The popularity of high growth investment themes like tech and sustainability waned significantly in 2022. Is now the time to take advantage of long-term mega trends?
For some, the waning collective investor focus represents an opportunity to take advantage of slashed valuations in a down-market to position their portfolio for what they see as an inevitable push toward sustainability.
1) Climate Concerns: Can OXY Out-Innovate the Competition?
Many big names throughout oil and gas are getting ahead of the narrative to adapt before regulatory demands force the issue. Occidental Petroleum (OXY) raced ahead by affirming its strategic and tactical plans to achieve net zero independent of a government mandate.
Spurred by an apparent moral investment and recognizing the practical need, OXY’s been at the forefront of physical innovations in oil and gas to remit climate impact. While not as flashy an innovation as Tesla’s pivot towards new magnets free of rare earth mining, they’re no less revolutionary to the industry.
In 2022, OXY broke ground on the first Direct Air Capture (DAC) plant in the Permian Basin, the United States’ primary source. DAC plants act as somewhat of a smog vacuum and pull carbon directly from the air before being pumped subsurface as a permanent, safe, and viable solution or repurposed for industrial use.
In addition to climate-friendliness, the move represents a strategic business plan as the carbon culled from the atmosphere is sellable as raw material for industrial use, as mentioned, or as credits to offset third-party pollution as others play catchup.
In fact, OXY sees carbon capture as a business model all its own – with a strong outlook.
According to a Journal of Petroleum Technology report on OXY’s developments, “Last year, the federal payment for a ton of CO2 used in enhanced oil recovery swelled from $35 to $130. Meanwhile, each ton of CO2 captured and permanently sequestered in the US has seen its government payout soar from $50 to $180.”
The old reduce, reuse, recycle catchphrase is new again and a driving ethos of the circular economy concept.
Per the United States Environmental Protection Agency, "a circular economy is one that reduces material use, redesigns materials, products, and services to be less resource intensive, and recaptures "waste" as a resource to manufacture new materials and products."
Much of the technical innovation within the circular economy is in packaging, specifically its reduction or modification into something not environmentally insulting. While many global and national governments make moves to eliminate plastic waste by banning straws or other single-use plastic items, companies are finding ways to retain their brand and quality while going circular.
H&M (HNNMY), is one of the first "fast fashion" brands to shrug off the industry's negative associations and embrace circular concepts. They've released an entire guidebook to their circular product planning, admitting that much of the struggle is finding a middle ground between recyclability and durability.
To that end, a core case study used as a grounding example of circular practices in their guidebook includes innovations like:
- Transition to mono-materials in many garments, meaning no cotton-poly blends or other fabric mixes. Mono-materials aid in recycling, especially when natural, like cotton or wool.
- Beyond typical materials like cotton and wool, H&M developed new biobased materials. Made from rice husks, coconut fiber, and reinforced with natural rubber, they're using the material they've deemed mirum in sandals and jewelry.
- New techniques in polyester manufacture increase recyclability.
- "AirCarbon" techniques create jewelry and accessories from captured carbon in the exact process we saw upstream in the supply chain with OXY's DCA development.
Still fast fashion? Maybe, but H&M's proving an ambitious competitor in its pivot towards circularity and away from the sheer scope of waste associated with brands like Shein.
3) Alternative Energy
Alternative energy saw a renewed push over the past few years as events like the Ukrainian/Russian conflict and OPEC actions pushed fossil fuel prices higher.
Alternative energy companies also enjoy being one of the few areas where governments actively and financially incentive their use and adoption. For example, the United States announced substantial consumer tax credits if they adopted solar technology, and firms like First Solar, Inc (FSLR) reaped the reward.
Taking a financial hit in 2022 with -$44m annual earnings, FSLR is one of the few unprofitable tech-adjacent firms that nevertheless saw valuations climb in the face of imminent recession – hinging mainly on the back of the prospect of waves of customers collecting solar credits by buying their equipment:
The valuation spike isn’t based solely on hope and a dream. FSLR is an industry leader in developing thin film photovoltaics (PV), the topmost, shiny portion of what you picture when considering a solar panel. These PVs are lighter and store, meaning cheaper to store and transport and ultimately cheaper to produce as they move out of R&D phases into scaled production.
As the only US-based thin PV producer, FSLR enjoys the comparative advantage of having systems with the lowest net production carbon and water impact while also eliminating the risk of falling afoul of moral decency and public sentiment by avoiding raw materials identified in the United States Bureau of Labor’s list of goods produced by child or forced labor.
FSLR’s PV products boast other bona fides:
- Its revolutionary new recycling program regenerates closed-loop semiconductors into new use.
- FLSR’s PV is the first included in the global Electronic Product Environmental Assessment Tool as a sustainable electronic.
Sustainable tech ETFs
Playing stock jockey isn't always the best plan, especially when shaky concepts like sustainability remain hard to pin down and subject to an idiosyncratic volatility of their own.
To cast the widest net possible, institutional funds offer a variety of ESG and sustainability-focused ETFs. BlackRock tends to be "the name" in ESG and sustainability investing strategies and provides a slew of ETF picks through their iShares subsidiary:
XVV: This ETF screens companies within the S&P 500 according to BlackRock's proprietary ESG-compliance methodology and only holds those that make the cut. Mostly aligned with the S&P 500's overall performance, XVV is a good option for those committed to sustainability and wants to put their money where their mouth is:
SDG: For those preferring more activism in their investment, SDG is a global ETF of companies precisely aligned with the United Nations’ Sustainable Development Goals. Somewhat surprisingly, as much of its portfolio holds emerging market stocks, the ETF fared comparably to the S&P 500 over the past year, although a more macro perspective shows underperformance at a still-healthy 46% growth since 2018:
By no means comprehensive, these two ETFs represent a growing trend in sustainable and conscious investing habits. Firms that don’t proactively get ahead of their competitors may find themselves in trouble when legislative action demands compliance, and investors blowing off the trend may find themselves underperforming.