 Investing in ‘Green themes’ proved very profitable last year. For example the average renewable energy related company saw its share price double last year, thereby substantially outperforming all of our other sustainable themes (see Key themes and topics for 2021). So far this year ‘Green’ themes have performed far less impressively owing, in our view, to concerns around valuation and the impact that a rise in inflation globally might have on growth stocks. In this publication we outline that the long term growth drivers for Green themes remain highly compelling. We see the retracement in most of the themes since the start of the year as a good opportunity for investors to (re)engage with them. We provide 45 Outperform rated companies across North and South America, Europe and Asia that our analysts see as their highest conviction ‘Decarbonising’ ideas today.

 We see four reasons for believing that the long term growth outlook for decarbonizing solutions appears second to none. Firstly we note that reaching climate change targets requires cUS$3trn of investments annually. To put it differently this suggests that annual investments in renewables need to rise more than 4x from current levels while investments in energy efficiency and electrification solutions need to rise three-fold during the next 20 years according to the IEA. Secondly our conviction in this growth path is strengthened by the fact that 127 countries globally, accounting for more than 60% of GHG emissions have already adopted net-zero targets. Thirdly we expect climate change regulation to tighten further and expect additional announcements around the EU’s Taxonomy regulation this year to support that view. Finally we see this year’s COP26 in Glasgow, various elections across Europe (e.g. Germany) and the green-agenda as laid out by President Biden in the US as clear near-term catalysts for stocks and themes exposed to decarbonisation.

 Which green themes appear most attractive In this report we provide key summaries for a range of themes exposed to the topic of ‘Decarbonisation’. These are: Solar, Wind, Hydrogen, Energy Storage, Energy Efficiency (Buildings, Transport and Industry), Green Infrastructure and Circular Economy. For each of these themes we provide a one-page summary slide that outlines the key long term drivers and catalysts. Furthermore, together with our analysts, we have also identified more than 400 companies globally that are exposed to these themes. When comparing these companies by theme we make the following observations.

– Growth during the next 2 years appears strongest for companies exposed to Hydrogen, Transport Energy Efficiency and Energy Storage.

– Profitability in terms of cash flow returns during the past 5 years have been robust for companies exposed to the themes of Industrial and Building Energy Efficiency. Companies (mainly tech-focused) that enable multiple decarbonizing themes scored best on CFROIs. Renewable Energy companies (solar, wind and hydrogen) have the lowest cash flow returns.

– Valuation appears challenging for most themes, however, companies exposed to Wind, Building Energy Efficiency and Green Infrastructure have less aggressive multiple-based valuations than those exposed to Energy Storage and Solar.

– Momentum in terms of upgrades to 12m forward EPS estimates is improving across the board. Themes that score best on this basis include Industrial Energy Efficiency, Enablers, Energy Storage and Circular Economy – Plastic related stocks.

 Highest conviction stock ideas Out of the entire universe of companies across all themes our analysts have selected 45 Outperform rated stocks. These are companies that analysts believe are either expected to remain sector leaders despite already having performed well or are companies who have yet to be fully rewarded for their exposure to the theme of the Green Economy. These stocks have been selected based on our analysts’ conviction without additional quantitative screening and are spread across North and South America, Europe and Asia, cover small and large caps and cover a wide range of industries. One page summaries for each of the stocks are included in this publication.