By Michael Brush, MarketWatch
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It’s increasingly likely that the Democrats will win the White House and the Senate. For investors, that means it’s time to review the environmental, social and governance (ESG) sector, with an emphasis on “green” stocks that might do well under a Joe Biden presidency.
For key insights and stock ideas, I recently spoke with three ESG fund managers with outperforming records, according to Morningstar, and a policy analyst from one of the companies. Beating the market is tough, especially when there are limits on what you can buy — such as an ESG mandate. It’s encouraging to see that investors can make excess returns while being environmentally aware.
Before getting to the stocks, let’s consider what these fund managers think about Biden’s $2 trillion green plan announced in mid-July.
Highlights of the Biden plan
First, Biden’s plan is ambitious. He wants a carbon-neutral power-generation sector by 2035, which is about five years sooner than the typical government deadline, says Chris Dodwell, a policy analyst at Impax Asset Management, which manages the Pax Global ESG fund, below. Who knows if that will actually happen. But as the saying goes, it’s always best to aim high so even if you miss, you may still do well.
Next, the plan is comprehensive, which environmental fund managers welcome.
“Everything he is doing aligns with the strategy that we as ESG investors have been arguing for, for years,” says Cheryl Smith, who manages the John Hancock ESG Large Cap Core Fund /zigman2/quotes/208727604/realtime JHJRX -0.11% . The fund beats its Morningstar large-cap blend benchmark by three percentage points, annualized, over the past three years.
By this, she means that Biden’s plan focuses on green infrastructure and green cars, carbon-neutral power, energy-efficient buildings, investment in green innovation, clean agriculture and job creation.
Of course, we don’t know that Biden will win, or that the Democrats will take the Senate. And even if they do, we don’t know if the Biden plan will pass.
“I think it’s great to have all these plans. The difficulty is executing them,” says Hubert Aarts of the Pax Global Environmental Markets Fund /zigman2/quotes/209773312/realtime PGINX +0.15% . “The second thing is, are they going to raise taxes to do this?”
That might make it a tougher sell. Aarts is worth listening to because his fund outperforms its world large-cap stock category by 6.6 percentage points over the past year, says Morningstar.
But in a sense, none of that matters, says Jonathan Waghorn of the Guinness Atkinson Alternative Energy Fund /zigman2/quotes/208260183/realtime GAAEX +0.33% . His fund beats its small- and mid-cap value sector benchmark by 34 percentage points over the past year, and 13.6 percentage points annualized over the past three years, according to Morningstar.
“The energy transformation is a transition which will happen with or without politicians,” he says.
Why? “The economics of renewable power and energy efficiency are such that it makes sense to make those changes.”
Here’s what he means. There are five forces that make green energy almost inevitable regardless of the politicians. They include: Population growth, which means we need more long-lasting energy sources; climate change, which is forcing us to take steps to protect the planet; and pollution, which is pressuring China and India, among others, to transition to clean energy.
The two other key factors pushing the world toward green energy with or without help from politicians are: energy independence, which makes countries want to generate power near where it is consumed, from local wind, solar or geothermal sources; and economics, because renewable energy is getting cheaper than conventional sources.
Ultimately, Waghorn’s way of thinking about why to invest in green energy makes the most sense, because it takes notoriously unpredictable politicians out of the equation in ESG investing. A basic rule in investing is to avoid having politicians and government as your partner, whenever possible.