Updating our Green Transformation theme basket

Themes are a better way to digest the equity market and the green transformation theme is an example of a market theme spanning many different industries and would have been difficult to capture looking at traditional classification techniques. We have written many notes on the green transformation last year and will continue this year, but as part of our exercise of rolling out these new theme baskets we have taken a new look at our Green Transformation basket and updated it to reflect our best bid on how to get exposure to this theme.

The table below shows 40 stocks with exposure to various categories under the green transformation theme spanning battery & energy storage, bioplastic, carbon capture technology, environmental services, fuel cells & hydrogen, hydro, solar, and wind. In all categories, we have preferred pure exposure in a category and then preferring large cap over small cap companies. Carbon capture technology is the only category with only pure play globally so far, so that category is unique. The bioplastic category is together with carbon capture the two categories with the least revenue and most emerging technology which increases the risk considerably.

Source: Bloomberg and Saxo Group
* Market capitalization, 12-month rolling revenue and 12-month rolling net income are all measured in USD mn.
** YTD (%) and 5yr (%) is total return year-to-date and the last five years in local currency

Performance and risk in the green transformation theme

Our Green Transformation basket obviously suffers from survivorship and selecting biases, so the past performance measure is no indication of future performance. But the basket return gives an insight into the demand for green stocks in 2020 which was a landmark year for green investing driven by strong political signals and reforms such as green bonds in Europe and China’s commitment to become carbon neutral before 2060. Last year was also the year when electric vehicles had their breakthrough in Europe with around 10% of all new cars sold being hybrids or EVs. Our Green Transformation basket is up 1,155% over the past five years compared to 94% for the MSCI World.

While the green transformation theme has been successful for investors the past couple of years the risks have gone up. Not because the trend is not right, or the political capital is vanishing because climate change has not gone away. But risks have gone up because of high equity valuations with the basket P/E ratio now at 266 and price-to-cash-flow at 34 which are steep valuation premiums compared to the global equity market. The question is naturally whether investors are now paying too much for the green future.