Goldman picks stocks poised to benefit from the multitrillion dollar ESG opportunity ahead

Goldman Sachs said sustainability-focused investing is transforming from aspiration to action and outlined a host of under-the-radar ways for investors to capitalize on the push toward a greener economy. The firm’s call follows meetings with investors across Europe and the U.S. Analysts led by Brian Singer noted a desire among sustainable fund managers to expand the investable universe of stocks, while also more closely defining sustainable objectives. The desire for clarity follows heightened scrutiny — including from the SEC — around whether sustainable funds are actually following through on their stated goals. “As we head into the second half, we continue to see a reevaluation of Sustainability investing strategies which we believe will result in greater focus and transparency of fund objectives over time and a greater focus on impact,” the firm wrote Monday in a note to clients. Part of this shift is also thanks to broader trends in the market. The recent outperformance in value stocks has led investors to reconsider these strategies. Additionally, highly concentrated positions in the final stages of clean energy supply chains — in solar and wind energy, for example — has led to crowded trades. With this in mind, Goldman categorized the investable universe into six sections, with accompanying stock picks. Green capex reinvestors/revenue beneficiaries/greenablers Energy efficiency Clean reliable energy Circular economy ESG improvers Food security ‘Green capex’ reinvestors Goldman said that green capex will be the “multi-year secular theme driving the next wave of infrastructure as focus rises to decarbonize the world.” All told, the firm said that capital spending toward net zero infrastructure needs to hit $6 trillion annually this decade, compared with the $3.2 trillion spent annually between 2016 and 2020. “Incremental Green Capex will be needed from a combination of governments, private companies and public companies, and will involve, in our view, an all-in approach across multiple sectors that will be critical or needed on path to Net Zero, Infrastructure and Clean Water goals,” Goldman said. The firm said it sees “significant discovery value” earlier in the green energy supply chain, especially within the industrials sector. Energy efficiency Commodity prices are rising, which will ultimately fuel a shift to cleaner technologies, Goldman said. “We see the opportunity for greater recognition among ESG investors of companies whose products/services can enable greater energy savings or lower energy consumption,” the firm said. Goldman said that Carrier is levered to energy efficiency in HVAC and building systems, while KB Home is a way to play energy-efficient new residential buildings and home appliances. Meantime AMD and Analog Devices are semiconductor companies enabling more energy efficient products. Clean reliable energy Renewable energy is now cost competitive with other generation technologies on a levelized cost of electricity basis. But looking forward, a greater premium will be placed on the reliability factor, including energy storage, the firm said. This is especially true in light of Russia’s invasion of Ukraine and the havoc it has wreaked on hydrocarbon prices. Within battery storage the firm pointed to Enphase , SolarEdge and Tesla . Hydrogen could also play a key role, and some of Goldman’s buy-rated stocks that operate in the space are Baker Hughes and Siemens Energy . Circular economy Goldman believes that the circular economy — recycling, reuse and remanufacturing — could unlock $1 trillion in annual untapped resource savings by 2025, while also playing a pivotal role in decarbonization. “[T]ransitioning towards a circular economy will be pivotal in solving the decarbonization puzzle and will become an area of rising focus for investors, corporates and regulators to achieve net zero carbon goals and decouple economic growth from resource consumption,” the firm said. Goldman pointed to Adidas and Nike as clothing makers using recycled product materials. Lyft and Uber meantime reduce demand for vehicles on the road. ESG improvers At this pivotal moment for ESG Goldman also said that investors will likely become more forward-looking when considering ESG opportunities due to possible regulation, supply chain risks, and the increase in capital required for Net Zero, among other things. “Our recent meetings indicate rising interest among investors for ESG Improvers, which we measure as those companies forecast to undergo business mix shift and/or reduce Greenhouse Gas emissions intensities in coming years,” the firm said. Stocks tied to this theme include Aptiv , Generac and Teck Resources . Food security Russia’s invasion of Ukraine has raised concerns around food availability given Ukraine’s position as a key wheat supplier to the world, offering compelling opportunities around companies that seek to mitigate food price inflation. The firm said that ag tech companies in particular could start to see more interest from investors. AGCO , Deere and Trimble have exposure to this theme, while Walmart and Dollar General are levered to food security via pricing power. –CNBC’s Michael Bloom contributed reporting.

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