million in client assets and is offered to foundation endowments, pension funds and high-net-worth individuals. The minimum investment is $250,000.

Yet, Greenchip also subadvises Mackenzie Investments’ Mackenzie Global Environmental Equity Fund, which has similar holdings. That fund, which launched in October 2018, manages $33-million in client assets and a more accessible minimum investment of $500.

I recently spoke to Mr. Cook to get his perspective on this emerging investment theme.

 What does Greenchip invest in?

About 15 per cent of our portfolio is in solar and wind energy equipment manufacturers. Another 15 per cent is in the renewable utility operators and the balance is spread across clean technologies. These include such things as pressure and heat recovery, LED lights, recycling equipment and variable speed electric motors. Think of them as technologies that help us do more with less. Other areas include mass transit, water and agriculture.

The companies tend to be mix of mid- and large-cap and includes those that make products for cleaner cars, homes, and factories. Our holdings include conglomerates like Siemens AG (SIEGY-OT) and Hitachi Ltd. We own Panasonic Corp. (PCRFF-OTC), which makes batteries, builds highly efficient homes and home appliances. Cascades Inc. (CAS-T) makes packaging and tissue products from recycled fibres.

The Greenchip fund has done pretty well in the past year, as has the overall market. It was up by 34.6 per cent in 2019 versus 21.9 per cent in Canadian dollar terms for the MSCI World index.

 What’s your philosophy on green investing?

There’s a big focus right now is on environmental, social and governance (ESG) principles in responsible investing. ESG deals with how companies behave and can be a useful tool to manage risk. But ESG doesn’t drive our process. We’re only interested in companies that sell solutions to long-term sustainability challenges. It’s a very different thing.

I don’t see it as moral issue or as being trendy. The economy is going through a massive shift. In the same way that we moved from wood to coal and then to oil and natural gas, we’re going through a great transition to solar, wind and renewable electricity generation. It will be a 70- to 80-year process. It may not be obvious, but we are in the middle of it.

The changes affect everything. Your new fridge is filled with power-management semiconductors. Your heating, ventilation and air conditioner systems are more efficient. The way thermostats work, the way water is pumped and cleaned. All of it.

This is why you see the Canada Pension Plan, the Ontario Teachers’ Pension Plan and the Caisse [de dépôt et placement du Québec] are all taking this very seriously. They want to be on the right side of the transition.

 What does this transition mean for the oil sands, which are important to Canada’s economy?

I think in the near term, demand for oil will increase. So, Canada’s oil-sands companies should be okay for the next 10 or 15 years. But there will be a day when demand is going to really bend down.

We are seeing this type of disruption in the U.S., with eight of the top 12 coal companies having gone bankrupt in the past three years. That’s going to continue.

What’s the outlook for renewable energy?

Solar is now cheaper to produce  in most parts of the world than natural gas and coal the two cheapest conventional generating technologies.  Global investments in wind and solar were worth US$300-billion in 2018, which is significantly outpacing all other forms of energy generation combined. Two of our top holdings are JinkoSolar Holding Co. Ltd. (JKS-N) and Canadian Solar Inc. (CSIQ-Q).

Renewable utilities have outperformed traditional fossil-burning utilities, as a group, over the past five years. We have owned Boralex Inc. (BLX-T) since [the Greenchip fund’s] inception. The company has been a leader in developing wind-generating facilities in Canada, the U.S. and France. It has done extremely well and it pays a reasonable dividend.

Where is the growth in renewable energy?

It’s everywhere where it makes sense. China, Japan, India, the U.S. In emerging markets, they’re building their electricity generating infrastructure for the first time, and renewables are often the cheapest way to do that.

You’re also seeing more wind farms in northern climates or places like Texas or southern Alberta, where the wind really blows. And you’re seeing more solar energy in places like Nevada and California.

What are the investment opportunities?

We have had pretty good returns from power-management semiconductors. They control variable speed motors for electric cars, modern heating, ventilation and air conditioning systems and your more efficient appliances at home.

We think it’s a huge opportunity, not only because of electric cars. Semiconductors and capacitors are the backbone that make electronics work. They are involved in things that improve efficiency. In cars, we’re not just talking power windows, but things like stop-start technology, fuel injectors and other drive train electronics. ON Semiconductor (ON-Q) and Infineon Technologies (IFNNY-OTC) are examples.

Sustainable agriculture is another area. We made an investment recently in Norway Royal Salmon ASA, a sustainable salmon farming company.

 How much should the average person invest in ‘green’ technology?

I would say 5 per cent of a portfolio is adequate. The best way to do so is through a diversified thematic fund.

 What about you?

I have 100 per cent of my equity portfolio in Greenchip.

You might like:
2 views of green energy investing
Brookfield Renewable is a green leader

(This article appeared in the Globe Advisor section of the Globe & Mail’s Report on Business on Jan. 16, 2020.)